US President Donald Trump has warned that the North Atlantic Treaty Organization (NATO) faces a “very bad” future if US allies do not aid open the Strait of Hormuz, the Financial Times reported on Monday.
On Sunday, Trump further said he had requested about seven countries to send warships to keep the Strait of Hormuz open, but his appeals yielded no commitments due to the acute rise in oil prices during the Iran war.
Meanwhile, Australian Transport Minister Catherine King told national broadcaster ABC on Monday that the country would not send the ships.
“We know how extremely important this is, but this is not what we were asked to do or what we are contributing to,” the minister said.
Market reaction
At the time of writing, the West Texas Intermediate Index (WTI) is down 0.08% on the day to $97.35.
Frequently asked questions on risk sentiment
In the world of financial jargon, two commonly used terms, “risk enhancement” and “risk mitigation,” refer to the level of risk that investors are willing to endure over a given period of time. In a “risky” market, investors are confident about the future and are more willing to purchase risky assets. In a “risk-free” market, investors begin to “play it safe” because they are concerned about the future, and therefore buy less risky assets that are more likely to produce a return, even if it is relatively modest.
Typically, during periods of increased risk, equity markets rise, and most commodities – except gold – also boost in value as they benefit from positive growth prospects. The currencies of weighty goods exporting countries are strengthening due to increased demand, and cryptocurrencies are rising. In a risk-free market, bonds rise – especially major government bonds – gold shines, and safe-haven currencies such as the Japanese yen, Swiss franc and US dollar all benefit.
The Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD) and smaller currencies such as the ruble (RUB) and South African rand (ZAR) tend to rise in risk-off markets. This is because the economies of these currencies rely heavily on commodity exports for their growth, and commodity prices tend to rise during risky periods. This is because investors anticipate greater demand for raw materials in the future due to increased economic activity.
The main currencies that tend to rise during “risk-free” periods are the US dollar (USD), Japanese yen (JPY), and Swiss franc (CHF). The US dollar because it is the world’s reserve currency and also because in times of crisis, investors buy US government debt, which is seen as safe and sound because the world’s largest economy is unlikely to collapse. Yen, from increased demand for Japanese government bonds because a immense portion is held by domestic investors who are unlikely to abandon them – even in times of crisis. Swiss franc because strict Swiss banking regulations provide investors with better capital protection.
