US attacks on Iran further unnerve already volatile markets
US President Donald Trump's decision over the weekend to join Israel in launching missile strikes on Iran creates yet another serious headwind for the global economy already dealing with the fallout from the recent imposition of tariffs on goods entering the US and rapidly weakening business and consumer confidence.
Equity markets are expected to sell-off on the news given the increased geopolitical risks and a likely spike in the price of oil with the NZ sharemarket being the first to indicate the extent of the fall when it begins trading at 10am today.
Politically, the decision to strike Iran marks a dramatic turning point in Trump's presidency after campaigning for his second term on a pledge to be a peacemaker who ends 'forever wars'.
The decision to launch military action will result in a range of potentially dramatic outcomes for financial markets to consider including the possible blocking of the Strait of Hormuz by Iran through which about 20 percent of the world's oil passes each day, the risk of attacks on US ships and bases in the Middle East, not to mention the possibility for retaliatory terrorist attacks given the now elevated threat level.
And then there are always the unforeseen consequences that result from these hasty military actions, including the potential for the destruction of the Fordow nuclear plant to permanently contaminate local water sources.
But foremost on investors minds will be the impact on the all-important oil price. Brent crude oil closed on Friday at US$77 a barrel, a five-month high, up almost 4 percent for the week and a whopping 33 percent since early May when it fell to a low of US$58 a barrel.
It's fair to say investors have been surprisingly complacent in recent weeks about the growing instability in the Middle East and the threat of Israel launching attacks on Iran.
Expect petrol prices at the pump to respond rapidly this week to reflect the growing geopolitical turmoil putting further pressure on already stretched household budgets.
And a continued spike in oil prices and their inflationary impact is just what central banks didn't want and haven't factored into their forecasts. Given slightly better-than-expected Q1 GDP data locally last week the combination will likely mean the RBNZ will opt to pause on a further cut in the OCR next month.
The question now is how much could we see oil prices spike and, more importantly, how will Iran respond to the US attacks? Moreover, could this latest action potentially lead to a regime change with the additional risks that would entail for the price of oil?
Historically, regime changes in major oil-producing countries such as Iran have had a significant impact on global oil prices, according to US investment banking group JPMorgan. In a recent note to clients it said further political destabilisation in Iran 'could lead to significantly higher oil prices sustained over extended periods'.
There have been eight cases of regime change in major oil-producing countries since 1979, according to the bank. It noted oil prices spiked 76 percent on average at their peak in the wake of these changes, before pulling back to stabilise at a price about 30 percent higher compared with pre-crisis levels.
It cited the example of oil prices nearly tripling from mid-1979 to mid-1980 after the Iranian revolution deposed the Shah and brought the Islamic Republic to power. That triggered a worldwide economic recession.
More recently, the revolution in Libya that overthrew Muammar Gaddafi jolted oil prices from US$93 per barrel in January 2011 to US$130 per barrel by April that year. That price spike coincided with the European debt crisis and almost resulted in a global recession, according to the bank.
However, regime change in Iran would have a much bigger impact on the global oil market than the 2011 revolution in Libya because it is a significantly bigger producer. If the market were to price in up to three million barrels a day going offline that would have a dramatic increase on oil prices, according to analysts.
Moreover, if the regime in Iran believes it is facing an existential crisis, it could use its stockpile of short-range missiles to target energy facilities in the wider region and oil tankers in the Persian Gulf, Helima Croft, head of global commodity strategy at RBC Capital Markets, told business news network CNBC over the weekend.
Tehran could also try to mine the Strait of Hormuz, the narrow body of water between Iran and Oman through which about 20 percent of the world's oil flows daily, Croft said.
There are already reports that Iran is jamming ship transponders and impeding GPS services which will further interrupt the flow of shipping traffic with several government ministries already warning their vessels to avoid the strait as much as possible.
In a worst-case scenario, oil prices could easily surge above US$100 per barrel if Iran fully mobilises to disrupt shipping in the strait, according to Bob McNally, a former energy advisor to President George W Bush.
'They could potentially disrupt shipping through Hormuz by a lot longer than the market thinks.'
Shipping could be interrupted for weeks or months, McNally told CNBC, rather than the oil market's view that the United States Fifth Fleet, based in Bahrain, would resolve the situation in hours or days.
'It would not be a cakewalk,' McNally said.
NZ corporate governance standards called into question
While the US has its 'Magnificent Seven' stocks that have been responsible for powering the market ever higher, NZ has a collection of prominent listed companies that might be termed the 'Shabby Five' for having done the complete opposite, according to a new report.
Highlighting multiple areas of weak corporate governance including a lack of strategic vision, poor capital allocation and insufficient self-reflection, the report from investment advisors Forsyth Barr should be compulsory reading for all directors serving on company boards.
Focusing on five underperforming companies in particular – Fletcher Building, Ryman Healthcare, SkyCity Entertainment, The Warehouse Group and Synlait Milk – the report makes for depressing reading, while noting there were several other potential candidates that could also have been included in the mix, most notably Spark and Kathmandu.
Though the combination of the Covid-19 pandemic followed by a painful recession have created challenging conditions for many businesses, the report notes several red flags that were evident along the way that should have acted as a warning for shareholders.
And as the following table highlights, those shareholders in each of the five companies covered in the report have every reason to feel aggrieved after suffering a significant deterioration in the value of their investments in recent years.
The report's lead author, Katie Beith, a corporate governance specialist, said a growing concern about the underperformance of a number of listed companies led to the commissioning of the report. And rather than seeking to lay blame, she said the intention was to highlight areas of weakness that needed to be improved and to learn from those experiences.
'My curiosity was initially sparked around examining the effectiveness of good corporate governance and working with our analysts to identify if there were common themes where things were going wrong that could be improved upon.'
And on that point, the report indeed highlights multiple areas of weakness in the performance of each of the companies, which Beith says should act as an early warning sign for shareholders, most notably poor cash conversion and capital discipline.
'All of the five case studies showed weak financial discipline – overpaid dividends, rising debt, or growth spending without clear returns, often disconnected from the business cycle,' the report notes.
In addition, financial restatements and impairments in all cases (with the exception of SkyCity) signalled overvaluations or misjudged expectations, while long-standing relationships with auditors were seen as reducing auditor independence or normalising incremental risk over time.
But perhaps the most concerning finding was the fact three of the five companies – Fletcher Building, Ryman and Synlait – do not conduct annual board assessments, which are seen as an important element of supporting accountability and providing stronger governance.
So does this suggest boards themselves should be subject to some form of audit with these findings included in annual reports?
Beith believes it's something that should be considered, though perhaps without the need for a formal audit.
'I hope that's one of the evolutions that we would see from this report. Annual assessments foster accountability and identify areas of weakness for development. It also enhances decision making.'
Though it is rarely straightforward to pinpoint a single cause when a company experiences a major share price decline, the report noted each of the five companies had faced serious challenges in recent years, many of which were self-inflicted.
Fletcher Building dealt poorly with problems in its construction division with inadequate internal systems and a one-size-fits-all reporting structure that failed to reflect the complexity of what were 20+ separate and distinct business units. Additionally, a number of poor capital allocation decisions were made that did not reflect the cyclical nature of its business. 'Management shifted focus to growth before historical construction problems were fully addressed,' the report notes.
Ryman Healthcare's debt was built to an unsustainable level culminating in two capital raises within two years. The company failed to take into consideration the impact falling property prices would have on its cashflow position as well as not taking into account the risks in relying on government funding when its cost base was not directly linked to it.
Though SkyCity Entertainment has arguably suffered the most as a result of Covid and a dramatic falloff in visitor numbers, particularly from China, the report notes that it too experienced serious governance deficiencies given that it failed to anticipate and act on increased regulatory scrutiny both here and in Australia that has cost it dearly in terms of fines and its corporate reputation more broadly.
Synlait Milk's primary challenge has been poor capital allocation – most notably the investment in its Pokeno facility which remains significantly loss making – and an over reliance on a single customer, a2 Milk, with the board appearing to be dismissive of the risks associated with a2s growth prospects leaving it heavily exposed. The report notes the company pursued an aggressive growth strategy based on a 'build it and they will come' rather than taking a more measured 'what if' approach that considered potential threats.
When it comes to The Warehouse Group the report notes multiple missteps over more than two decades. These have included a failed expansion into Australia, a costly foray into consumer finance that was eventually shut down, a disastrous venture into sporting goods retailing resulting in a $60 million writedown of its investment in Torpedo 7, and the failure of its integrated online platform TheMarket.com which it closed last year after failing to find a buyer. As the report notes, rather than consolidating and strengthening its competitive positions, WHS allocated significant capital toward multiple inorganic ventures most of which failed to deliver, ultimately undermining long-term shareholder value.
Shareholders though also need to up their game, according to the report. As anyone who has attended company AGMs knows only too well, the standard of questions generally leaves a lot to be desired.
Beith encourages shareholders not to shy away from asking the hard questions including asking about capital allocation decisions, fully explaining the rationale behind strategy and, perhaps most importantly, questioning how risk is being managed
'Don't settle for surface-level answers; probe for clarity on returns, accountability, and alignment with long-term value.'
But perhaps the single most important question shareholders constantly need to be asking themselves: is the board demonstrating accountability and engagement? Poor communication with stakeholders – particularly during periods of underperformance – is a definite red flag.
Coming up this week
Tuesday
• Credit Card Spending & Balances (May) – RBNZ
• NZ Windfarms SSM
Wednesday
• Overseas Merchandise Trade (May) – Stats NZ
Thursday
• Serko AGM
Friday
• ANZ-Roy Morgan Consumer Confidence Survey
• Residential Mortgage Lending (May) – RBNZ
• ERoad AGM
• Oceania Healthcare AGM
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There will be a bigger war. It's going to destroy our country and our people are going to die.' Salari said she had woken up to messages from her family on Sunday who confirmed they were safe, but she had not been able to get back in contact with them since. Meanwhile, New Zealand Jewish Council spokesperson Ben Kepes said people should not conflate the actions of the Israeli government and the Israeli military with Jews worldwide. Iran has said multiple times that it does not believe Israel has a right to exist, he said. 'Most New Zealanders when they understand the issues would say that regardless of whether they support the actions of the Israeli government, that Israel has a right to exist as a sovereign nation.' Kepes said he was a Jew in New Zealand and did not hold an Israeli passport, nor vote for the government in Israel. 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Prime Minister Christopher Luxon, who is overseas for a NATO summit, told RNZ's Morning Report that New Zealand wanted to see a peaceful stable and secure Middle East. 'The way to get there is a political solution rather than military action, it's actually through dialogue and diplomacy.' As a small country that is thousands of miles away from the conflict, all New Zealand could do was to advocate for what it thought should happen, he said. 'What we don't need is more military action, we need a political solution to all of these issues in the Middle East.' On Sunday, Foreign Minister Winston Peters said ongoing military action in the Middle East was 'extremely worrying'. Peters previously said before the weekend escalation that the provocative behaviour by both Israel and Iran was to be criticised, and New Zealand would not take sides in a conflict of this nature. 'There are no innocent parties in this conflict,' he said. Will this latest Middle East conflict affect the price of petrol – and everything else? The escalation poses a major threat to New Zealand's economy, RNZ's Susan Edmunds reports. Infometrics chief executive Brad Olsen said if there were attacks on US shipping, or attempts to limit access through the Strait of Hormuz, oil prices could spike. Iran's parliament reportedly voted on Monday morning (NZ time) to close the Strait of Hormuz, which around 20 percent of the world's oil travels through. 'If [Iran] do ratchet up the tension further, if this starts to broaden out into shipping attacks, I think market expectations and worries about oil supply will increase substantially. The question is, just to what degree do you price this and how do markets look at that?' Koura KiwiSaver founder Rupert Carlyon said the biggest risk was to inflation. 'If it does turn into a broader Middle East war and potentially shutting down the Strait of Hormuz, then we are likely to see higher oil prices, which will flow through to everything and shipping delays making it harder and more expensive to import things here in New Zealand.' What about Kiwis who are in Iran or Israel? Nearly 250 New Zealanders are now registered as being in Iran and Israel as a Defence Force Hercules makes its way to the region to help. New figures provided to RNZ and recorded on SafeTravel show 119 New Zealanders in Iran and 117 in Israel. RNZ understands some of those people may have managed to flee somewhere safer, but have not yet updated their status with SafeTravel. The Defence Force announced on Sunday it is sending a plane to the Middle East to assist any New Zealanders stranded in Iran or Israel. The plane is not part of any military combat operations. The C-130J Hercules, along with government personnel, left Auckland on Monday morning. 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Iran has said multiple times that it does not believe Israel has a right to exist, he said. 'Most New Zealanders when they understand the issues would say that regardless of whether they support the actions of the Israeli government, that Israel has a right to exist as a sovereign nation.' Kepes said he was a Jew in New Zealand and did not hold an Israeli passport, nor vote for the government in Israel. 'I have zero control over Israel, so holding me responsible of the actions of the government is not only absurd, but it's a stereotype that is really dangerous.' According to the 2023 Census, about 2700 people living in New Zealand are of Israeli or Jewish background, while about 5600 identify with the Iranian ethnic group.
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How the world reacted to US strikes on Iran
Several close US allies urged a return to the negotiating table following American strikes on Iran that fueled fears of a wider conflict, while noting the threat posed by Tehran's nuclear programme. Some countries and groups in the region, including those that support Iran, condemned the move while also urging de-escalation. US President Donald Trump described the damage as "monumental" after the US hit three Iranian nuclear sites, although the US assessment was unfinished. Initial battle damage assessments indicate that all three sites sustained extremely severe damage from the US strikes. (Source: 1News) Iranian Foreign Minister Abbas Araghchi said the US had "crossed a very big red line," the time for diplomacy was over and Iran had the right to defend itself. Here is a look at the global reaction: ADVERTISEMENT United Nations UN Secretary-General António Guterres said he was "gravely alarmed" by the use of force by the United States. "There is a growing risk that this conflict could rapidly get out of control — with catastrophic consequences for civilians, the region, and the world," he said in a statement on the social media platform X. "I call on Member States to de-escalate." "There is no military solution. The only path forward is diplomacy." United Kingdom British Prime Minister Keir Starmer warned of escalation beyond the Middle East as he called for all sides to negotiate a diplomatic end to the crisis, saying stability was the priority in the volatile region. The UK, along with the European Union, France and Germany, tried unsuccessfully to broker a diplomatic solution in Geneva last week with Iran. ADVERTISEMENT Starmer said Iran's nuclear program posed a grave threat to global security. 'Iran can never be allowed to develop a nuclear weapon and the US has taken action to alleviate that threat,' Starmer said. Russia Dmitry Medvedev, who serves as deputy head of President Vladimir Putin's Security Council, said several countries were prepared to supply Tehran with nuclear weapons. He didn't specify which countries, but said the US attack caused minimal damage and would not stop Tehran from pursuing nuclear weapons. Russia's Foreign Ministry said it 'strongly condemned' the airstrikes and called them a 'a gross violation of international law, the UN Charter, and UN Security Council resolutions'. Iraq ADVERTISEMENT The Iraqi government condemned the US strikes, saying the military escalation created a grave threat to peace and security in the Middle East. It said it poses serious risks to regional stability and called for diplomatic efforts to de-escalate the crisis. 'The continuation of such attacks risks dangerous escalation with consequences that extend beyond the borders of any single state, threatening the security of the entire region and the world,' government spokesman Bassem al-Awadi said in the statement. Egypt President Abdel Fattah el-Sissi warned of 'grave repercussions' for expanding the Middle East conflict and urged a return to negotiations. Satellite images taken by Maxar Technologies show images of the Isfahan and Natanz sites before and after they were attacked by the US. (Source: Supplied) Saudi Arabia Saudi Arabia, which previously condemned Israel's strikes on Iran's nuclear facilities and military leaders, expressed 'deep concern' about the US airstrikes, but stopped short of condemning them. ADVERTISEMENT 'The Kingdom underscores the need to exert all possible efforts to exercise restraint, de-escalate tensions, and avoid further escalation,' the Foreign Ministry said in a statement. Watch: US defence bosses reveal devastating details of 'precision strike' on Iran on TVNZ+ Qatar Qatar, which is home to the largest US military base in the Middle East, said it 'regrets' escalating tensions in the Israel-Iran war. Its Foreign Ministry in a statement urged all parties to show restraint and 'avoid escalation, which the peoples of the region, burdened by conflicts and their tragic humanitarian repercussions, cannot tolerate'. Qatar has served as a key mediator in the Israel-Hamas war. Hamas and the Houthis ADVERTISEMENT Both the Houthi rebels in Yemen and Hamas condemned the US strikes. The Houthi political bureau in a statement called on Muslim nations to join 'the Jihad and resistance option as one front against the Zionist-American arrogance'. Hamas and the Houthis are part of Iran's so-called Axis of Resistance, a collection of pro-Iranian proxies stretching from Yemen to Lebanon that for years gave the Islamic Republic considerable power across the region. Lebanon Lebanese President Joseph Aoun said the US bombing could lead to a regional conflict that no country could bear and called for negotiations. 'Lebanon, its leadership, parties, and people, are aware today, more than ever before, that it has paid a heavy price for the wars that erupted on its land and in the region,' Aoun said in a statement on X. 'It is unwilling to pay more.' Pakistan ADVERTISEMENT Pakistan blasted the US strikes as a 'deeply disturbing' escalation just days after it nominated Trump for the Nobel Peace Prize for his diplomatic intervention with the India-Pakistan crisis. 'These attacks violate all norms of international law,' the government said in a statement. 'Iran has the legitimate right to defend itself under the UN Charter.' China China condemned US strikes on Iran, calling them a serious violation of international law that further inflamed tensions in the Middle East. In a statement, the Chinese Foreign Ministry urged all parties — especially Israel — to implement a cease-fire and begin dialogue. 'China is willing to work with the international community to pool efforts together and uphold justice, and contribute to the work for restoring peace and stability in the Middle East,' the ministry said. European Union ADVERTISEMENT The European Union's top diplomat said Iran must not be allowed to develop a nuclear weapon, but she urged those involved in the conflict to show restraint. 'I urge all sides to step back, return to the negotiating table and prevent further escalation,' EU foreign policy chief Kaja Kallas said in a post on social media. Italy Foreign Minister Antonio Tajani said Iran's nuclear facilities 'represented a danger for the entire area' but hoped the action could lead to de-escalation in the conflict and negotiations. Ireland Deputy Prime Minister Simon Harris called the US airstrikes 'an extraordinarily dangerous escalation of a conflict that already best be described as a tinderbox'. Ireland, which has been especially critical of Israel's war in Gaza, echoed other European calls for negotiations that would prevent Iran from getting a nuclear weapon. ADVERTISEMENT 'We're now entering a moment of particular danger,' Harris said. 'The chances now of a spiral of escalation are more likely than ever before, and there is a real prospect now of the international community losing all control of this very, very volatile conflict.' Australia Foreign Minister Penny Wong said Australia's government endorsed the US strikes. 'We support action to prevent Iran getting a nuclear weapon and that is what this is,' she said. Her remarks to Channel Nine news Monday were firmer than an official statement supplied Sunday by her government immediately after the strikes that stopped short of backing them. 'Ultimately we want to see de-escalation and diplomacy,' Wong said. She would not say whether Australian satellite communications or signals intelligence were employed by the United States. Both countries are members of the Five Eyes intelligence sharing partnership. But Wong said the US had been clear that 'this was a unilateral strike.' NZ Defence Force is on the way to the region, hoping for a chance to evacuate those who want to leave. (Source: 1News) ADVERTISEMENT Latin America Left-wing Latin American governments expressed fierce opposition to the US strikes. Iran-allied Venezuela called the attacks 'illegal, unjustifiable and extremely dangerous'. Colombian President Gustavo Petro said they were an insult to the Middle East. Chile's President Gabriel Boric said they violated 'rules we have established as humanity'. Mexico's Foreign Ministry made 'an urgent call for peace'. In contrast, Argentina's libertarian President Javier Milei, a loyal ally of Trump and Israeli Prime Minister Benjamin Netanyahu, praised the attacks on social media. 'Terrorism, never again,' his spokesperson said. Japan, Thailand and Vietnam Japanese Prime Minister Shigeru Ishiba told reporters it was crucial to calm the situation as soon as possible, adding that Iranian nuclear weapons development also must be prevented. He declined to comment on whether he supported the US attacks on Iran. Vietnam called on parties to continue negotiation efforts and respect humanitarian law and International Atomic Energy Agency regulations. 'Vietnam is deeply concerned about the escalating and complex conflict in the Middle East, which poses a serious threat to the lives and safety of civilians, as well as to regional and global peace and stability,' Foreign Affairs Ministry spokeswoman Pham Thu Hang said in the statement. ADVERTISEMENT Thailand called on all parties to immediately stop all acts of violence and seek a peaceful resolution. 'Thailand expresses its grave concern over the escalating tensions between Israel and Iran, particularly in light of the recently intensified attacks and expansion of conflict by other parties, which pose a serious threat to regional peace and stability and risk further escalation, all of which is dangerous and affecting countless civilians," the Foreign Affairs Ministry said in a statement. The Vatican Pope Leo XIV made a strong appeal for peace during his Sunday Angelus prayer in St. Peter's square, calling for international diplomacy to 'silence the weapons'. After an open reference to the 'alarming' situation in Iran, the first American pontiff stressed that 'today more than ever, humanity cries out and invokes peace and it is a cry that demands reason and must not be stifled'. Pope Leo urged every member of the international community to take up their moral responsibility to 'stop the tragedy of war before it becomes an irreparable abyss'.
