Trump kills the Hormuz deal, markets price in a longer war

Iran's proposal was a classic example of what economists call a terms-of-trade negotiation: each side offers to give up something it controls in exchange for something the other controls. Iran controls access through Hormuz; the US controls the naval blockade and the sanctions regime. The deal on the table was Hormuz access in exchange for sanctions relief. Trump's rejection means neither side has yet found a price the other will accept, and the blockade continues to act as a tax on global oil supply.

The market reaction tells you what traders think the rejection means. US stocks rose and Treasury yields fell, which sounds counterintuitive until you follow the chain. Lower oil prices reduce inflation expectations. Lower inflation expectations reduce the pressure on the Federal Reserve to keep interest rates high. Lower expected rates make bonds more attractive, pushing yields down, and make equities cheaper to value, pushing prices up. One diplomatic rejection, filtered through the oil market, changed the calculus for every asset class in a single session. Whether that repricing lasts depends entirely on whether Iran and the US find a way back to the table before the midterms.

The BOK's warning is a description of cost-push inflation, which is when rising production costs, rather than excess demand, push the general price level up. The mechanism runs like this: energy prices rise, so manufacturers pay more to run their factories, so they charge more for their goods, so retailers pay more for stock, so consumers pay more at the till. Each step in the chain is a separate price rise, but they all trace back to the same source. This is different from demand-pull inflation, where too much spending chases too few goods, and it matters because the cure is different too.

Raising interest rates, the standard tool for fighting inflation, works well against demand-pull inflation because it discourages borrowing and spending. Against cost-push inflation it is blunter: it reduces demand, which can slow the price rises, but it also slows the whole economy at the same time. The BOK faces exactly this trade-off. South Korea's export sector is already under pressure from weak global demand, so a rate rise that tips the economy into slower growth is a real cost. I'd argue the BOK will raise anyway, because letting inflation expectations become entrenched, meaning letting people assume prices will keep rising and so demand higher wages, is harder to fix later than a short growth slowdown now.

The wave of overseas takeovers is a real-world example of foreign direct investment, which is when a company or investor from one country buys a controlling stake in a business in another. The textbook says FDI brings capital, technology and jobs to the host country. That is sometimes true. But when the FDI takes the form of buying an existing listed company rather than building a new factory, the capital goes to the seller, not into new productive capacity. The distinction matters: a foreign firm buying a UK manufacturer does not automatically mean more UK output.

What makes this year's surge interesting is the valuation gap that is driving it. UK-listed companies have traded at a lower price-to-earnings ratio, meaning investors pay less per pound of profit, than equivalent US or European firms for several years. That gap reflects a mix of slower growth expectations, political uncertainty and the pound's weakness since 2016. Overseas buyers are, in effect, arbitraging that gap: paying a premium over the current share price that still looks cheap in dollars or euros. The honest question is whether this repricing is a vote of confidence in UK assets or simply a one-off harvest of a discount that built up over a decade.