Oil Price Pressures Pose Risks to Trade and Inflation, Despite Resilient Macro Environment

Market Update: US-Iran Tensions and Global Economic Impact

Key Takeaways:

• Market volatility driven by US-Iran tensions is expected to remain high, with a risk premium priced into markets, rather than a base-case war scenario.
• Energy exporters face significant economic costs from a prolonged war, which creates a natural restraint on escalation.
• Oil-importing economies, such as India, may experience trade balance and inflation pressures if crude prices persist above comfort levels.

Market Impact:

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• Oil prices are likely to be affected by disruptions to the Strait of Hormuz, with potential for sharp increases in crude prices.
• Inflation expectations may rise if crude prices remain elevated, leading to a more complicated growth-versus-inflation trade-off for central banks.
• Energy and upstream-linked businesses are likely to be in focus amid crude volatility, while defence and cybersecurity sectors may see increased strategic spending visibility.

Equity Market Outlook:

• A further 5% correction in equity markets cannot be ruled out if crude prices spike sharply or global risk appetite weakens.
• Corrections driven by external shocks often stabilize once clarity emerges, and the current environment suggests event-driven volatility rather than structural deterioration in fundamentals.
• Uncertainty remains the primary headwind, with higher oil volatility creating pressure across currencies, bond yields, and inflation expectations.

Earnings and Economic Growth:

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• Earnings risk is selective at this stage, with fuel-intensive sectors and industries vulnerable to sustained fuel price increases.
• Economic growth may be impacted by policy reaction risk if inflation expectations re-accelerate, leading to potential changes in rate cut timelines.