March seventeenth, two thousand twenty-six
《Oil Is Only the Opening Act: The Real Repricing Will Land on Growth, FX, and Industrial Supply Chains》 《Oil is only the opening act; the real repricing will land on growth, exchange rates, and industrial supply chains》
Author: Ariston
Continuation of Notes260316《From Hormuz to growth damage, the market is slowly realizing this is not just an oil-price shock》. The previous article noted that the most important thing to focus on now is not the ups and downs of oil prices themselves, but the fact that the market’s understanding of this shock is still stuck in the first phase... The first phase is about oil prices, inflation, and interest rates, while the second phase is the truly troublesome part: growth, industrial supply chains, and earnings.
This is where the disconnect lies:Interest-rate markets have already reacted to higher energy prices and inflation that is harder to bring down. Real supply chains in Asia are also beginning to encounter more tangible supply problems, but the equity market as a whole has yet to take the second phase seriously.
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I.Understanding the importance of the channel more fully
The reality facing Asia is no longer just somewhat more expensive oil, but bottlenecks on the physical side. Before the crisis, around 1320 ten thousand barrels of crude oil a day destined for Asia passed through the Strait of Hormuz, accounting for roughly half of Asia’s crude oil imports. China, India, Japan, and South Korea were the most exposed major buyers. If the recovery of flows through this channel fails to keep pace, Asia will first feel not just the price impact, but also tightness in logistics, raw materials, and intermediate goods.
That is why, in the previous article, we said the most important variable now is not whether Brent can reach 110 or 120, but whether oil flows can recover quickly. The price itself certainly matters, but price is only a symptom, not the underlying problem.
For businesses, paying a somewhat higher energy bill and being unable to obtain enough feedstock are problems on entirely different levels. The former squeezes profit margins; the latter directly affects capacity utilization, delivery schedules, and inventory management. If the market is still focused only on the oil-price curve, without seriously tracking signs of logistical disruption and product shortages, then it is clearly not sufficiently prepared for the second phase.
Chart: If high oil prices persist, they often hit demand itself; car sales are the clearest example
II.Equity markets are clearly lagging interest rates in pricing growth
Looking at asset performance, the most obvious disconnect now is that interest rates are already pricing in inflation that is harder to manage, while equity markets are still half-heartedly betting that this will pass quickly. One point makes this especially clear: the probabilities of stagflation and recession implied by equity markets remain very low. Compared with the energy shock in 2022, equity markets are pricing in bad outcomes much more cautiously this time.This difference is not without reason, because the macroeconomic backdrop is indeed different: today’s starting points for fiscal policy, employment, and inflation are all unlike those in 2022. But underestimating growth damage and refusing to acknowledge growth damage are two different things.
What is more worth considering is that many typical growth proxies have begun to give back their gains for the year, but overall they have not yet fallen enough to reflect a more complete downward revision to growth...
Chart: The most typical growth proxies have begun to give back their gains, but overall they have not fallen enough to truly reflect damage to growth
Small caps, banks, cyclicals, and short-cycle industrials are all giving up some of their year-to-date performance, but many of these sectors are still in positive territory for the year. This suggests that the market is still betting on an underlying assumption: oil trade will eventually resume flowing, and nominal growth will not be truly interrupted. In fact, as long as this assumption has not been overturned, the second-phase repricing is not yet over.
As we have consistently emphasized, investing is a bet on uncertainty with risk control as its prerequisite. Whether you are on the optimistic side of the second phase (growth continues without being affected) or the pessimistic side (growth will suffer real damage), the next profits can only be found in this underpriced area. The first-phase trade, focused solely on the ups and downs of the oil basket, can already be declared over.
III.Asia’s divergence will become increasingly evident
The easiest thing to get wrong right now is to keep treating Asia as one unified basket of risk assets. On the surface, this shock is of course still the familiar story of oil prices, the dollar and risk aversion. But the more important change is that Asia is rapidly splitting into different camps. Some economies first have to contend with growth problems, some with exchange-rate problems, and some are under pressure on both fronts. Lumping these three situations together can easily lead to overly crude trades down the road.
One detail worth paying close attention to is that the divergence within Asia is already showing up in exchange rates. And what lies behind it is not simply risk-on or risk-off sentiment, but the different ways each economy is dealing with the energy shock.
The Malaysian ringgit’s recent resilience is not hard to understand. When oil prices rise, it naturally has more of a buffer than many economies that rely entirely on imports. Even with the dollar itself relatively strong, the ringgit can hold up comparatively well. The renminbi has also been steadier than many other Asian currencies. One reason is that China’s exposure to the energy shock differs from that of other economies; another is that it has stronger exchange-rate management, a firmer pricing anchor and more policy buffers. So it has not been as fragile in this external shock as many might intuitively have expected.
Figure: Divergence across Asian foreign exchange markets
If I had to identify two especially representative examples at the country level, I would pick China and India.China’s distinguishing feature is not that it is entirely unaffected by external shocks, but that it has significantly more internal buffers. Economic activity has held up well since the start of the year, with industrial production, investment and retail sales all steadier than expected. Economic data are improving, and households continue to reallocate their deposits, pointing to improving domestic capital activity. More importantly, although China also consumes large quantities of crude oil shipped through the Strait of Hormuz, it has larger inventories and stronger policy buffers. As a result, the external shock is first reflected in asset-price volatility rather than immediately breaking through to the macroeconomic fundamentals.
At the market level, this difference is already beginning to show up in trading patterns in exchange rates and interest rates. The renminbi has traded more within a range and tactically: the market is willing to acknowledge the unfavorable external environment, but also knows that policy and inventories provide a buffer. So trading is more about taking things as they come than about one-way panic. For Chinese assets, the greater drag is not a few extra dollars per barrel of oil, but whether a slowdown in global growth would affect export-linked sectors and risk appetite at the same time. In other words, China’s main risk looks more like a second-round shock than a first-round shock.
India is the opposite. It is not without policy tools, nor without a central bank, but it faces a more direct test of external vulnerability. When oil prices rise, the impact first hits the current account, then inflation, then corporate costs, and ultimately exchange-rate expectations.The dollar-rupee exchange rate 92.50 matters not merely as a technical level, but more like a stress-test line. If it holds, that suggests the central bank and the market can still temporarily contain the shock at the level of prices. If it breaks decisively, the market will no longer be trading just on risk sentiment; it will be repricing India’s macroeconomic fundamentals.
Figure: Dollar-rupee (daily chart, as of 260317)
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A couple of days ago, I was invited to a private discussion to share my views on the current situation. Everyone’s discussion focused on commodities and interest rates. My view was that foreign exchange markets matter too. They matter because, on closer examination, the problem really is not just a slight shortfall in supply: it is a slight shortfall in supply happening at the same time as a stronger dollar.
As long as shutdowns and transport disruptions in the Middle East continue to intensify, the market will face not only more expensive energy imports, but also tighter financing conditions and foreign-exchange expectations.The dollar here is not an abstract macroeconomic variable; it is more like an insurance policy. The longer the conflict drags on, the more willing the market will be to use dollars to hedge against stagflation and a decline in risk appetite. That will rapidly amplify the fundamental differences that already exist within EM.
Figure: The US Dollar Index (4-hour chart, as of 260317)
That is why I see the dollar’s current strength as tactical rather than structural, but still believe it should not be underestimated. Tactical means this is not a shift in worldview toward being long the dollar forever. The reason not to underestimate it is that time is currently on the dollar’s side. As long as energy prices and geopolitical uncertainty do not ease significantly, the dollar’s defensive qualities will continue to be reinforced, and the Asian economies with more fragile external balances and greater energy sensitivity will be the first to run into trouble through their exchange rates.
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There is another detail here that is often underestimated. The dollar is strong not just because people are afraid, but also because, in relative terms, the United States is still the economy that will feel the damage later. Asia will first face import costs and exchange rates; Europe will soon face slower growth; the United States, by contrast, looks more like the last place to be affected.
As long as this time lag remains, it will be difficult for the dollar to weaken immediately.
Figure: In this environment, the dollar is more like an insurance policy; the longer the situation drags on, the more attractive it becomes as a hedge against stagflation
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This is why we think Asia can no longer be viewed as one big basket going forward. Put another way, continuing to treat all of Asia, or even EM, as a single risk asset is no longer appropriate. This is partly why we have sold down the EEM allocation position that we had held continuously since last year, turning it into a trading position (see “WEEKLY WRAP 260308”).。
The regions, markets and industries that will be hit harder are those that rely on external energy and are more sensitive to chemical feedstocks, oil and industrial intermediate goods.In other words, the most important question for Asia going forward is not whether the whole region will come under pressure, but which parts will see a price shock repriced as growth pressure first.
Of course, reaching the kind of truly historic oil shock seen on those previous occasions would require higher prices and a longer duration. Put differently, The immediate question is not whether we have already entered a super crisis, but whether, if this does not end soon, it will turn step by step into a real crisis. This is inevitably a gradual repricing process. You may not accept that, and it may indeed never happen, but you cannot pretend not to see it—or really not to know.For macroeconomics and asset prices, time itself is the most expensive variable. The longer this drags on, the faster Asia’s internal divergence will move from prices to growth and exchange rates.
The currency, equity, and interest-rate markets will be reorganized around this question. The divergence among Asian assets starting today may not be the result of muddled market sentiment; instead, it may mean the market is finally pricing fundamentals in greater detail.
Chart: JPM Sales Notes image, somewhat compressed. What this shows is that the stagflation probability implied by the stock market remains low, which does not fully match the fundamental divergence that has already emerged in Asia.
Chart: What can truly propel this shock to historic proportions is not the oil price at any given point, but how long it stays elevated.
Chart: Time matters more than price itself. Time determines whether shutdowns and supply disruptions will continue to worsen, and these in turn determine whether pressure will spread from prices into a broader macroeconomic shock.
In a nutshell, if you look only at the headline, Brent above 100 dollars would intuitively bring to mind 2022 or even earlier rounds of oil-price shocks. But viewed more calmly, we are not at that scale yet. These two assessments have completely different market implications. The former looks more like a brief inflation scare; the latter would begin to weigh systematically on growth, corporate earnings, and exchange-rate stability.What is in least short supply right now is discussion of oil prices; what is most lacking, instead, is respect for how long this could last.As long as disruptions to transport and supply continue, the market will sooner or later shift its focus from the level of oil prices to the economy’s capacity to withstand pressure. At that point, asset performance will no longer be a simple risk-off story. Instead, a new debate will emerge over who has the strongest buffers and whose vulnerabilities will be exposed first.
Four. Inflation trading in the interest-rate market
The logic here is fairly straightforward. The reaction in the interest-rate market right now does not surprise me, but I am also reluctant to see it as the final outcome.
Oil prices rise, short-term interest rates move higher, and the market starts discussing whether more central banks will be forced to turn hawkish; all of this is easy to understand. But if the shock drags on, what ultimately becomes harder to avoid is not an inflation scare but slowing growth. Rising corporate costs, eroding consumer purchasing power, and weakening external demand, taken together, will eventually pull the market back toward pricing in growth.
So I would divide the current trading into two stages: first, inflation pushes rates higher; then growth brings them back down. In other words, a stronger dollar and a more hawkish front end may be the clearest short-term expression right now. But if the market really begins to acknowledge that the damage to growth in Asia and Europe will be more pronounced, duration may become attractive again. The recent surge in bond yields is certainly real, but whether it can persist ultimately depends on whether the market is willing to acknowledge weaker growth.
More specifically, if the market does shift to pricing in growth, it is more likely to show up first as the front end ceasing to reprice further upward, followed by the intermediate and long ends starting to price in recession or slower growth. Many people are still reluctant to take on duration, for the simple reason that they fear buying too early. But that is precisely what suggests the conditions for this trade are gradually maturing. Genuine turning points usually do not emerge when the market has stopped worrying about inflation altogether, but when it begins to realize that although inflation is a problem, growth is an even bigger one.
Supplementary note: Some institutions are avoiding duration to guard against a more troublesome scenario: growth slows, but sticky inflation and supply disruptions prevent central banks from quickly pricing in easing, leaving duration with less upside than expected for a considerable period. So perhaps the conditions will truly mature when the market starts to confirm that damage to growth will outweigh sticky inflation and feed through to the policy path and term premium. In reality, a few variables lie between “slowing growth” and “falling interest rates.” First, will inflation expectations become entrenched because of the energy shock? Second, will the term premium rise because of fiscal supply, risk premiums, and geopolitical uncertainty? Third, will central banks actually be willing to respond to weaker growth with a dovish stance?
Chart: The surge in yields looks more like the first stage of the trade; what matters in the end is whether damage to growth becomes the market’s main focus.
Five. The real trouble for industrial supply chains is the gradual shift from a price problem to a physical one
Having discussed regional market divergence, we now need to dig into the industries themselves. Looking more closely at sectors, the most representative aspect of this repricing is not energy stocks, but the industrial supply chain and consumer discretionary sectors being forced to confront more concrete problems.
Autos are the clearest example. High oil prices first squeeze consumers, then sales. If this is compounded by unstable supplies of chemical raw materials and naphtha, the problem is not just weaker demand; production could also start to come under pressure.The major Japanese and South Korean automakers have already seen significant pullbacks in this round. This reflects the market reassessing a question: if oil prices really stay elevated for longer, will global auto demand be pushed down a notch, and will companies still be able to maintain their original sales and earnings expectations?
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Chemicals and building materials better illustrate the danger of the second stage. Their problem is not simply rising costs: once feedstock becomes scarce, a price problem turns into a physical one.
If Asian markets encounter more severe raw-material shortages because of blocked transport routes, some companies will not merely see slightly weaker margins; they may have to cut production or even declare force majeure.Interestingly, some upstream chemical companies in Europe may not be the worst off in the short term. They will of course also face higher energy prices, but for at least some raw materials they may be less likely than their Asian peers to run into a “can’t get the product” problem first.The market usually likes to interpret high oil prices as a broad macroeconomic variable. But at the industry level, the impact is not uniform; it brings a highly asymmetric redistribution.
Six. Not all industrial sectors should be avoided; the real opportunities and risks have shifted
I don’t want to frame this as a one-sided flight-to-safety story, because that could make us miss the real structural opportunities.
Not all industrial and cyclical sectors should be avoided.
South Korean nuclear power EPC, defense, certain shipyards, and equipment supply chains directly tied to energy security are, on the contrary, in a more favorable position.The logic is not complicated: once the market recognizes that energy security, restocking, and military expansion are not short-term headlines but ongoing items in budgets for the coming years, these companies’ order visibility and valuation frameworks will be repriced together. The recent pullback in these assets has often looked more like a disturbance caused by positioning and short-term sentiment, and does not necessarily mean that the medium-term thesis has been broken.
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There is also some structural defensiveness in autos. As long as things do not deteriorate to the point of a global recession, automakers with a higher share of hybrid models may actually be more defensive in a high-oil-price environment, as consumers shift their preferences toward more fuel-efficient options. Even leading new-energy vehicle makers may see a round of valuation recovery as funds hedge, a swing we have already seen.The remaining issue is that these structural benefits coexist with weakening aggregate demand. So this is not a direction to pursue blindly, but more like choosing assets that are relatively less bad in a difficult environment.
What really needs to change at this stage is the old habit of turning to resource and oil-and-gas stocks as soon as oil prices rise, or mechanically buying safe havens whenever geopolitical conditions worsen. Market differentiation has now become so fine-grained that we need to look at order structure, raw-material sources, and the ability to pass on costs. Judging only by the broad direction is not enough.
Seven. What we really need to watch out for is a market that first doesn’t believe, then suddenly believes too quickly
One other easily overlooked but actually crucial contrarian risk is the squeeze caused by de-escalation.
Not everyone is currently positioning for the worst-case scenario. On the contrary, many positions have not been unwound to the point of reaching a typical bottoming range, and some hedges have even shifted into more linear expressions through indexes and futures.This means that if transit routes reopen and political rhetoric eases, the growth proxies that fell the hardest—such as banks, small caps, cyclicals, and short-cycle industrials—could see a rapid rebound. In other words, the market is underestimating the second phase on the one hand, while also failing to position itself defensively enough on the other. That combination itself means volatility will be high.
So I’m now more inclined to understand the market as switching between two trades rather than following a one-way story. In the short term, the trade is about inflation, oil prices, and central banks; in the medium term, the factors that truly determine direction are growth, earnings, and divergence within Asia. As long as the recovery in oil flows through the Strait of Hormuz is slow, Asia will feel the second phase earlier than the United States, because it will encounter the real constraints of logistics, raw materials, and industrial supply chains sooner. By the time the market turns around and acknowledges that the problem has shifted from prices to output, the cost will be far greater than it is today.
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(End of article)
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