Initially, the market viewed the Euro/Sterling pair through the lens of interest rate spreads. However, as geopolitical conflict extends, the risk of a stagflationary environment for the UK increases. This shifts the dynamic, potentially weakening Sterling against the Euro despite central bank actions.
While markets focus on oil prices and de-escalation timelines, they are underestimating second-order effects of geopolitical conflict. Significant risks exist from supply shortages in less-discussed industrial commodities like helium and sulfur, which can have a tangible, negative impact on the broader business cycle.
The Swedish Krona (Stocky) recently benefited from a pro-cyclical environment and capital repatriation, making it a market favorite. Now, its status as an energy importer combined with a potential reversal of the global growth story has completely changed its outlook, making it vulnerable despite potentially hawkish central bank policy.
Consensus earnings for MSCI EM are overly optimistic post-conflict. Historical data from oil supply shocks shows that significant earnings downgrades typically occur with a two to three-quarter delay. This suggests that current perceived market resilience is likely just a temporary lag before revisions catch up to reality.