When inflation risk dominates markets, the traditional negative correlation between stocks and bonds breaks down. Bonds (duration) stop acting as a reliable hedge for equity drawdowns. In this environment, investors must seek explicit convexity hedges, like call options on oil or inflation breakevens, rather than relying on a balanced portfolio.
The oil supply shock isn't simultaneous. It's a rolling disruption dictated by shipping times, hitting Asia first due to its reliance on Gulf crude and shorter voyages (10-20 days). Africa, Europe, and finally the U.S. (35-45 days) feel the impact sequentially, buffered differently by regional inventories.
Contrary to its safe-haven reputation, gold often gets swept up in an initial 'sell everything' trade during market stress. Gold performs best in moderate uncertainty, not extreme volatility like a Lehman-style event. Its bullish case only emerges later as the inflationary and growth impacts of a crisis become clear.
The conflict has shifted the FX regime from pro-cyclical to risk-off, making the US dollar attractive as a high-yielder, defensive asset, and energy exporter. Beyond the dollar, the primary theme is pairing energy exporting currencies (like AUD, NOK, BRL) against energy importing currencies (like EUR), which are most vulnerable.
The key difference from the 2022 Russia-Ukraine shock is the macroeconomic starting point. Inflation was already at 6% then, versus a much lower level now. Interest rates were at rock-bottom levels, whereas now they are neutral to restrictive, giving central banks more of a buffer before needing to react aggressively.
The Federal Reserve's decision to keep rates unchanged provides a crucial, if unintentional, benefit to Emerging Markets. It limits pressure on EM central banks that would otherwise be forced to hike rates to defend weakening currencies against a backdrop of rising global interest rates, giving them more time to assess the shock.