Those of us participating in the stock market understand only this. We look at everything from the lens of our investments. Will Google move up or down? Well, the answer lies in more than just what Google is doing as a company in the US.

I have to admit that one year ago, I was skeptical of where this technology goes. But with the progress that’s been made in what these models can do now, I’d be stupid if I didn’t change my mind.

I think many of the early proponents of AI oversold the concept. They talked about it becoming a magical entity that would be the answer to all the world’s problems.

I still doubt that’s where it’s going. But AI is definitely solving a number of the world’s problems.

As I went down a rabbit hole over the past several days, I started to realize that AI is having a bigger impact across the world than we can fathom. What surprised me most is where the fastest adoption is actually happening. Not just in New York or London, but in Lagos, Nairobi, Mumbai, São Paulo, Jakarta, and Dhaka.

If you’ve been watching the S&P 500, you’ve been watching the Builders. Nvidia, Microsoft, Google. They’re laying the infrastructure. But in frontier markets, something else is happening. You’re watching the Implementers, and they’re moving fast.

Why This Is Even Happening

Here’s the thing nobody told you about the AI race.

Western markets are slow because they have too much to defend. Legacy software, legacy banking systems, legacy regulations, legacy ways of doing business. Every AI rollout in the US has to wrestle with what’s already in place.

Frontier markets don’t have that problem. They never built the bank branches at scale. They never built the desktop infrastructure. So when AI arrives, it doesn’t disrupt anything. It just becomes the system.

That’s why a Kenyan farmer can get AI-powered crop advice on a basic smartphone, while a US farmer is still on the phone with their county extension office. It’s not a question of who’s smarter. It’s a question of who has less to undo.

This is the part most investor reports miss. They look at GDP per capita and assume slower adoption. The opposite is true.

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Africa: Skipping the Line

Africa never built the large-scale landlines or the massive roll-out of desktop infrastructure. What looked like a disadvantage for decades is now the whole point.

MTN Group, the continent’s largest mobile operator with over 300 million users, partnered with Microsoft in early 2026 to roll out AI-powered tools across its consumer base. This isn’t AI for tech elites. This is AI landing directly in the hands of small business owners, farmers, and first-time internet users, all through their phones.

That’s not a small story. That’s 300 million potential new users entering the Microsoft ecosystem.

But the Africa story doesn’t end there. Look at Kenya.

97.5% of Kenyan internet users aged 16 and above engage with AI tools every month, according to the Digital 2026 Mid-Year Global Update Report. That puts Kenya ahead of the UAE. Ahead of Indonesia. Ahead of countries with ten times the per-capita income.

Safaricom, the operator behind M-Pesa, transitioned its mobile money platform to a cloud-native, AI-powered Fintech 2.0 system in late 2025. M-Pesa now serves 60 million customers across Kenya and Ethiopia, processing 100 million transactions a day. That platform isn’t just processing payments anymore. It’s running fraud detection, credit scoring, and investment recommendations through AI.

Nigeria is doing something similar with banking. Nigerian banks and fintechs deployed AI fraud detection tools in 2025, and the country saw a 51% reduction in digital payment fraud losses despite higher transaction volumes. Try getting numbers like that out of a US bank.

India: Building Its Own Stack

India could have just been a customer. It chose to be something else.

The Google and Reliance Jio partnership did something genuinely significant in late 2025. Jio, an Indian telecom company, began offering Google Gemini 2.5 Pro natively inside its 5G network, free, to hundreds of millions of users. But the part that really matters is what they’re building underneath it. Using Google’s TPU infrastructure, they are developing localized language models across all 22 official Indian languages.

This is a blueprint every developing nation is now watching closely and the numbers back this up. India leads Asia in AI adoption at 94%, according to multiple 2026 surveys. Compare that to Japan at 51%. The same models, the same tools, but Indian workers are integrating them faster than almost anyone else on the planet.

Brazil: Where AI Meets the Real Economy

South America doesn’t get enough credit in this conversation and Brazil is changing that.

The country launched its National AI Plan with a budget exceeding $500 million per year through 2028. That’s a government making a serious bet, and the private sector is running alongside it.

Mercado Libre, the regional e-commerce giant you may know as MELI, reported in early 2026 that AI-driven initiatives pushed revenue up 45%. Their AI assistants now autonomously handle 87% of customer interactions. For context, most Western companies are still celebrating when they hit 30%.

What’s interesting here is the breadth. Brazil isn’t just doing fintech AI or retail AI. It’s deploying AI across logistics, agriculture, healthcare, and public services. The country has structural problems AI is genuinely well-suited to solve, and it’s not waiting for permission from anyone.

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Southeast Asia: Generation AI

Southeast Asia might be the most underrated AI story on the planet right now.

According to Deloitte’s recent Asia Pacific study, 90% of students and 72% of employees across Indonesia, Malaysia, the Philippines, Thailand, and Vietnam have used generative AI. That’s not a forecast. That’s already the reality. And the percentage of daily users is expected to grow by 232% over the next five years.

The average daily user is saving 6 hours a week at work. That’s a labor force productivity transformation.

Indonesia leads the region with 69% AI adoption. Malaysia is at 68%. The Asia AI market is projected to hit $87.65 billion in 2026 and could reach nearly $300 billion by 2030. Southeast Asia alone is expected to expand from $12 billion in 2026 to almost $80 billion by 2031.

What’s driving it? Demographics. Over 213 million people aged 14 to 34. More than 70% of citizens own smartphones. They’re young, digitally native, and have no inherited bias against using AI for everything.

Vietnam built PhoGPT, a Vietnamese-language ChatGPT alternative. Indonesia is deploying AI in agriculture and healthcare. Grab, the regional super-app, is rolling out AI-powered features across all six major Southeast Asian markets simultaneously.

Who’s Actually Cashing In

Microsoft is plugging into Africa through MTN. Google is plugging into India through Jio. AWS is powering Safaricom’s AI infrastructure in Kenya. Every one of these deals represents hundreds of millions of users walking through the door.

Nvidia is selling chips into every one of these regions. AMD is gaining ground. Cloud infrastructure providers are building data centers in places they would have ignored five years ago. East Africa just got its first AI-ready data center, a 22.5 megawatt facility in Nairobi. Vietnam, Indonesia, and the Philippines are competing to host the next AWS, Microsoft Azure, or Google Cloud regional facility.

What Could Derail This

I’d be doing you a disservice if I didn’t mention the risks.

Energy is a real one. AI is power-hungry, and a lot of these markets don’t have the grid capacity to support large-scale AI computation. Data center growth could outpace electricity supply, especially in Southeast Asia.

Currency risk is another. Nigeria’s naira has devalued to roughly 1,420 per dollar with inflation running between 25% and 30%. That makes everything harder, including AI infrastructure imports. Similar pressures exist across other emerging currencies.

And then there’s regulation. Most of these countries don’t have binding AI rules yet. That’s a feature today. It could become a bug tomorrow if a public backlash forms.

But here’s the thing. None of these risks change the underlying direction. They just change the pace.

The Quick Summary

We’ve spent the last two years debating whether Nvidia is overvalued or whether Microsoft can monetize Copilot fast enough. Those are fine questions, but they’re not the only ones that matter. The race most investors are watching is happening in the wrong place. The more interesting race is the one most people aren’t looking at.

In today’s article, we look at all the data and analysis to explain in simple terms the reason for the disconnect, where the current oil market stands, and what could push the situation to resolve one way or another.

The Great Divergence

The global oil market is currently witnessing a fundamental crisis of price discovery, evidenced by a significant divergence between “paper” futures and the “physical” spot market. Delivery from the Strait of Hormuz has been physically severed, making financial barrels effectively non-convertible into physical ones. As of April 2026, Dated Brent is at of $121/bbl, while Brent futures languish at $99/bbl (prices may have changed as the market moves, but the difference is what’s important).

This ~$22/bbl gap represents the risk premium of physical non-delivery. In a functional market, this spread typically oscillates between $1 and $2/bbl, maintained by arbitrageurs who align financial expectations with physical reality.

Institutional investors, commodity index traders, and hedge funds trade “paper oil” to gain portfolio exposure or earn a return, rather than because they are commercial users who process or market the actual oil. These investors strongly prefer futures contracts precisely because they do not obligate the buyer to take physical possession of the commodity.

The Mechanics of Scarcity - Drivers of the Disconnect

Changes in the physical oil market are constrained by slow shipping times, whereas financial prices adjust immediately through automated trading. This friction has created a “starvation” market structure where the physical reality of missing barrels has finally overtaken financial optimism. Following the imposition of a US naval blockade and the implementation of unofficial IRGC-linked toll systems, crossings through the Strait of Hormuz have collapsed to roughly 4% of normal levels—the lowest recorded in April.

The “oil-on-water buffer” that previously masked the severity of the closure was exhausted on April 20. This date marks the arrival of the last tanker to clear the Strait on February 28, meaning no more pre-closure barrels remain in the global supply chain. While some “leakiness” exists, Lloyd’s List Intelligence identifies at least 26 Iranian-linked shadow-fleet vessels bypassing the blockade. This is a drop in the bucket against a 14 mbd supply deficit. Current Iranian exports are constrained to approximately 0.8 mbd, less than half of the March pace, creating a compounding and irreversible shortfall.

Core Drivers of the Divergence (Estimates from JPM)

• Mechanical Delivery Failure: The war and ensuing dual blockade have physically severed the primary delivery chokepoint, rendering futures contracts “un-deliverable” in the prompt market.

• The February 28 Exhaustion: The arrival of the final pre-blockade cargo on April 20 removed the last layer of physical insulation from the market.

• Production Shut-in Lag: Algorithmic models often ignore that oil fields are not “on-off” switches. Mechanical realities necessitate production adjustments after 16 days of export blackout, moving toward full shut-ins of roughly 1.9 mbd by day 30.

• Horizontal Escalation Risks: Geopolitical risk is no longer contained to Hormuz; Houthi forces in Yemen have been placed on high alert, bringing the Bab el-Mandeb into focus as a potential secondary site for the conflict’s expansion.

These logistical bottlenecks have forced the market into a state of extreme backwardation, serving as a desperate distress signal for immediate supply.

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Decoding the Signal in Backwardation

Extreme backwardation is the market’s way of “pricing time” rather than just the commodity. It signals acute distress - the system values one barrel today more than a dozen barrels three months from now because, for many nations, three months from now is too late.

Asia, which relies on the Persian Gulf for 80% of its oil, is the epicenter of the tightening. The human and industrial cost of this scarcity is manifesting in real-time:

• Philippines: A national energy emergency has been declared as gasoline prices more than doubled.

• India: The government has halted commercial LPG supplies to protect households, forcing the closure of 20% of hotels and restaurants in Mumbai.

• Italy: Jet fuel rationing has commenced at four major airports, with Europe-wide shortages predicted within weeks.

The financial market’s persistent assumption that supply will eventually normalize is a dangerous fallacy. By mid-April, the global supply chain was effectively hollowed out, forcing the market to seek a new equilibrium through the rapid, unsustainable drawdown of inventories.

The Buffer Paradox

Inventories act as a crucial buffer against supply shocks, but they are currently depleting at a dangerously fast rate. Between March and early April, the global market drew down ~250 million barrels to cushion the Strait closure, according to JPM. Asia is bearing the brunt of this tightening, as buffers are depleted to maintain basic refinery operations.

In April, the market is grappling with a staggering 13.7 mbd disruption to global supply. Even with refinery run cuts stepping up to absorb 3.8 mbd of the shock, the market is left with a massive physical deficit. Currently, an extraordinary inventory draw of 7.1 mbd and a forced demand loss of 4.3 mbd are being used to balance the ledger, but bridging this gap by draining stockpiles cannot continue indefinitely.

China remains the wildcard. Current models assume a 1 mbd release of Chinese crude reserves; should Beijing withhold this volume, global commercial inventories will hit “operational minimums” by early May. At that point, the “buffer” vanishes, and the price will be forced to resolve through a spike for further demand to be destroyed.

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Scenario A: The Violent Convergence (Paper Rises to Physical)

In the “Paper Rises” scenario, the financial markets undergo a traumatic capitulation, acknowledging that physical scarcity cannot be waited out. This would trigger a violent upward correction, forcing the futures prices to converge towards physical reality as inventories hit zero.

The catalyst for this convergence is the “Slower Production Ramp” identified by Goldman Sachs. Even if the Strait reopened today, a rapid return of supply is a mechanical impossibility. Empty tanker capacity in the Gulf has fallen by 50% (roughly 130 million barrels), meaning there are simply not enough vessels to move oil even if it were produced. Furthermore, reservoir complexities in Iran and Iraq, where a significant share of production comes from fields with low or very low reservoir pressure, may mean that wells cannot be easily restarted. Restarting a shut-in field is a technical ordeal, not a policy choice, likely keeping the physical market in a state of starvation long after a theoretical reopening.

Scenario B: The Drag of Systematic Demand Destruction (Physical Drags Down)

Conversely, Scenario B posits that the physical price of ~$140/bbl acts as a regressive tax so severe it breaks the back of the global economy before the paper market can catch up. This is “involuntary demand destruction”—the mechanical failure of industries and sectors to pay for survival.

As these localized failures aggregate into a macroeconomic slowdown, industrial output will collapse. The resulting economic shock would drastically reduce global oil demand, eventually forcing physical prices down to meet the lower paper expectations. In this scenario, the economy “wins” the race by dying first.

The Long Road Back

The winner of the oil price race is a choice between a financial correction and an industrial breakdown. However, the data confirms that any recovery will be defined by long-term scarring.

Even with a full and safe reopening of the Strait, the road back is long. External forecasts indicate a production recovery of only 70% after three months and 88% after six months. Countries like Kuwait anticipate a three-to-four-month ramp-up, while Iran and Iraq face even more protracted timelines due to reservoir pressure loss.

The authoritative outlook for late April 2026 is one of extreme volatility. The risk of horizontal escalation at the Bab el-Mandeb suggests that even as the market looks toward a resolution in Hormuz, new chokepoints may be severed.

Whether the paper market spikes or the physical market collapses, the global energy system has been permanently altered by the friction of an unprecedented halt. The “winner” is whichever force acts fastest in the final days of April.

Sources: JPM Oil Flash Notes; GS Oil Analyst Notes

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Last week, the US announced plans to establish a manufacturing hub in Luzon, the Philippines, designated as an Economic Security Zone. I argued this would not make China happy. Most people thought it was about challenging China's manufacturing prowess. But that is not what this is about.

Where does the Philippines sit, in relation to China? Right across the South China Sea.

This is a critical shipping route for China, and while it’s not as narrow as the Strait of Malacca or the Strait of Hormuz, it nevertheless has major significance to Chinese trade.

This area is often called the “Iron Triangle” - a strategic geographic formation in the South China Sea, comprised of the Paracel Islands, the Spratly Islands, and Scarborough Shoal.

This area is one of the world’s most vital economic arteries, with approximately one-third (roughly 21% to 33%) of all global maritime trade, valued at between $3.4 trillion and $5.3 trillion annually, passing through its waters. While China does not have full legal control, it has established de facto operational dominance by militarizing artificial islands.

I find it seriously hard to believe it’s just a coincidence that the US has decided to establish a manufacturing hub designated as an “Economic Security Zone,” intended to operate as a high-speed “industrial acceleration” platform. This project falls under the Pax Silica Initiative and is built around the Luzon Economic Corridor (LEC), which aims to turn the island of Luzon into a resilient alternative to Chinese-dominated supply chains. (I’ve highlighted Luzon in the map above)

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The scale of that effort is visible in the data. China has reclaimed over 3,000 acres in the South China Sea, the vast majority completed before 2022. Vietnam is the only other country coming close, accelerating its own reclamation sharply since 2022. Every other claimant, Malaysia, the Philippines, and Taiwan, barely registers. China did not just win the reclamation race. It lapped the field.

None of this is about manufacturing, but rather about the politics and control.

After the war broke out in the Middle East, almost every analyst talked about how this was a proxy war with China. First, it was Venezuela and then Iran - both suppliers of crude to China. So the fact that there may be oil in these waters is of particular interest.

The Philippines and China are cautiously exploring potential joint oil and gas cooperation in the South China Sea, despite ongoing sovereignty disputes and high tensions in the region, largely driven by the Philippines’ need to secure energy supplies amid global fuel disruptions. While President Ferdinand Marcos Jr. is open to talks, the Philippines emphasizes that any deal must comply with its constitution and the 2016 arbitral ruling. - The Diplomat

The country's strategic location has long been a point of interest for the US, and the relationship has deep roots. Despite having a base in Okinawa, the South China Sea remains an area of interest to the US, and it is of significant importance to China.

Since World War II, the US has been friends with the Philippines, but in 1991, the Philippine Senate rejected a treaty to renew the U.S. bases. Recognizing new regional threats, the two nations signed the Visiting Forces Agreement in 1999 to allow U.S. troops to return for joint training and exercises without permanent bases.

After China seized Scarborough Shoal, Manila shifted its focus from internal security to external defense, leading to the Enhanced Defense Cooperation Agreement (EDCA) in 2014, which allows U.S. forces to rotate through Philippine bases.

Under President Marcos Jr., the alliance has reached its highest level of integration in decades. In 2023, the number of EDCA sites was expanded from five to nine, specifically targeting locations facing Taiwan and the South China Sea.

But the alliance has a critical gap that China is almost certainly aware of. The US commitment to meet ‘common dangers’ applies clearly at Second Thomas Shoal, where the Sierra Madre sits grounded in Philippine-claimed waters. At Sabina Shoal, however, that guarantee is far less certain, and a floating vessel like the Teresa Magbanua may not meet the threshold. China is not probing these waters at random. It is probing the exact points where American resolve is ambiguous.

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The map puts the stakes in perspective. China’s Nine-Dash Line cuts through the exclusive economic zones of Vietnam, the Philippines, Malaysia, and Taiwan, overriding each country’s legitimate maritime claims in a single sweeping assertion. For the Philippines specifically, Scarborough Shoal sits 240 kilometres from Manila, and both current flashpoints, Second Thomas Shoal and Sabina Shoal, fall squarely within Philippine waters. China is encroaching on someone else’s backyard, at the exact points where American guarantees run thin.

More recently, the US, Australia, and the Philippines have carried out joint military exercises, but China is now stepping up its efforts after the Middle East war. China is significantly tightening its control over the South China Sea and the Taiwan Strait through “gray-zone” tactics designed to assert dominance without triggering a direct military conflict.

Recent satellite imagery reveals the deployment of a floating barrier at Scarborough Shoal to block Filipino access, alongside the construction of a massive 1,500-acre airbase on Antelope Reef in the Paracel Islands. Furthermore, Beijing has extended its sea and air presence by imposing long-term airspace restrictions near Taiwan and organizing thousands of fishing vessels into formations capable of obstructing shipping lanes or supporting future blockades.

The Foundation for Defense of Democracies argues that the US and its allies must strengthen their distributed military presence and accelerate defense cooperation with frontline partners like the Philippines.

That seems to be exactly what the US is doing - both economically and perhaps, militarily. We can’t expect that the US will leave the critical manufacturing hub for semiconductors and minerals unguarded.

China moves slowly and with determination. It has spent decades fortifying these waters, reclaiming land, and probing every gap in the alliances that surround it. But the US has been here before. The last time it arrived in the Philippines with this level of strategic commitment, MacArthur waded ashore on Leyte and declared the enemy's control over these lands finished. The geography has not changed, and the strategic imperative remains. And if history is any guide, neither has America's intention to return.

“People of the Philippines: I have returned. By the grace of Almighty God our forces stand again on Philippine soil — soil consecrated in the blood of our two peoples. We have come, dedicated and committed, to the task of destroying every vestige of enemy control over your daily lives, and of restoring, upon a foundation of indestructible strength, the liberties of your people.” - General Douglas MacArthur

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And the cost of war lingers in ways that other economic shocks do not. The IMF has found that of all the crises that reduce GDP growth, conflict produces the most persistent and damaging effects. This is the backdrop against which every economy in the world is now revisiting its growth and inflation assumptions for the remainder of 2026.

There is a common tendency, when a major supply disruption arrives, to treat inflation and economic slowdown as simultaneous events — two problems that appear together, worsen together, and are resolved together. The more accurate description of what is currently unfolding is a sequence.

Inflation moves first. It works its way through energy prices, fertilizer costs, freight rates, and supply chain stress, and it hits hardest in the economies with the least capacity to absorb it.

The growth damage follows, but it follows later and lands in different places. The gap between what has already happened and what remains in transit is, in my view, the most important analytical lens for making sense of the current macro environment.

The ordering is not a technical detail but rather the central analytical problem. When inflation is visible in the data, but growth destruction has not yet materialized, economies can appear more resilient than they actually are, producing false signals for policymakers, investors, and businesses trying to read the cycle. By the time the growth damage becomes measurable, the tightening bias adopted during the inflation chapter will have already done its own damage, leaving central banks with less room to respond precisely when the data demands it.

This Is Not Just an Oil Story

It’s natural to focus on crude oil when thinking about a Gulf supply shock, and the scale of the disruption in the oil market alone is genuinely significant. But the Gulf’s role in the global commodity system extends well beyond crude.

The region is a dominant supplier of the raw materials that underpin global food production — urea, ammonia, sulfur, and phosphate-linked compounds that form the basis of agricultural fertilizers.

Qatar is among the world’s largest urea exporters, and damage to its gas processing infrastructure is not the kind of thing that is repaired in weeks. Independent analysts covering the fertilizer sector estimate that the disruption to Gulf urea and ammonia supply could persist for several years, regardless of how quickly the shooting stops.

This matters enormously for food prices across South Asia, Sub-Saharan Africa, and parts of Latin America, where fertilizer import costs translate directly into planting decisions and harvest yields. The historical relationship between energy prices and the FAO food price index is well established, and that relationship is now re-tightening after a period of relative calm.

Global supply chain pressure indicators rose sharply in March to their highest reading in over a year, and there is no obvious reason for that trend to reverse in the near term.

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China: Buffered, Not Immune — and No Longer Exporting Deflation

China’s structural insulation from the Hormuz shock is real, though the degree to which it insulates China from the broader consequences of the disruption is frequently overstated.

Roughly a third of China’s crude imports travel through the Strait, compared with over 70% for both South Korea and Japan. China’s energy mix is also more diversified than most of its neighbors, with coal, nuclear, and a rapidly expanding domestic renewables base reducing the economy’s overall sensitivity to imported hydrocarbon prices. The country holds strategic petroleum reserves estimated at around four months of seaborne import cover, providing a meaningful buffer against short-term supply disruption.

Where the analysis becomes genuinely important for the rest of Asia, however, is on the question of China’s role in global price formation. For the better part of four years, China’s industrial overcapacity functioned as a deflationary force in global goods markets. Excess production across manufacturing sectors pushed export prices lower, and that disinflationary effect was felt across import baskets in economies throughout Asia and beyond.

China’s producer price index declined on a YoY basis for 41 consecutive months — a deflationary streak that suppressed input costs for businesses importing Chinese intermediate and finished goods across the region.

That dynamic is now reversing, but not for the right reasons. The PPI deflationary streak is ending because of cost-push pressure from higher energy and raw material inputs, not because domestic demand has recovered or because capacity has been rationalized.

China’s “neijuan” problem, a term that captures the self-defeating cycle of industrial overcapacity, aggressive price competition, and margin compression, remains structurally unresolved. Higher input costs arriving into an industrial sector already running on thin margins do not create pricing power, but rather, they squeeze earnings further.

The key implication for the region is that the disinflationary tailwind China has been providing to its trading partners has been removed, and for economies that relied on competitively priced Chinese inputs to hold their own domestic price levels in check, that removal carries real consequences for inflation dynamics in H2 2026.

Asia’s First Movers: The Double Hit

Developing economies across Asia are absorbing the inflation chapter of this shock in real time, while the growth chapter, which will eventually materialize in the consumer markets that drive their export revenues, is yet to be written.

Bangladesh illustrates it clearly. Its export economy is built on ready-made garments sold primarily into EU and US retail markets. The transport and raw material cost increases that are flowing through Bangladeshi production economics right now are a function of the supply shock that has already happened.

The weakening of discretionary consumer spending in Europe and the United States, which will reduce demand for those garments, is a function of the growth shock that is still working its way through the transmission mechanism.

Across the five largest ASEAN economies, the aggregate 2026 growth forecast has been revised down by around 0.6 percentage points since the conflict began, while inflation has been revised up by approximately 0.9 percentage points. These revisions are not evenly distributed.

The Philippines and Thailand face above-average fuel cost pass-through because both economies have historically maintained thinner energy subsidy systems than their regional peers. So, a larger share of global fuel price movements flows directly to households and businesses rather than being absorbed by government budgets. This structural feature means inflation becomes embedded in domestic price levels faster, and it puts central banks in those countries under pressure to respond to an inflation problem even as the growth outlook is deteriorating.

Natural insulation shields Malaysia and Indonesia from global volatility, rooted in domestic energy and commodity wealth. While political goodwill exists to share these advantages, the practical reality of bilateral support remains limited by the physical hurdles of infrastructure and refining bottlenecks.

India sits in a particularly acute version of the bind that is common across the region. The Indian Rupee has depreciated by more than 10% in FY26 and briefly breached the 95-per-dollar level in late March before the Reserve Bank of India intervened in foreign exchange markets to stabilize it.

In ordinary circumstances, currency weakness supports export competitiveness. In the current environment, with global trade volumes softening and energy costs rising, a weaker rupee functions primarily as an amplifier of imported inflation into an economy that imports over 85% of its energy requirements. Analysts estimate that a $10 increase in crude oil prices reduces Indian GDP growth by around half a percentage point.

Foreign investors withdrew nearly $12 billion from Indian equity markets in March alone, bringing cumulative outflows since the conflict began to close to $23 billion. The RBI delivered 125 basis points of rate cuts over its prior easing cycle to support growth, and it now faces a policy dilemma with no straightforward resolution. Further easing threatens to exacerbate currency weakness and fuel imported inflation, and yet, aggressive tightening could derail a recovery that has yet to find its footing.

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When Uncertainty Freezes Enterprise

There is a well-established finding in the economics of agriculture and smallholder enterprise: when input cost uncertainty rises above a certain threshold, producers do not simply absorb the higher costs and continue operating at the same scale, they reduce activity.

Planting decisions get made more conservatively, equipment investment is deferred, and commercial production gives way to subsistence behavior because the expected return on a commercial crop cannot be reliably estimated when fertilizer, fuel, and seed prices are all moving in ways that are difficult to predict at the time the decision needs to be made.

This is the rational response to genuine planning uncertainty in a capital-constrained environment, and its macroeconomic consequences are significant.

When agricultural producers across South and Southeast Asia contract their commercial activity simultaneously, not because prices are necessarily unaffordable at a given moment, but because they cannot be planned, the supply-side constraint on food production compounds the demand-side cost pressures that are already tightening.

The current shock is not only a price shock. It is an uncertainty shock, and that is, in some respects, harder to address through conventional policy tools.

The Developed Market Constraint

Developed market central banks were already navigating a complicated inflation picture before this shock arrived. The Federal Reserve, European Central Bank, and Bank of Japan had all been managing price pressures that were proving stickier than their models anticipated, even in a relatively benign commodity environment. The energy disruption removes whatever remaining ambiguity existed about the near-term inflation trajectory across all three.

The most important variable globally remains the Federal Reserve’s response function. The most recent US CPI data reflects the early-stage pass-through of higher energy costs into the domestic price level, contained for now but moving in the wrong direction. If inflation expectations drift durably higher among US households and businesses, the Fed’s ability to characterize the shock as temporary diminishes rapidly, and rate cuts get pushed further out on the horizon.

The EU and UK face a compounded version of the same constraint. Both are significant energy importers, both are running inflation above target, and both governments are operating with considerably less fiscal headroom than they had when the 2022 energy shock required large-scale household support programs. The room to cushion households and businesses through the inflation chapter of this story is meaningfully smaller this time.

The Sequence

The reason the stagflation framing is appropriate here, but needs to be applied carefully, is that stagflation is not a simultaneous condition in this episode; it is a sequence with a specific order, a specific geography, and specific consequences that flow directly from the ordering itself.

Real household incomes in the developing world are falling now, due to the cost of cooking gas, transport, and food. Corporate margins are compressing across the supply chain as input costs rise faster than output prices in most sectors outside of energy. Investment decisions are being deferred because the cost environment is too uncertain to plan around, and that deferral of investment is itself a growth-dampening force that will persist beyond the immediate shock.

The demand destruction that will define the second chapter of this story has not yet fully materialized in the data. It will arrive when sustained energy and food costs reduce discretionary spending in EU and US households at a scale that is visible in retail data and ultimately in order books.

When that transmission completes, the economies that felt the inflation first, the garment exporters, the light manufacturers, the agricultural producers across Asia, will absorb the demand weakness second. The double-hit structure is the consequence of how this particular shock is sequenced through the global economy.

The double-hit structure is worse than a simultaneous shock would be for a specific reason - it forecloses the natural policy responses. A simultaneous shock can be addressed with a single coordinated response; a sequenced shock requires two responses at two different moments, and the tightening bias that was appropriate during the inflation chapter actively compromises the capacity to respond to the growth chapter when it arrives.

Central banks that raised rates or deferred cuts to contain inflation will find themselves with less room to ease when the growth data finally demands it. Governments that spent fiscal capacity cushioning households against energy costs will have less space to support demand when export orders weaken. The sequence does not merely describe how the damage is distributed; it also determines how much total damage is done.

Closing Thoughts

Markets have already started pricing in the inflation chapter of this story. We can see front-end yields moving higher, and easing expectations have been pushed back. If anything, the ECB, the BoE, the BoJ, and the RBA are all pricing in hikes. For emerging markets, many were on the path to easing and have now been stopped in their tracks.

But the growth chapter has not been priced, and that is where the asymmetry sits. Equities and credit are still trading as though the demand impact of this shock will be modest and brief, an assumption that the data flow through Q3 will seriously test.

Within that context, EM differentiation matters more than regional beta. Current account surplus economies with commodity export exposure are in a structurally different position from oil-importing economies facing the double hit described above, and treating them as a single asset class will produce the wrong conclusions.

While the story is still being written, it is one that has quite a bit of nuance, and uncertainty persists. The transmission of this shock will not be uniform, and neither will the policy response. We need to frame our investment decisions accordingly.

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What this has led to, however, is a relatively significant sell-off, against solid earnings growth expectations, resulting in margin compression.

Next Twelve Month Price-to-Earnings (NTM P/E) has now declined to about 19x, dropping -17%, so technically in a correction. Despite this backdrop, earnings estimates have not been recalibrated lower.

In fact, over the past month, earnings growth estimates have increased by 3%. Some of this, of course, comes from the energy sector because of higher crude oil prices.

Even though the NTM P/E ratio is actually more in line with the long-term average, we expect multiples to move back higher because the “E” or the earnings portion stems from the high-growth Mega Cap tech companies.

Having said this, given the current conditions of tariffs and higher energy costs, we won’t be surprised if some of the uplift in the P/E ratio comes from earnings estimates being revised lower.

A stronger USD for one-third of the quarter is also sure to play into some of the commentary. About 60% of the S&P 500’s revenues come from overseas sources. GS estimates that every 10 percentage point increase in the trade-weighted USD contributes to a -$7 drop in EPS, or a -2.1% decline.

With Q1 2026 earnings season starting on April 13 for the US, we look at the few issues that we should keep an eye on. The last two weeks of April will be the heaviest, with 60% of the S&P 500 market cap reporting during that timeframe.

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Peak Spend… still waiting on proof

Mega Cap Tech capex spending for AI is set to peak in Quarter 1, 2026, and analysts will be looking for guidance on how that may change.

The other issue coming more into focus these days is the depletion of free cash flow. We’d highlighted this back in November.

Whether it be for debt repayment or for direct capital expenditure, companies are diverting cash flows from their stronger business lines, thereby structurally weakening their financial position for an avenue that is yet to realize solid, sizable returns.

We will be looking at the growth in the headline numbers to justify the capex.

A Silver Lining on Tariffs… sort of

Chair Powell keeps reminding us that we have yet to see the full impact of tariffs on inflation. This was a bigger concern to him than the oil spike, which the Fed has usually been content to look through. We have seen some impact of the increase in prices of goods, but there is more to come.

However, the “more” may not be that much more. Now that the Supreme Court has ruled against the tariffs and alternative measures are being taken, the effective tariff rate actually goes down. We’d highlighted the chart below from GS in February, soon after the ruling. GS suggests that the effective tariff rate drops from 10pp to 9pp.

So we suspect that we will actually get some positive news on the tariff pass-through, i.e., it’s not as bad as we thought it was going to be.

Supply Chain and Fuel Costs… again!

Any optimism around lower effective tariffs may, however, be dampened by bad news of higher transport costs.

Industrials have been one of the hardest hit since the war started. We have the usual suspects - airlines and trucking, which are directly impacted by higher fuel costs.

“Our current industry forecast calls for the US airline industry to consume 20 billion gallons of jet fuel in 2026, which suggests a fuel price headwind in the $10s of billions on an annualized basis.” - Deutsche Bank

Their research suggests that, if all else remains the same, airlines could see a significant impact on their EPS forecasts.

However, the truth is, we will likely see costs being passed on, and demand destruction as fewer people will take flights.

Beyond that, freight rates have increased globally, not to mention the gradual increase in other commodity prices across the spectrum.

Fuel Oil - diesel & gasoline - are input costs for industrials, accounting for anywhere between 10-20% of costs. In many cases, long-term fixed price contracts mean companies cannot readily pass on these costs, leading to a hit to their profit margins, unlike the airlines.

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The Human Element

An update on the health of the consumer is an issue that we always want to hear about. Higher energy costs will certainly weigh on consumer spending, crowding out discretionary spending, in particular. One important tailwind we had flagged, in the beginning of the year, was fiscal stimulus. That situation is becoming more and more precarious.

The other factor is shifts in hiring. The labor market has been gradually slowing down over the past 6 months, with “AI taking jobs” being a particular concern.

We will want to keep an eye out for commentary surrounding this. Sustained high prices could slow down hiring even more, putting outsized pressure on the low-income consumer.

Weakness in the job market can certainly keep the Fed on a dovish path, not that we think that the Fed is looking to hike. Unlike the ECB and the BoE, the view for the Fed is a longer “hold” instead of an increase in rates.

What the Banks Know That We Don’t

Speaking of rates, the banking sector, as always, is a great source of information.

The burning question on everyone’s minds right now is private credit. More specifically, “Will stress from private credit spread to the banking sector?”

While many of the banks have made general loans to private credit companies, most of them are well-structured and collateralized. Nevertheless, there is always the risk of total failure. This is what we will want to know - how exposed are the banks to private credit, software, and AI?

Closing Thoughts

Given that we are in the fog of war, market participants will be less likely to make drastic moves, so the reaction function to earnings releases may be relatively muted. We’ve established previously that even if the war were to end in two to three weeks, the after-effects will continue to cloud the global economy, including the US. Continuing issues from AI, software, jobs, and of course, higher energy costs will all be previewed during this earnings season.

As always, there will be plenty to learn.

The closure of the Strait of Hormuz is that event.

For the first time in modern history, a major oil and gas chokepoint has been physically shut. We know the stats - roughly 20% of global oil and 25% of global LNG passes through those 33 kilometers of water1. We are seeing an immediate price shock, but the more important story is that this shock will linger as supply gets taken offline.

The world did not stumble into this vulnerability. It was built, deliberately, over a decade of policy choices that starved fossil fuel investment before any credible replacement existed. The Hormuz shutdown has now simply made it impossible to ignore.

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The 80% Reality

Let me start with a number that should be at the heart of every conversation about energy. In 2024, fossil fuels accounted for 86% of global primary energy supply, according to the Energy Institute’s Statistical Review of World Energy2. That share has been stuck near 80% for five decades, through every climate summit, every net-zero pledge, and every renewable record year. The world added more solar and wind capacity in 2024 than in any previous year. It also hit a fourth consecutive year of record fossil fuel demand.

We have not been in an energy transition. We have been in an energy addition. Renewables are growing, but they are being layered on top of a fossil fuel base that is not shrinking, because total energy demand is growing faster than clean alternatives can scale. That fundamental mismatch was always the problem. We chose to treat the aspiration as if it were already the reality, and we allocated capital accordingly.

The Capital Starvation

Between 2015 and 2025, upstream oil and gas investment fell 35%, from $869 billion to $567 billion, according to the IEA3. This was a deliberate policy outcome of ESG pressure on capital allocators. The IEA’s own 2021 Net Zero roadmap explicitly called for an immediate end to new oil and gas field development, and the financial system treated fossil fuel investment as a reputational risk. Capital did not flow away from oil and gas because demand was falling. It flowed away because the policy narrative said demand was going to fall but it never did.

Nearly 90% of annual upstream oil and gas investment since 2019 has not gone to finding new supply, but simply to offsetting the natural decline of existing fields. The IEA calculated in its 2025 field decline report that if all upstream investment were to stop today, global oil production would fall by 8% per year, losing the equivalent of Brazil and Norway’s combined output every single year. That figure was 4 million barrels per day in 2010, rising to 5.5 million in 20254.

The industry is just replacing lost barrels, and that too, not entirely.

The lead time problem makes the consequences of this choice structural and irreversible in the near term. A new conventional oil field takes roughly 20 years from exploration license to first production - five years to discover, eight to appraise and approve, and six to build. The decision not to invest in 2018, 2019, and 2020 is not a policy error that can be corrected immediately. It is baked into the supply curve for the next decade.

Then there’s the IEA’s own reversal, which deserves more attention than it has received. In 2021, its Net Zero by 2050 roadmap5 told the world that no new oil and gas field development was necessary. Capital markets, pension funds, and governments took that guidance seriously. In 2025, its report on field decline rates warned that sustaining production would require hundreds of billions in annual investment and flagged accelerating supply security risks. The institution that helped engineer the investment drought was, four years later, warning about the supply gap it had helped create. That reversal received a fraction of the attention the original roadmap did.

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Who Cut the Cord

Commercial bank lending to fossil fuel companies fell from $922 billion in 2021 to $632 billion in 2023. Major US banks left the Net Zero Banking Alliance in late 2024 and early 2025, increasing financing again in 2024 to $869 billion6.

The cumulative levels of financing have added up, but the pivot to green financing has definitely led to underinvestments in fossil fuel.

Capital migrated to private equity, at higher cost, shorter time horizons, and with far less institutional discipline. This is exactly the wrong structure for upstream development. It was the structural shift away from the long-term capital that conventional oil and gas development requires.

Energy commentator Alex Epstein argued in Fossil Future that a systematic underestimation of fossil fuel demand, combined with overestimating the readiness of alternatives, had driven policy frameworks well ahead of physical reality. Whatever one thinks of his broader thesis, the investment record since 2021 is difficult to argue with.

The cheerleading on renewables was so intense that capital rotated out of the one sector the world still depended on for 80% of its energy. The supply gap that is now visible in the Hormuz shock is a consequence of that rotation.

Oil Is Not Just About Fuel

The impact of the Hormuz closure on petrochemicals is only just now being discussed. Petrochemical feedstocks will produce 18.4 million barrels per day of polymers and synthetic fibres by 2030, more than one in every six barrels of global oil demand. Petrochemicals are already the dominant driver of oil demand growth, with their share of incremental demand rising to more than 60% in 2026.7 That share is rising as materials demand continues to grow, even as transport demand eventually peaks.

Petrochemicals are fundamental to a whole host of products that we use every day - plastics, synthetic rubber, fertilizers, pharmaceuticals, detergents, paints, and solvents. Remove oil and gas from the supply chain, and you are not just turning off the lights. You are disrupting food production, medicine, packaging, and construction simultaneously. And, here is the irony that the transition narrative almost entirely ignored - solar panels, wind turbine blades, EV battery casings, and building insulation are all petrochemical products. The physical infrastructure of the energy transition is manufactured from the material we decided to stop investing in.

Ignoring petrochemicals is a core policy error of the last ten years, and this is now becoming far more visible.

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The Reckoning Arrives

Last week, TotalEnergies dropped its net-zero 2050 target8. The reason was not a change of strategy but a legal impossibility - EU sustainability reporting standards require any net zero plan to align with 1.5 degrees of warming, and the scientific community consensus now holds that 1.5 degrees is out of reach.

TotalEnergies said it “must confront ambition with reality.” That statement, from a company that had been among the more credible voices on the energy transition, is as close to a formal acknowledgment of policy failure as the industry will produce. It will not be the last.

With the Strait of Hormuz closed and the structural supply gap now visible to everyone, the companies that followed the transition narrative furthest will face the hardest recalibration. The reckoning is not coming because of one corporate announcement. It is coming because the world is now confronting, in real time, what a decade of underinvestment in oil and gas actually looks like when the tap gets turned off.

Asia has already been acting on that reality for some time, without the formal announcement. Japan and South Korea, both advanced economies with net-zero commitments, never stopped expanding coal capacity because they understood, at a grid operator level, that they could not afford not to. China, Japan, South Korea, and Indonesia together account for 57% of the world’s 2,143 GW of operating coal-fired capacity as of 2024, and all four countries have added to that capacity since 20209. They made a different calculation than European policymakers - energy security first, transition ambition second.

The Hormuz crisis is now validating that sequencing in real time.

With LNG flows being disrupted, Japan has now moved to actively increase coal-fired generation as a near-term buffer. According to Wood Mackenzie10, coal fleets in the current shoulder season could offset up to 70% of Japan’s gas-fired generation and more than 100% of South Korea’s if utilization rates are pushed higher. South Korea is also actively considering more flexible use of coal if LNG deliveries remain constrained.

Europe’s own version of this reckoning is Germany’s Energiewende. It stands as the clearest and most expensive case study in what happens when you dismantle dispatchable baseload capacity on an ideological timeline rather than an engineering one.

Nuclear output peaked at 167 TWh in 2006. By 2025, it had reached zero with the final three plants shut down over objections from the country’s own grid operators, who had warned the decision was premature. The gap was filled partly by renewables, partly by gas, and partly by coal imports. German consumers paid some of the highest electricity prices in Europe. The grid required expensive emergency interventions during Dunkelflaute periods. Germany is now quietly reassessing whether a nuclear restart is feasible, a conversation that would have been politically impossible three years ago.

What Japan, South Korea, Germany, and TotalEnergies have in common is not a failure of ambition. It is a failure to protect energy security as a non-negotiable constraint throughout the transition.

Japan reached for coal because nuclear was paralysed since Fukushima, and LNG supply is now disrupted. Germany shut down nuclear power before storage existed and before the grid could cope. TotalEnergies cannot formulate a net-zero plan because the policy architecture assumed a pace of transition that the physical energy system never delivered.

They are the same failure, repeated across geographies, because the same mistake was made everywhere. The transition was planned around what we intended the energy system to become rather than what it actually was.

What an Honest Transition Requires

Chronic upstream underinvestment, concentrated supply geography, and geopolitical shock have arrived simultaneously in a system with no buffer. The Hormuz crisis is a major test, at global scale, of what the sequencing failure actually costs.

Countries that maintained diversified supply chains and refining capacity are managing. Countries that ran down reserves, rotated capital out of fossil fuels, and deferred infrastructure investment are not. Energy security has clearly not been prioritized in the right way.

The lesson is not that the energy transition should be abandoned. It is that it cannot be executed at the expense of the system it is replacing before the replacement is ready. Transitions require sequencing. Sequencing requires honesty about where you actually are, not where your policy documents say you intend to be. Energy security requires diversification that is maintained.

Continued upstream investment should not have been optional during the transition period, and we’re realizing that now. The IEA estimates that over 45 million barrels per day of oil from new conventional fields would be needed by 2050 just to maintain today’s production levels against natural decline. That does not happen without sustained capital at scale. Storage and grid infrastructure must precede, not follow, renewable capacity additions.

The energy transition is inevitable and necessary. The question is whether it is sequenced or chaotic. For the past decade, we have run the chaotic version - pulling investment from the incumbent system faster than the alternative could scale, and calling it progress. The Hormuz crisis is showing us, in real time, what that costs.

We’ve now crossed Week 2 of the Middle East War. I keep coming back to the word “unprecedented” because no one thought that this would happen, let alone go on for over two weeks. The Strait of Hormuz closing down was definitely not on anyone’s bingo card.

There’s so much going on that it’s almost hard to keep track. We’re covering some of the most pertinent issues in the daily Breakfast Bites. Today, I thought I’d share some more of the interesting charts that are floating out there.

Different Grades of Crude

We all know that crude oil comes in different grades, but quite often, we lose track of who produces what and where they end up. Here’s a great chart that gives us a rundown of the details. (I don’t have a source for this chart, but if anyone has it, please do share).

The Update on Middle East Exports

Very few tankers are leaving the Strait of Hormuz since the war started. Almost 19 ships have been attacked.

Of particular note is that no LNG carriers have left over the last few days.

What we’re seeing right now is the diversion of exports, from the pipeline that runs across Saudi Arabia to a location called Yanbu.

The country had planned ahead and built an east-to-west pipeline to transport oil to the Red Sea side of the country. The other pipeline that circumvents the Strait of Hormuz is the Abu Dhabi pipeline that runs to Fujairah, which was hit yesterday. The fire has been put out now, but exports from Fujairah are still lower than before.

There are still some issues on that side with Houthis threatening to attack. After 2023, shipping traffic still remains 50% lower than before.

Iran’s Exports

Iran has been exporting oil. According to some sources, exports have increased during the last two weeks, but I haven’t been able to confirm that. We know that China is the largest buyer.

However, on 14 March, the US managed to hit military installations on Kharg Island - Iran’s main hub for oil exports.

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Who suffers?

Well, the whole world suffers. But here are some numbers on the extent of buffers that some countries have. Some are in a more dire situation than others. Many of these countries use Natural Gas for electricity, and we have planting season in many parts of Asia, which means fertilizer stock is very important to keep costs down.

Transportation Fuel

A major issue during all of this is transport fuel.

We all know higher diesel prices will feed through to trucking costs, that may eventually be passed on to consumers. Tanker prices have already spiked, causing current shipping conditions to also tighten. Another alarming situation is whether ships will have enough fuel to operate.

Widespread flight cancellations in the Middle East and large-scale disruptions to LPG supplies are expected to curb global oil demand by around 1 mb/d during March and April compared to previous estimates.

Nevertheless, Jet Fuel prices have soared, and this is bound to put pressure on the airline industry and consequently, passengers. Many airlines don’t hedge jet fuel prices anymore, and according to Deutsche Bank, the last time crack spreads were this high, Delta had to file for bankruptcy. But, airlines are in better shape now - the key will be the length of the war, and how much of the SPR release alleviates the pressure.

Meanwhile, the Middle Eastern carriers have done a phenomenal job restoring flight traffic - Emirates, in particular, is a standout. Dubai Airport is a major hub for both commercial and passenger traffic.

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A balance of pressure?

JPM is tracking the level of shut-ins, i.e., when production facilities in the Middle East have to shut down because there is no more storage. According to their latest shart, shut-ins are above their estimates.

The IEA has announced the largest oil release ever. This is both good news and bad news. The good news is that there will be some barrels back on the market. Although they go to only the 32 IEA countries. Some will be released this week, while the rest will be by the end of March. The bad news is that the flow will likely not be enough to cater to the almost 20mbpd lost from the Strait of Hormuz. This level of release also signifies that there may be a more lengthy war than previously anticipated, or at least the after effects are expected to linger (we know the second is true).

Where is the war headed?

BCA research published this in the very early days of the war, but I think it still holds true.

Two important issues that weigh on the US is the people’s view and the midterm elections.

According to polls, people are not really supportive of this war.

So it remains to be seen how this pans out. At this stage, I don’t think anyone knows when or how the war will come to an end. What we do know is that the longer this persists, the more lasting the impact of the war will be, as we talked about last weekend. In the meantime, all we can do is stay informed and trade carefully.

MacroVisor

The Weekend Edition 172: The Hormuz Multiplier

Happy weekend, and welcome back to the MacroVisor Weekend Edition…

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2 months ago · 15 likes · 1 comment · Ayesha Tariq

As always, the Weekend Edition remains free. If you found this useful, please share it. Breakfast Bites subscribers receive the daily tactical note and outlook each morning.

I’ve been thinking a lot this week about how markets always fixate on the most visible number, and right now, that number is crude oil. Brent has crossed $90/bbl is the headline. But the more I dig into what’s actually happening across supply chains, the more convinced I am that oil is just the opening act. The war in Iran is producing a cascade of second and third-order disruptions that most investors haven’t fully priced yet. That’s what I want to work through today.

The Direct Hit: Oil, Gas, and the Arithmetic of Disruption

Let’s start with what we know. The Strait of Hormuz carries roughly 20 million barrels of crude per day, or approximately 20% of the world’s traded oil and LNG supply. As of Day 6 of the conflict, commercial traffic through the strait was virtually nonexistent, with activity largely limited to Iranian vessels.

The consequence is a rapidly building storage overhang. Roughly 76 million barrels of crude have accumulated in the Gulf since the end of February, split between floating storage, refinery tanks, and commercial facilities. That is approximately 4.5 days of regional crude exports sitting idle. Iraq has already cut supply by about 1.5 million barrels per day; Kuwait is approaching tank tops and has cut refinery runs by around 600,000 barrels per day.

Goldman Sachs models two scenarios from here. In their baseline, the disruption is short-lived, and oil averages $76/bbl in Q2 and $65/bbl in Q4, as the market’s risk premium fades. In their upside scenario, oil temporarily reaches $100/bbl, pushing global headline inflation up by 0.7 percentage points and shaving global GDP growth by 0.4 percentage points.

JPM puts it more starkly: the market faces an asymmetry of -$10 on reassuring headlines and +$30 once Gulf production shut-ins begin to ripple through.

Saudi Arabia has attempted to reroute exports through its East-West pipeline to Yanbu on the Red Sea. Loadings there have surged to about 2.5 million barrels per day, up 1.8 million month-on-month, but the pipeline is still running well below its 5 million barrel capacity, and logistics at the port are constraining the ramp. The UAE’s Fujairah terminal has barely moved despite 400,000 barrels per day of spare bypass capacity sitting unused. In total, roughly 1.6 million barrels per day of available alternative export capacity is not being utilized.

Then there is the Houthi variable. Any serious attempt to reroute Gulf crude through the Red Sea faces the same armed corridor that has plagued shipping since late 2023. The bypass isn’t clean.

The Indirect Impact: When Oil Becomes Everything Else

This is the part that gets under-appreciated in the opening days of any oil shock. Crude oil is not just fuel. It is the raw material for an enormous range of industrial and consumer products, and the supply disruption is now working its way through all of them.

Fertilizers

Natural gas and its liquid derivatives are the primary feedstock for nitrogen-based fertilizers, and the Gulf is a major global supplier of urea. QatarEnergy declared force majeure on March 4, halting production of urea and polymers alongside LNG at its Ras Laffan complex. The timing matters enormously: northern hemisphere spring planting is either underway or imminent, and fertilizer procurement cannot simply be delayed a few weeks without consequences.

The supply disruption from Qatar compounds existing tightness in the urea market. Korea’s 2021 urea crisis, triggered by a sudden drop in Chinese exports, is the precedent people are referencing, and it is not a comfortable one. Agricultural commodity prices have barely reacted yet, which suggests the market is either assuming a short disruption or hasn’t fully connected the dots.

Helium: The Supply Chain You Cannot Synthesize

I want to spend more time on this because it is genuinely unusual, and the implications extend well beyond energy markets.

Helium cannot be synthesized. It is a byproduct of the radioactive decay of uranium and thorium, trapped in geological formations over millions of years alongside natural gas. When you extract it, you cannot replace it. The US is the largest producer globally, but Qatar accounts for approximately 30% of the world's supply, all of it extracted as a byproduct of LNG liquefaction at the Ras Laffan facility (Chemical & Engineering News, March 2026).

With Ras Laffan shut down and the Strait of Hormuz closed, that 30% of the global helium supply has effectively gone offline. Helium prices are already rising, with surcharges being applied by at least one major industrial gas supplier. If the disruption extends beyond two weeks, logistics networks will be forced to restructure, and unwinding those changes afterward could take months, according to consultant Phil Kornbluth (Gasworld, March 2026).

Why does this matter for markets? The semiconductor industry accounts for roughly 24% of global helium demand. Helium is used to cool silicon wafers during the lithography and etching processes, creating stable vacuum environments and preventing overheating at the high temperatures required to etch transistor patterns. South Korean lawmakers have already sounded the alarm, noting the exposure of firms like SK Hynix and TSMC to a prolonged supply squeeze (SDxCentral, March 2026).

Qatar also houses one of only two plants globally that produce semiconductor-grade helium. The market was already in a period of tight supply even before this crisis. A sustained disruption introduces a real cost input shock into the semiconductor industry at precisely the moment global AI infrastructure investment demands more chips, not fewer.

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Synthetic Fibers and Textiles

Around 70% of all textile fibers globally are oil derivatives. Polyester alone now exceeds all natural fibers combined in terms of global consumption volume. The raw material for polyester is purified terephthalic acid (PTA), which is derived from paraxylene, which is in turn derived from crude oil and naphtha.

An oil price shock of this magnitude doesn’t just inflate energy costs for garment factories. It raises the cost of the fabric itself. For a global apparel industry already navigating demand softness, margin pressure, and extended freight times, a simultaneous spike in synthetic fiber input costs is a compounding stress, not a separate one.

Methanol, Polymers, and the Broader Petrochemical Chain

QatarEnergy’s force majeure declaration extends beyond LNG and helium. It covers methanol, polymers, aluminum, and other natural gas-derived products. Methanol is a foundational industrial chemical used in the production of formaldehyde, acetic acid, and a range of plastics and resins. China, South Korea, and Japan are particularly exposed here, given their reliance on Gulf methanol imports.

Aluminum production at Qatar’s smelters has also halted, as LNG powers the electricity needed for the highly energy-intensive smelting process. Electricity accounts for roughly 40% of aluminum production costs. The ripple effect from a prolonged Qatar shutdown touches automotive parts, packaging, construction, and electronics.

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Broken Connections: Aviation and Shipping

The Middle East is not just a source of energy. It is the physical architecture through which global trade and passenger traffic flow. That architecture is now severely disrupted.

The Aviation Crisis

Dubai International Airport is the world’s busiest hub for international passengers. It is the connecting point between East Asia, South Asia, Africa, and Europe for hundreds of millions of travelers annually. Doha and Abu Dhabi perform similar roles. Together, they are the connective tissue of long-haul aviation.

Since the conflict began on February 28, more than 23,000 flights have been cancelled, leaving over a million travelers stranded across multiple continents (Fortune, March 2026). Emirates, Etihad, and Qatar Airways all suspended or severely curtailed operations. Turkey’s Istanbul Ataturk, a secondary hub for many Europe-Asia routes, is also congested as traffic reroutes. The disruption has been described as unprecedented outside of the COVID-19 pandemic, when travel was explicitly prohibited. This is worse in some respects: aircraft and crew are physically displaced across the globe, creating a logistical knot that takes weeks to unwind even after airspace reopens.

The impact is not just inconvenience. Airlines face a jet fuel cost shock simultaneously. Delta has estimated that a 10% rise in jet fuel prices adds approximately $1 billion to its annual fuel bill. For carriers with heavy Gulf route exposure, the combination of lost revenue from cancellations and rising fuel costs could be severe enough to affect guidance.

Freight and Shipping

Maritime freight was already under pressure from the Red Sea Houthi attacks that have been ongoing since late 2023. The Suez Canal route, which handles a significant share of global container trade between Asia and Europe, had already seen a meaningful diversion of traffic to the Cape of Good Hope, adding 2-3 weeks to transit times and raising freight rates.

The closure of Hormuz now places additional pressure on those same alternative routes. Energy tankers seeking to bypass the Gulf are competing for the same Cape of Good Hope corridor that container ships are already using. More vessels, same lanes, means higher rates and lower vessel availability across the board. War-risk insurance premiums have tripled from roughly 0.125% to 0.2-0.4% of vessel value per transit, a cost that ultimately passes through to importers and consumers.

Dubai’s role as the world’s primary air freight transshipment hub has also been disrupted. Air cargo from Asia to Europe and Africa routed through Dubai is now facing the same operational uncertainty as passenger traffic. This affects pharmaceutical supply chains, electronics, perishables, and e-commerce with particular severity.

The Sovereign Wealth Fund Withdrawal

This is a longer-term structural shift that I think the market is not pricing at all yet, and it may prove to be the most durable consequence of the conflict.

The Gulf Cooperation Council’s sovereign wealth funds collectively manage approximately $5.6 trillion in assets, a figure that was forecast to reach $8.8 trillion by 2030 (Foreign Policy, December 2025). They account for roughly 40% of global SWF assets and represent six of the ten largest funds in the world. In the first nine months of 2025 alone, Middle Eastern sovereign investors accounted for 40% of all state-investor deal value globally, deploying $56.3 billion (Global SWF). These are not passive capital pools. They have been among the most active and sought-after co-investment partners in global private equity, infrastructure, AI, and real estate.

That is about to change, for two reasons.

The first is the defense and reconstruction bill. Countries at the epicenter of this conflict, Qatar, UAE, Saudi Arabia, Kuwait, will face significant near-term costs in bolstering air defenses, protecting critical infrastructure, rebuilding what has been damaged, and addressing the economic fallout of the disruption to their energy sectors. These are domestically binding fiscal demands. The model of directing hydrocarbon surplus into global investments assumes a certain level of stability at home. That assumption has now been tested.

The second is the shift in revenue. These funds are ultimately funded by oil and gas export revenues. A prolonged supply disruption reduces those revenues precisely when domestic expenditure demands are rising. The math is tightening from both sides.

The consequence for global capital markets is real. GCC SWFs have been active in European infrastructure, US private equity, Asian technology, and global real estate. A meaningful pullback in new deployment, or worse, liquidation of positions to meet domestic funding needs, would remove a consistent and significant source of long-duration, patient capital from markets that have become accustomed to its presence.

The Political Architecture: Was This by Design?

I want to end with something analytical and uncomfortable, drawing on the thinking of Dr. Anas Alhajji, one of the most rigorous energy economists I follow.

His argument, and I think it deserves serious consideration, is that this crisis has served a remarkably coherent set of US strategic objectives, and that the alignment between outcomes and stated policy goals is too precise to be entirely coincidental.

The US National Security Strategy, published last November, made two things clear: AI dominance requires energy abundance, and that energy needs to be cheap for US companies and expensive for competitors. Separately, Trump has been explicit about wanting Asian companies to sign long-term LNG contracts with US suppliers, wanting to reshore semiconductor manufacturing, and wanting to sell more US agricultural products to countries like India that have resisted them.

What has the Hormuz crisis actually delivered? The halt to Gulf helium exports, with the US as the world’s largest helium producer, has damaged Asian semiconductor supply chains directly. The shutdown of Gulf fertilizer exports to India creates the conditions to pressure New Delhi toward purchasing US agricultural products. The disruption to methanol exports has hit Chinese, Korean, and Japanese industrial production. And most significantly, every Asian company watching this unfold is now acutely aware of the risk of depending on Gulf energy, and is reassessing long-term supply diversification toward US LNG and oil.

Trump’s offer of insurance guarantees and naval escorts to reopen the strait is the final piece. It effectively makes US military presence the price of passage, establishing indirect control over the cost and availability of Gulf energy exports to competitors. The offer also raises insurance costs on non-US-escorted shipping, which structurally advantages US supply.

Whether this was deliberately engineered or is simply a fortuitous alignment of outcomes with objectives is ultimately a question about intent that I cannot answer from the outside. What I can say is that the strategic beneficiary of this crisis is unambiguous. And that framing should inform how we think about when and how it ends.

As Alhajji notes: Trump has now achieved all of his energy and strategic objectives. The incentive to end the conflict quickly is correspondingly high.

What I’m Watching

The next 7-10 days are critical. J.P. Morgan estimates supply shut-ins will escalate from the current 1.5 million barrels per day to potentially 4-6 million barrels per day by end of next week if refined-product storage in Kuwait and the UAE reaches capacity. That is the threshold at which this transitions from a price shock to a genuine supply crisis.

I read refiners in Singapore have also started to declare force majeure, shutting down refineries. These refineries usually need to run with at least 60% feedstock, and when it drops below that level, shutting down is the prudent measure.

Beyond energy, I am watching helium surcharge announcements from Linde, Air Liquide, and Iwatani. Any force majeure cascade in that market would take months to unwind and would directly affect semiconductor production costs globally.

On the SWF side, I’m watching for any signals of liquidity needs or position changes from the major Gulf funds, particularly in credit markets. GCC sovereigns have been large buyers of US and European fixed income; any reversal in that flow would matter.

The political track matters most. If there is a ceasefire, the risk premium can deflate quickly. But the physical damage to Ras Laffan, to Saudi refinery infrastructure, and to maritime confidence will take longer to repair than a ceasefire announcement.

The oil price might settle. The second-order story will linger.

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Some of this gained momentum as Bloomberg published an article titled: Private Equity’s Giant Software Bet Has Been Upended by AI

Last year, we covered how the debt market has entered the chat, funding mega cap tech data centers, specifically noting Oracle and the Blue Owl case. This represents the flip side, where private market lending is exposed to a sector facing disruption from AI.

The fear hitting software stocks is not unrealistic. If AI can do the job, then companies need fewer people, and therefore, they need to buy fewer licenses. This started with the “vibe coding” phenomenon and has now spread to other companies such as Salesforce and Adobe.

Lenders previously viewed software companies as “easy money” because their subscription revenues were considered stable and guaranteed for years. Now, however, that funding is drying up because banks fear AI will make those software products obsolete faster than the companies can pay back their loans.

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We also had news from Anthropic discussing a new “legal” AI tool that could automate reviewing contracts, non-disclosure agreements, compliance workflows, and legal briefings.

European companies providing legal software saw their share prices take a significant hit. (https://www.theguardian.com/technology/2026/feb/03/anthropic-ai-legal-tool-shares-data-services-pearson)

However, Anthropic also provided a disclaimer that the work needs to be reviewed by licensed attorneys before relying on it for legal decisions. So we’re not getting rid of all the lawyers just yet!

Nevertheless, the question remains: how do we train our lawyers then? Law, medicine, and several other professions are called “a practice” for a reason. People require hours of practice to get to extremely skilled levels. That basic foundation of grunt work actually does serve a purpose, providing people with the mastery of basic skills before moving on to the next level.

By taking away that “practice” from the future generation of lawyers, I’m not sure what we’re looking at. Perhaps we’re thinking about shorter hours and more work-life balance. But, it could also mean a slower climb, and eventually a reason not to follow through on pursuing the profession.

While I’m all for making legal and medical advice accessible to people, I’m not completely certain that the “AI” we currently have can do this seamlessly. We’re arming more keyboard warriors with information that may or may not be correct, allowing them to challenge professional opinions because their AI Chatbot said so. Arming people with knowledge is a good thing, but we have to hope that it’s the right knowledge.

Having said this, we’re still looking at a situation where Business Development Companies are highly exposed to the software sector, in many cases, more than anticipated. According to Raymond James, software exposure could be categorized under different industries, e.g, healthcare software would be under the healthcare sector.

A Business Development Company (BDC) portfolio is essentially a collection of loans made to private, medium-sized U.S. companies.

According to GS, the loan market serves as a more direct channel for stress affecting software issuers. Software accounts for nearly 16% of the leveraged loan universe but makes up less than 5% of the HY bond market. Credit quality is also weaker within the loan space. While less than 30% of the HY market sits below the B- (B3) threshold, 52% of software and computer services loans are rated below that level. Even before taking the benefit of loan seniority into account, the typical software corporate rating profile looks stronger in the HY market.

So again, it’s the direct lending market that we need to be more concerned about. Having said that, we’re not likely to see this show up in the financial statements of listed BDCs anytime soon. So the sell-off is definitely premature, and is not considering the level of risk involved.

Software companies are not sitting idle either. They are pivoting as well - using AI to improve their offering.

For once, I am actually not erring on the side of caution. I think this sell-off is overdone. While software companies will take somewhat of a hit, time will tell whether that hit is substantial enough for everyone to panic the way they have.

I started writing my Substack with the Weekend Edition in 2021, but sometime in April 2025, I took a long pause. There was just too much going on everyday and the weekends were also filled with events that became overwhelming.

My Weekend Editions had started out with a weekly recap, a specific topic to discuss, a review of earnings, and calendars.

But over time, since we introduced the Breakfast Bites covering the market daily, I don’t see the need to recap the week, and would rather focus on themes and issues that have been living rent-free in my head.

As always, the Weekend Edition will always remain free.

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“Sell America” May Not be What it Seems

It has been a turbulent few weeks for the market. First, the Federal Reserve was served subpoenas leading to Fed Chair Powell calling it a pretext to attack them personally. This brought about questions about Central Bank independence - a cornerstone for economic stability.

Second, we had threats of tariffs on Europe and a heated situation surrounding Greenland. Global leaders took to the stage at the World Economic Forum to denounce what America has been doing.

The result - “Sell America” has become a theme.

The moment we say this, it’s natural to think about the US stock markets, but that’s not where we should be looking. US Equities did sell off during the geopolitical stress. However, that had more to do with stretched valuations and extended positioning. It didn’t take much to rattle the equity markets, but as we see from earnings season, the fundamental story of earnings and revenue growth still remains intact.

As we approach the major earnings period over the next two weeks, we’re likely to continue to see growth in the US equity markets, resulting in some stability in prices. Consensus estimates suggest a 20% YoY growth for megacap tech, and that should keep the momentum going for the equity story.

The bigger issue is the uncertainty surrounding US public policy - both domestic and international. We just don’t know what to expect next.

This comes against a backdrop of rising fiscal spending, adding to the debt burden of the US that was already a concern for most investors. Let’s not forget about the weakness in the labor market and the sticky inflation, possibly leading to some economic weakness in the second half of the year.

I have no qualms about American Exceptionalism when it comes to equities, and given the pace at which innovation was taking place, particularly in the AI sector, US equity markets may reign supreme.

As an investor, staying in the US equity markets makes sense. The volatility may be short-lived and may, in fact, give us opportunities to buy the dip in companies with solid fundamentals. This extends to investment-grade debt as well, which is why we’re seeing issuances being lapped up and spreads narrowing.

The US Treasury Market is a different story. Most recently, we’ve heard theories of Europeans dumping US Treasuries after the Greenland issue. But the shift started ahead of that.

We’ve seen Central Banks actively accumulating gold as a fallback asset instead of heading straight for US Treasuries (USTs). Not only do USTs no longer command the same platinum rating that they used to, but more and more countries are wary of where the US is headed.

Rising fiscal spending will ultimately require more debt issuance, despite what the Administration says about tariffs supporting revenues. While the US Treasury has been content to remain at the front end of the curve over the past few years, 2026 may be the year that issuances start to migrate to the longer end of the curve to support the deficit spending. More supply = lower price = higher yields.

While this should be attractive for global investors, the concern is more around the untenable nature of the debt now. We’ve already seen that global demand for US Treasuries has taken a hit. Much of that has been replaced by central banks buying gold. More recently, we’ve seen foreigners actually buying Japanese Government Bonds at a record pace for the last two weeks.

The chart below shows us Net Capital Flows trending lower, despite positive flows coming into US equities.

Serving a subpoena on a sitting Fed Chair doesn’t bode well with international markets. There is a major question surrounding central bank independence, and we know the Administration is poised to name a Fed Chair who will likely favor easier monetary policy.

But this late in the game, we now seem to have a dark horse in the Fed race - BlackRock’s Global Head of Fixed Income, Rick Rieder. He is quickly becoming a favorite for the Fed Chair pick as he brings some balance and can dispel some of the worries surrounding the perceived neglect of Central Bank independence. Nevertheless, Rieder is also partial to easier monetary policies, as he’s been heard saying that interest rates are still too high for the housing market and consumers.

What We’re Watching

Given this situation, the obvious indicator that we’re keeping a lookout for is the Yield Curve. With easier monetary policy, we expect the front end of the yield curve to remain depressed, while the long end of the yield curve is likely to rise steepening the curve. We’ve seen a preview of this happen already, and with more uncertainty in US policy and economic outcomes, we expect this to continue.

The steepening of the yield curve favors cyclicals when it comes to equities, but it also brings with it some bad news. Past is not prologue; however, the pattern usually suggests that a yield curve above 1 and recessionary conditions go hand in hand.

With the strength in economic growth bolstered by fiscal spending, this doesn’t seem to be a likely outcome on the face of it. However, we never say never, and if the momentum in company earnings doesn’t hold up and we see another spike in inflation, we may see deterioration in economic conditions, even if we don’t see a recession.

Our top allocations have been gold and uranium, and more recently, we’ve also added cyclicals such as consumer discretionary and transportation, all of which are doing fairly well.

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Thursday brought us some interesting comments from Fed speakers, some alluding to a possible rate cut in June, if trade tensions cause an increase in unemployment. The market clearly didn’t hear the second part of the discussions, and the prospect of a Fed rate cut seemed to be cause for celebration.

With last week’s move, the S&P 500 is now +10% from the recent low, and is closing in on recovering the drop since Liberation Day.

Is this a sustainable buy signal?

To be fair, we don’t really have the all-clear yet. There’s still a lot that needs to be determined.

A few conditions still need to be fulfilled for the all-clear:

• Tariff Policy Clarity

• Stable Macro Data

• Monetary Policy Support

• Earnings Push

• Improved Positioning

• Buybacks could create a floor

Tariff Policy Clarity

Yesterday, I posted the following chart on Twitter showing that Customs revenues have started to roll in.

I got an interesting question - “Aren’t the tariffs on pause”?

This is a very valid question, and it goes to show that there still remains a lack of clarity on tariffs. What we know so far:

• China has been hit with 245% tariffs

• There is a 90-day pause on reciprocal tariffs, but a 10% universal tariff still remains on ALL countries.

• Mexico and Canada are still at 25%, or at least that’s what we think.

• There are further nuances in sector tariffs.

• Tariff rates and exceptions are changing almost every day.

We’re only looking at these changes and trying to model what the outcome could be for companies, and how they could weigh on stock prices.

Think about CEOs and management teams. They’re pulling their hair out. From small to big companies, anyone who has any international exposure doesn’t know how to plan for the next three months, let alone three years.

This uncertainty at the company level means we don’t know anything about how these companies will decide to shape their plans once tariffs have settled in place, which makes it infinitely harder to value the companies and put a price on their stock.

What we’re doing right now is buying on guesswork and faith.

Stable Macro Data

Inflation expectations have been increasing. In fact, the last reading was the highest seen since 1982.

Now, with an average level of tariffs, we can expect inflation to start creeping up. Even if the long-term goal is to move production back to the US, we all know that in the interim, companies will have to pay the tariff to import, and pass on some (if not all) of that increase in costs to consumers. Those that don’t pass on the increase in costs will take a hit to their margins.

If companies absorb the costs of tariffs, they will need to cut costs elsewhere, and that could start to push unemployment up. Again, not the ideal situation.

Finally, if the tariffs remain high enough, we will see consumer demand dry up and lower imports. The inflation could turn to deflation, and that will see GDP growth data drop.

We’re seeing activity data (PMIs) start to point lower, and prices paid start to turn higher. This could be the first phase.

Striking the balance between tariffs, inflation, and unemployment, and positive GDP growth will be tricky. Until we see stability, we may continue to see choppy markets.

Monetary Policy Support & Multiple Expansion

While Fed speakers alluded to a rate cut in June / July, we still have only 2 cuts projected for the year. If you remember, last year we had 4 rate cuts scheduled for 2025, and that optimism led to most analysts modeling much higher price targets for the S&P 500 because of multiple expansion. With tariffs threatening to keep inflation sticky, we’re not likely to get the kind of easing that we had hoped, unless we see a recession. That would be bad for the market, and rate cuts would actually not be much of a welcome move.

If we do, however, get favorable news on tariffs, we could see a shift in monetary policy, and that could very well take us back to the path that we were on, with multiples increasing and stock prices going higher.

Earnings Push

The second factor of the valuation target is earnings. Most analysts were looking at a +14% increase in EPS for the S&P 500. The blended earnings growth rate according to FactSet is now 10.1%. Blended earnings take actual results + estimated results for those that have not reported yet.

We’ve been seeing data from MS as well, which shows us earnings estimates are being revised lower, and now just in the US, but globally as well. However, these are just the estimates. And until we have more clarity on trade negotiations, it’s likely that the worst will be feared.

So we still need that push from earnings to see some stability in this market. Google’s earnings last week gave us some hope. Investors liked the double beat and the beat on Search. There’s still a lot left to be determined in terms of AI capex deployment, but the market was looking for some good news, and got it. The bar was set quite low.

Next week, ~39% of the S&P 500 will report earnings, with Amazon & Apple in focus due to tariffs.

Positioning needs to improve

We looked at positioning a few weeks ago, and things only got worse from there. What we saw was hedge funds, managed funds & systematic funds (CTA) reducing their exposure to US Equities. We also saw that foreign buyers were stepping aside. GS shows that Europeans have been net sellers over the past two months.

Many of the systematic funds tend to have trigger levels, where they flip to buying again. These levels may change, but not by much. As of now, GS expects CTAs to start buying again between 5480 and 5600.

Earnings season could also bring about a change in positioning for hedge funds. The issue here is the rotation. We may continue to see rotation into sectors where valuation is “less expensive”, as healthcare, consumer staples. These are also the more defensive sectors and are not dependent on a narrative, such as AI. We’re also likely to see more rotation into Large Cap value and low volatility.

We actually proposed buying SPLV two weeks ago, and that has been quite resilient in this market.

If you recall, the sell-off this year was initially on the AI trade breaking down, after Chinese companies released their LLMs. So, it stands to reason that there could be some caution in terms of the AI trade. Next week’s earnings should tell us more. But the bottom line is, we need to see those flows start to come back.

Buybacks may accelerate

With all the uncertainty ahead, many companies are indecisive about how to deploy capital expenditure allocations. We highlighted this as a major issue that may crop up. While that may put a dampener on Private Capital Spending in GDP growth reports, it could also mean that companies are sitting on more cash. With stock prices cratering, this could prompt companies to start using their buyback authorizations and buy back stock.

Buying back stock is also an easier way to allocate stock than increasing dividends. People don’t like it when companies cut their dividends so once they increase the dividend percentage, it’s hard to go back. Buybacks also give a false impression of improving EPS.

Note that last week and the upcoming week are the two biggest weeks during earnings season and post that ~72% of the S&P 500 will be out of the buyback blackout window.

The issue is timing. Most analysts peg the total buyback number at $1T+ for 2025. With the excess cash and low stock prices, we may see accelerated buybacks over the next quarter, with lower levels towards the end of the year. This is could provide a floor to stock prices.

Closing Thoughts

I’ve been very cautious over the past few weeks and have been talking about not blindly buying the dip. We need to see confirmation that the market has stabilized before we can consider looking into going all in. I think we all have FOMO, and social media just seems to make it worse. Most people who tell you blindly buy the dip are operating on faith.

Yes, the market eventually goes back up. But if the dip keeps dipping, how long can you hold out?

If you’re buying on margin, I suspect things can get very uncomfortable.

When Nvidia was at $150, I’m sure there were people who thought - “I should’ve bought it at $98. I’ll never get this chance again.” It went down to $87 two weeks ago.

If you can withstand the dip, there’s nothing wrong with averaging in. But, I also don’t think that it makes practical sense for me to say things are great again when they are not.

The level of uncertainty continues to remain high.

Have a safe trading week out there!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

Calendars

US Earnings

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than if explicitly mentioned.

The past week seemed like a year. While markets are yet to recover, we’ve seen some respite with all the broad market indices closing in the green for the week.

However, we still remain below the 200-day moving average, and looking closely at the daily price action, we see that choppiness abounds.

Markets are highly reactive to the news and have been seeing large one-day price swings of almost 8% on particularly low volume. This tells us that plenty of market participants are still sitting on the sidelines.

Volatility continues to remain significant. The SPX Volatility Index or Vix continues to hover at levels above 30, when the 3-year has been 18.8.

The other issue that spooked the market this week was the bond market. With lower growth, we’d expect bond yields to fall. That’s what we’ve been seeing. One of the arguments put forth was that this was all being engineered by the administration to reduce yields so that US Treasuries could be refinanced at lower rates, leading to a lower interest burden.

But on Wednesday, we saw quite the opposite. Yields started spiking, and the bond market was selling. There were some concerns that this was because of the basis trades and various other structured products. Some say it was the Japanese and/or the Chinese selling bonds.

The bottom line is though, that bonds were being sold - whether by choice or forcefully. And quite likely, the cash was being used either to meet margin calls, buy gold, or move to other currencies/assets.

The net result of course, is that we saw gold spike and the US Dollar start moving lower. In fact the USD Index (DXY) hit a 3-year low on Friday.

The Money Printer

Fed speakers also confirmed stepping in if the markets became turbulent. and this would not be the first time the Fed has stepped in. Of course, we know they swooped in during the 2020 pandemic, and that was a larger problem. But in 2019 as well, the Fed had to step in.

On September 16, 2019, the repo rates started to spike.

Repo rate: The rate charged for a Repurchase Agreement. A repurchase agreement, or 'repo', is a short-term agreement to sell securities in order to buy them back at a slightly higher price.

Both the Effective Fed Funds Rate (EFFR) and the Secured Overnight Financing Rate (SOFR) started to move outside the FOMC’s target range.

A few basis points move is not entirely unusual, but these spikes were well above the range.

On September 17, 2019, the SOFR crossed 5%, and this was at a time when the Upper Bound of the Fed Funds Rate was 2.25%.

The Fed responded by injecting $75 billion into treasuries and MBS. This operation provided $53 billion in additional reserves and led to an immediate decline in rates.

The Fed also continued to reduce rates for the rest of the year.

We aren't seeing anything similar to those levels just yet. But this kind of distress can unfold quite quickly.

The current level of overnight repo has decreased substantially from where we were, and this doesn’t necesarily mean distress unless you look at the context. This can, however, be a sign of tightening liquidity conditions, especially if it’s paired with rising rates and widening spreads in other parts of the market, as we are seeing. Bank reserves still remain solid so there’s not reason to panic, but we’re still seeing the Fed starting to pay attention to managing liquidity, perhaps pre-emptively.

During their last meeting, the reduced their level of QT (quantitative tightening) or bonds running off the balance sheet drastically, and should there be further disruption in the markets, they will likely stop QT altogether.

Again, the bar to starting QE (quantitative easing) or outright buying bonds is likely quite high at this stage. But if the bond sell-off continues we may see that happen. It would be a more effective way to introduce liquidity into the system than cutting rates. This is why you see a lot of people talking about the Fed bringing back the money printer.

Uncertainty of Tariffs still remain

The uncertainty around tariffs continues to weigh on global trade sentiment. Despite some recent clarity, we’re far from a resolution. Europe is still moving forward with plans to impose retaliatory tariffs on the US starting April 15, in response to the longstanding steel and aluminum dispute. That’s just the beginning — additional tariffs could follow later this month, in May, and again in December. The risk of a drawn-out tit-for-tat scenario is very real.

Meanwhile, Canada and Mexico — two of the US’s largest trading partners — remain in a holding pattern. No firm resolution, no clear path forward. And while China has taken the brunt of the tariff escalation, with a current effective rate of 125%, it’s worth remembering that US imports from China extend far beyond just semiconductors and hardware. It’s a broad basket that touches everything from machinery to consumer goods.

Even though the US has left a baseline 10% tariff in place on most other trading partners, pending negotiations, the average tariff rate has barely budged. We’re now at a weighted average of 24%, slightly lower than the 27% peak — but still elevated enough to affect supply chains, corporate planning, and inflation expectations. The situation might feel like it’s calming down, but under the surface, it’s anything but settled.

Inflation and Credit Risks

And the markets are certainly not discounting the weight that these decision will have on American businesses. On Friday, we saw the University of Michigan’s sentiment reading showing another spike in the inflation expectations - both for the year ahead and for five years out.

Add to that, we’re seeing High Yield credit spreads start to move up.

The ICE BofA US High Yield Index Option-Adjusted Spread is basically a way to measure how much extra return investors want for holding risky corporate bonds instead of safer US government bonds.

When this spread moves higher, it usually means investors are getting more cautious. They’re worried about the financial health of lower-rated companies and want to be paid more to take on that risk. A rising spread can be a sign of growing stress in the credit markets or concerns about the broader economy.

It stands to reason that higher tariffs will put a lot of smaller companies out of business. Many of these companies operate on very thin margins, and often, their lifeline for operations remains credit- whether that is bonds issued in the market or bank debt.

This is yet another reason to keep an eye on the regional banks. If these companies go through stress, then a lot of regional banks that have loaned them money will also start to go through stress. So, we’re definitely not out of the woods.

Closing Thoughts

The Tariffs were paused, and the market rallied. Now, the market is convinced that there is a Trump put, and we need to keep that in mind while trading. We could see reflexive buying at the 4800 level for the SPX. Part of that also had to do with the spike in yields and the perceived instability of the US Treasury market. So that’s yet another signal.

So we have perfect conditions for us to expect intervention from either the Administration or the Federal Reserve if things get dicey enough in the US Treasury Market and somewhat in US equities.

This softens the probability of left tail risks (market downturns) and increases the likelihood of right tail risks (market upturns). In fact, the announcement on Saturday to exempt certain products, namely technology-related products, further causes the market to expect more exemptions and a much softer stance of tariffs in the future.

We will likely see reflexive buying every time we hear some good news, and with that, we will likely get tradable rallies. That being said, we still have quite a low level of liquidity in the market, and conditions like these usually lead to bear market rallies.

However, the underlying issues are yet to be resolved, and we continue to exercise caution in this environment.

Have a safe trading week out there!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

Calendars

US Earnings

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than if explicitly mentioned.