G3 Energy shocks - Weekly Wrap

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Energy shocks - Mar. G3 Leading Indicator Watch - Mar 21

We reviewed historic energy shocks to set base case expectations for asset price behavior.

In general, oil stays higher for longer, equities are initially resilient and yields tend to fall. 2022 was the outlier as the Fed started very far behind the curve with inflation already high and the Fed was forced to hike.

We also stress-test our leading indicator models by applying the sensitivities observed in the 2022 shock and assuming oil prices remain at 100 or 120 for the rest of the year.

The takeaway is that the US economy is the most resilient to energy shocks, with Europe uniquely exposed after a harsh winter and facing a recession in most scenarios. China is better placed compared with Europe given Chinese focus on energy resilience in recent years.

Energy Shocks - Historical Base Case

• Oil Higher for Longer, equity resilience, yields lower
• 2022 as Outlier, USD now terms of trade beneficiary

US

• Growth: tipping point is around 120 WTI assuming full ‘22 shock repeats today
• Inflation: meaningful upside even at 100 WTI

China

• Growth: Sustained 120 Brent would result in significant Chinese downturn
• Inflation: Chinese PPI set to surge at Brent 120

Eurozone

• Growth: Very exposed, recession in most scenarios
• Inflation: Substantial inflation upside after harsh ’25 winter already depleted gas storage

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Approaching Peak Uncertainty - Mar 19

We suspect the next couple of days will mark “peak uncertainty” about the Iran war. As a mental model, we define it as when the “worst case” scenarios begin to be realized, typically leading to a capitulation volatility spike and tactical liquidation.

This is how we framed our tactical outlook during volatility on Liberation Day. “Peak uncertainty” capitulation is usually "a" time to add risk, even if it may not be “the” time.

Iran recently damaged 17% of Qatar's LNG capacity at Ras Laffan (for up to 5 years). It could be plausible event marking peak uncertainty for markets over the next couple of days.

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3 Quick Points on the Iran War - Mar 16

1. Muted equity market reaction likely a result of good starting conditions. base case: during historical “risk-on” macro regimes, shocks have been better absorbed by equity markets (see chart below).

2. High real yields offer protection for both recession and sustained inflation. Many investors today are likely thinking: “hope for the best, but prepare for the worst”. Beyond raising some cash, we think rotating into TIPS can offer portfolio resilience at an attractive entry point.

3. "Sell America” theme runs headfirst into the “Primacy of Sovereignty”. In late February, we saw signs of excess in the “Sell America” theme. The Iran War could reverse that narrative.

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