Hong Kong stocks hit largest intraday decline of the year; high oil prices reshaping near-term market dynamics

Why does the market believe that high oil prices have insufficient impact on pricing?

Cailian Press, March 23 (Editor: Feng Yi) — Due to the intense escalation of the Middle East situation, global stock markets have shown a clear risk-averse trend in the short term, and today Hong Kong stocks also experienced a panic sell-off.

As of the time of writing, the Hang Seng Index dropped over 4% intraday, hitting the largest daily decline of the year.

Galaxy Securities analysts pointed out that if a prolonged quagmire conflict occurs between the US and Iran, the Hong Kong stock market will go through three stages of evolution: “short-term emotional shock → medium-term fundamental transmission → long-term structural divergence.” On a macro level, it faces a severe combination of “low growth, high interest rates, and sticky inflation.”

In fact, since last week, when international oil prices rose to the hundred-dollar mark, the ongoing fluctuations in the Middle East situation have already prompted some funds to preemptively trade in anticipation of a delayed rally.

Logically, many institutions currently believe that if the US-Iran conflict becomes prolonged, the oil price center may rise further and fluctuate at high levels, making it difficult for global inflation to fall back. This will inevitably affect the pace of major central banks’ interest rate cuts, potentially leading to a pattern of low global growth, high interest rates, and sticky inflation.

On the other hand, since the escalation of the Middle East geopolitical conflict, the impact of macro liquidity shocks has continued to manifest, also suppressing risk asset prices.

Galaxy Securities stated that the global monetary tightening environment will further compress policy space in various countries, with the dollar strengthening, non-US currencies under pressure, and capital flowing back into dollar assets. The global interest rate center will rise, putting pressure on equity valuations and weighing on non-US assets.

Additionally, media reports indicate that a senior official of the European Central Bank said that, due to some banks showing weakness in key indicators, the ECB is urging lending institutions to closely monitor their dollar funding situations.

For Hong Kong stocks, there may also be additional pressure from the concentrated lock-up stock unlock wave from late March to early April, combined with earnings season volatility and potential external shocks, making the short-term market increasingly pressured.

It is worth noting that, according to research by Huaxi Securities, the impact of the Strait of Hormuz blockade on global oil supply is the largest among geopolitical events in history.

According to IEA estimates, the blockade has caused a sharp reduction of about 20 million barrels per day in global oil supply, accounting for 20% of total global supply. The supply gap is about ten times larger than during the Russia-Ukraine conflict and the Libyan civil war.

From the market trend perspective, due to previous disagreements on whether the conflict will persist, the upward movement of the dollar and US Treasury yields has been relatively weak, reflecting that the market has not fully priced in the impact of prolonged high oil prices exceeding expectations.

However, Huaxi Securities believes that as the inflation acceleration driven by oil price shocks intensifies, market expectations for “pause or restart rate hikes” are heating up. Based on the reassessment of the Federal Reserve’s rate cut path, funds will quickly shift into dollar cash, exerting significant pressure on non-interest-bearing assets and risk assets.

Overall, concerns about stagflation triggered by geopolitical risks are reshaping the market’s short-term trading logic. In the short term, global funds, especially passive funds, need to significantly reduce positions to cope with redemptions or risk exposure reduction, further increasing sector rotation and abandoning high-beta assets in favor of defensive assets.

Looking ahead, CITIC Construction Investment’s research report suggests that, under the background of a sharp rise in global energy prices and suppressed consumption, sectors that may be significantly damaged include: high-valuation sectors, high-energy-consuming (oil-consuming) industries, and demand-constrained cost-increasing industries. However, sectors benefiting from the closure of the Strait of Hormuz and long-term high oil prices, such as coal chemical industry, new energy, energy storage, nuclear power, power grids, as well as coal and hydropower with stable cash flows, are also optimistic.

(Cailian Press, Feng Yi)