Hong Kong Stocks Post Largest Intraday Decline of the Year as High Oil Prices Reshape Market's Short-Term Logic

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 fell more than 4% intraday, hitting the largest daily decline of the year.

Galaxy Securities analysts pointed out that if a long-term quagmire conflict occurs between the US and Iran, the Hong Kong stock market will undergo a three-stage 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 triggered some funds to preemptively trade on the expectation of stagnation.

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

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

Galaxy Securities stated that the synchronized tightening of the global monetary environment will further compress the policy space of various countries. The dollar is strengthening, non-US currencies are under pressure, funds are flowing back into dollar assets, and the global interest rate center is rising, which will suppress equity valuations and put pressure on non-US assets.

In addition, media reports indicate that a senior official of the European Central Bank said that due to the observation of some key indicators weakening in certain banks, the ECB urges lending institutions to closely monitor their dollar funding situations.

For Hong Kong stocks, there may also be additional pressure from the concentrated unlocking of restricted shares from late March to early April, combined with profit fluctuations driven by earnings season expectations 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 all geopolitical events.

According to IEA estimates, the Strait 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 the persistence of the conflict, 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, significantly suppressing non-interest-bearing assets and risk assets.

Overall, concerns about global stagflation triggered by geopolitical risks are reshaping short-term market trading logic. In the short term, global funds, especially passive funds, need to significantly reduce positions in response to redemptions or risk reduction, further rotating industries, abandoning high-beta assets, and embracing defensive assets.

Looking ahead, CITIC Construction Investment’s research report suggests that, against the backdrop of a sharp rise in global energy prices and suppressed consumption, sectors that may be significantly affected include: high-valuation sectors, high-energy-consuming (oil-consuming) industries, and demand-restricted cost-increasing industries. However, it also remains optimistic about industries 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, which have stable cash flows and are defensive in nature.