Economists Gauge Hit From Mideast War as China Seen Among Losers
(…) The main transmission mechanism to the world economy is via oil. Brent rallied as much as 13% to above $82 a barrel — the highest since January 2025 — before paring some gains in Asian trading on Monday.
Iran supplies about 5% of global oil, and a complete outage would lift the price by about 20%, Bloomberg Economics’s Ziad Daoud and Dina Esfandiary wrote in a report before oil started trading in Asia. Furthermore, about 20% of global oil supply transits through the Strait of Hormuz, and if that’s shut prices could spike to as much as $108 per barrel, they warned.
If sustained, those higher oil prices would hurt major importers including China, Europe and India, while beneficiaries would include exporters such as Russia, Canada and Norway, the BE analysts wrote in a note. As for the US, consumers would lose out as higher fuel costs squeeze incomes, but the economy overall faces less of a drag as shale has made it an oil exporter. (…)
If broader market upheaval is sustained, those with fewer buffers may prove vulnerable. Analysts at Citigroup say countries with low FX reserves, such as Argentina, Sri Lanka, Pakistan, and Turkey, “face heightened risks of sudden capital outflows and currency depreciation.” (…)
As for central banks, they’re likely to take a measured approach for now.
“What complicates the near-term further is that there will be a broad-based increase in global uncertainty, which may feed through into the demand side of the economy while inflation expectations pick up,” the TD Securities analysts wrote. “This argues for patience initially, but a willingness to react if and when the situation stabilizes in the Middle East.”
The FT:
In a marked escalation from the weekend, one of Saudi Arabia’s largest oil refineries was attacked by drones, forcing a shutdown. Analysts warned the escalating conflict could now spread to energy infrastructure across the Gulf, potentially causing a prolonged rise in oil prices. (…)
Ras Tanura, which was previously targeted by Houthi militants in 2021, is the largest oil refinery on the Gulf coast and can process 500,000 barrels of crude a day. It is also the main export terminal for Saudi oil in the Gulf.
“It’s a huge escalation,” said Ali Shihabi, a Saudi commentator close to the royal court. “Saudi Arabia, which wanted to stay out of the war, will have to decide how to respond.” (…)
“Gulf energy infrastructure is now squarely in Iran’s sights. The attack is also likely to move Saudi Arabia and neighbouring Gulf states closer to joining US and Israeli military operations against Iran,” said Torbjorn Soltvedt, principal Middle East analyst at risk intelligence company Verisk Maplecroft. (…)
“The most feared scenario is not its closure [Strait of Hormuz], but serious damage to the region’s key oil and gas infrastructure.”
Analysts at Morgan Stanley said a significant amount of crude already outside the Gulf could ease tightness in the oil market.
Martijn Rats, an analyst at the bank, said Saudi Arabia had raised exports by an additional 1.5mn barrels a day so far this year, and calculated that the kingdom could sustainably pipe 7mn b/d to its terminal on the Red Sea, bypassing the Strait of Hormuz. China had also stockpiled close to 1mn b/d of crude over the past six months to weather any disruption.
Trump’s epic gamble in the Middle East The US president’s goal of regime change augurs immense regional chaos
(…) he has launched a fateful war of choice. America, the region, and Iran most of all, may come to regret it bitterly if, as so often happens in wars, this one veers off its prosecutor’s script. (…)
But overthrowing authoritarian rule usually requires either ground troops or a popular uprising, the outcomes of which have rarely brought positive change to the Middle East.
Trump has made clear he is not committing the former; rather he has cavalierly called on the people of Iran to rise up.
Most Iranians undoubtedly would like a fresh start. But even if the regime crumbled — and this still remains a big if — the region is haunted by the spectre of Iraq in 2003 and Libya in 2011: the collapse of their dictatorships led to anarchy and civil war.
Iran is a complex multi-ethnic society of 90mn people with a potential for unravelling disastrously. Such a scenario is one of the reasons Arab foes of Iran have been wary of America pushing for regime change. (…)
Now fighting an existential war it has long prepared for, the regime has lashed out all across the region, targeting Israel and US assets across the Gulf, and disrupting oil flows. That bombs are falling on neighbours that had counselled against a US strike appears to be of little consequence to an Iranian military bent on revenge.
At some point soon, Trump may opt to declare victory in the hope of moving on. As former American presidents found out, it’s easy to start a war in the Middle East but much harder to end it. This campaign has been dubbed “Operation Epic Fury.” Epic Gamble would be more appropriate.
Ed Yardeni:
Losing Iran is a big blow to Russia, which received military equipment, especially drones, from Iran. China imports lots of oil from Iran and has invested significantly in the country. In North Korea, Little Kim is probably scrambling to fortify his bunker. China has seen America’s military might in action twice in Iran and once in Venezuela since the start of Trump’s second term. China’s leaders might now consider postponing any planned invasion of Taiwan.
In the Middle East, the terrorist proxies of Iran’s Mullahs in Gaza (Hamas), Lebanon (Hezbollah), and Yemen (Houthis) have already been decapitated once by the Israelis. Now they’ve lost their puppet master in Tehran. The Abraham Accords are likely to be expanded to include more Arab countries. (…)
As in Venezuela, Trump probably expects to be running Iran’s oil business from the White House soon. (…)
In any event, oil prices are likely to fall in the coming months, assuming this war is short, as it’s bound to be. (…)
The range of potential longer-term consequences for the American role in the developing new world order, and for the balance of power in the Middle East, is equally breathtaking. But there’s no template. The breadth of responses to similar shocks in the past has been varied, as Citi demonstrates in this chart.
The huge outlier was the 1973 Yom Kippur War, which triggered a massive bear market. It was different from the others because it led to a protracted reduction in the supply of oil to the rest of the world. Shocks that passed quickly, or in which the threat to the oil supply was decisively countered, often proved to be buying opportunities.
What’s different about this incident compared to other recent conflagrations is that there has been retaliation, which has hampered other countries in the region and cost American lives. The longer an outright shooting war continues, and the further it spreads, the greater risk that this becomes a major shock that brings down a range of markets. (…)
The key issue is the Strait of Hormuz, through which about 20% of global oil exports are transported. If Iran wants to close them, it can — at great financial cost to itself and to other Gulf countries. There are already reports of attacks on ships. Hubert Marleau of Palos puts the prospects for the oil price as follows:
A true Hormuz disruption would constitute a tail scenario, which could easily increase the price of Brent to $125 a barrel, whereas a quick regime change would oppositely restore normalcy and bring oil prices back to $60 a barrel. There is a third scenario, where the oil flows under threat not in an apocalyptic manner as OPEC+ increases oil production at an accelerating pace; but nonetheless in an escalating one, constraining supply and running the price to an $80 peak.
The third is arguably the likeliest. For now, the problem is that an interruption of some duration to oil supply, and therefore a hike in the price, is a given until there is greater clarity. Even though Iran has formally announced that it does not intend to close the strait, the impact on the flow of oil from the region is still significant, as the emerging markets investment group Gramercy explains:
Commercial shipping has largely paused regardless, as insurance underwriters withdrew war-risk coverage within hours of the initial strikes. Our assessment is that the binding constraint on oil flows is currently the insurance market, not a military blockade
On this basis, the immediate surge above $80 for Brent seems to make sense, and there is also no need for the price to move much further without material new developments. (…)
Winston Churchill: “the statesman who yields to war fever must realize that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events”.
US Producer Prices Rise More Than Expected on Services
The producer price index increased 0.5%, the most since September, after a revised 0.4% increase in December, a Bureau of Labor Statistics report showed Friday. An underlying gauge that excludes food and energy advanced by the most since July. (…)
After the report, some economists bumped up their estimates of the core PCE price gauge to a 0.5% advance, which would be among the strongest in recent years. Others expect a firm, but more moderate gain. (…)
Services costs increased by the most since July, including the largest pickup in margins in data back to 2009. This likely reflects companies passing along higher tariff-related costs at the start of the year. (…)
Excluding food and energy, the January increase in goods prices was among the largest since early 2022. Categories such as engines, communications equipment, machine tools and a variety of metals rose sharply.
A less-volatile PPI measure that excludes food, energy and trade services increased a more moderate 0.3% for a third straight month. (…)
Friday’s PPI release got little media attention this weekend. Not as scary as war, but scary nonetheless.
- Core Goods PPI final demand spiked by 0.68% in January from December (+8.5% annualized). 6-month average +4.7% annualized. Tariffs, not included in the PPI, continue to percolate from importers to manufacturers. Are they finding their way to the consumer?
- PPI Trade Services, which measures wholesale/retail profit margins: +2.5% MoM. This is +34.5% annualized! Highest since at least 2010.
On a YoY basis, core goods are up 3.8% and services +3.4%, both on a solid uptrend.
Ed Yardeni has the chart linking Core PPI Final Demand for Personal Consumption with core CPI and core PCE inflation:
The US CPI for February is out March 11.
One of the most effective plays is reducing the reported value of goods companies bring into the U.S. Importers may not be able to escape a tariff, such as the global 15% rate Trump announced after the recent Supreme Court ruling, but they can pay it on a smaller amount.
Typically, an American importer declares the value of the goods it brings into the country based on what it pays. If an American furniture retailer pays a Chinese trading company $300 for a sofa subject to a 50% tariff, it would normally declare that value and owe U.S. Customs $150.
But under a legal precedent established in the 1980s, companies that dig deeper into their supply chains can report what was paid in the “first sale.” Suppose the original manufacturer of the sofa sold it for $200 to the trading company, which then marked it up to $300. The American retailer can declare the value of the sofa as $200—the first sale—and pay customs only $100 in duties. (…)
When tariffs were low, companies often didn’t bother to investigate the first sale price because the paperwork required to prove it was considerable. Now podcasts and webinars have spread the word, and lawyers say the tactic is common.
Another method is “unbundling,” or carving out costs such as insurance or transport that generally aren’t subject to tariffs. Importers try to figure out what part of their import bill is tied to the actual manufacturing of the product—and pay the tariff only on that amount. (…)
All this goes a long way toward explaining why the tariffs haven’t fueled high inflation. (…)
In February, Sens. Bill Cassidy (R., La.) and Sheldon Whitehouse (D., R.I.) introduced a bill to end use of the first sale rule.
See how the White House keeps spinning tariffs:
“The Trump administration takes the integrity of the President’s tariffs with the utmost seriousness, and foreign exporters should think twice before attempting to undermine America’s tariff regime,” said White House spokesman Kush Desai.
EARNINGS WATCH
From LSEG IBES:
479 companies in the S&P 500 Index have reported earnings for Q4 2025. Of these companies, 72.4% reported earnings above analyst expectations and 22.5% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 16% missed estimates.
In aggregate, companies are reporting earnings that are 5.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.4% and the average surprise factor over the prior four quarters of 7.6%.
Of these companies, 72.7% reported revenue above analyst expectations and 27.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 63% of companies beat estimates and 37% miss estimates. Over the past four quarters, 71% of
companies beat the estimates and 29% missed estimates.In aggregate, companies are reporting revenues that are 1.8% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.7%.
The estimated earnings growth rate for the S&P 500 for 25Q4 is 14.3%. If the energy sector is excluded, the growth rate improves to 14.7%.
The estimated revenue growth rate for the S&P 500 for 25Q4 is 9%. If the energy sector is excluded, the growth rate improves to 9.8%.
The estimated earnings growth rate for the S&P 500 for 26Q1 is 12.7%. If the energy sector is excluded, the growth rate improves to 13.8%.
Trailing EPS are now $275.54. Full year 2026e: $315.36. Forward EPS: $314.77e. Full year 2027: $365.44
Revisions:
Guidance:
The equity market has broadened but only a few sectors are expected to post above average earnings growth:
Actually, Q1 earnings growth has been downgraded since Jan. 1, except for 3 sectors averaging +27.8% growth while the other 8 earnings are expected up 1.0%…
