Markets are trying to price a war. Not the headlines – the duration and more importantly, who carries the cost.
The instinctive reaction has been simple: Oil up → inflation up → rates up. That’s directionally right. But it misses the point. Because inflation is not just a function of oil. It’s a function of exposure to oil. The United States enters this shock with a buffer. Growth is stronger than peers. Energy exposure is fundamentally different. As a net energy producer, higher oil prices are not purely a drag – they are partially a redistribution within the economy. But that buffer is not absolute. Shale supply responds with a lag. Consumers still feel gasoline first. And history reminds us – 2022 being the clearest example – that second-round effects can still force policy tighter than expected. The Fed has room to pause. Just not unlimited room. Now contrast that with the more fragile end of the spectrum. For economies like South Africa – and many oil-importing EMs – the transmission is immediate and unforgiving: Currency weakens. Fuel rises. Inflation expectations adjust. Policy credibility comes into question. Empirically, the pass-through tells the story: South Africa absorbs roughly 90–95% of Brent moves into domestic fuel, while the U.S., cushioned by taxes and production, sees closer to 40–50% (SARB fuel-price transmission; EIA data). That gap is everything, because at that point, monetary policy stops being forward-looking. It becomes reactive. And this is where divergence begins. The Federal Reserve can wait, observe, and assess persistence. Many emerging market central banks cannot – operating with tighter credibility constraints, more fragile currencies, and far less tolerance for policy error. In that environment, the risk is not doing too little. It is being forced into an overreaction that later requires a painful policy U-turn. This is not a uniform global inflation shock. It is a relative one. The longer the conflict persists, the more this asymmetry compounds. Oil remains elevated – though not unchecked. Markets are already pricing a supply response: U.S. shale and OPEC spare capacity create an eventual release valve, with forward curves easing beyond the near-term shock. But that relief is back-loaded. The front-end still absorbs the stress.
Which is why price action looks the way it does.
Currencies move first. Front-end rates reprice next. Then duration adjusts. This is where the narrative shifts. Emerging market duration had rallied on a clean story: Improving inflation. Policy normalization.Synchronised easing. That story assumed a stable global backdrop. That assumption is now broken. This is no longer a beta trade. It is a credibility trade. And that is the repricing now underway. Not panic. Precision.
Kristof Kruger Head of Fixed Income Trading at Prescient Securities
