Expectations of a more conciliatory US approach towards Iran could keep oil prices lower, while easing tariff pressures could further benefit emerging markets by reducing inflationary concerns, according to Scott Chronert, Managing Director and Head of US Equity Strategy at Citi Research.
These developments have coincided with a roughly 10% correction in oil prices and a decline in 10-year yields. The market is simultaneously factoring in a reduced supply of debt financing for artificial intelligence (AI) infrastructure build-outs.
Beyond energy markets, the political shift is altering expectations around trade. Trump-era tariff policies slated for 2025 have weighed on investor sentiment for over a year. A reduction in these tariff threats, combined with cheaper crude, directly benefits emerging economies. “The combination of the two is why you’re seeing a broadening effect today,” Chronert explained, adding that this dynamic opens up opportunities globally and supports a rally beyond the large-cap S&P 500 into smaller US equities.
While a definitive negotiation path between the US and Iran remains elusive, the underlying commodity outlook is bearish.
Citi Research’s commodities team projects significant further downside for crude if the Strait of Hormuz fully reopens and logistics expenses normalise. Driven by this structural view, the firm shifted to an underweight position in the energy sector heading into the fourth quarter.
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Citi Research’s Scott Chronert expects lower oil and tariff pressures to boost emerging markets
The dual relief from falling oil and easing tariffs is also reshaping monetary policy expectations by dampening inflation. Investors previously anticipated three additional Federal Reserve rate hikes between now and next fall. The market is now pricing in only two.
This softer inflation outlook removes some immediate pressure from the central bank, particularly given the hawkish stance on inflation under Fed Chair Kevin Warsh. However, the ultimate economic impact will take time to materialise. “The market is pricing in a changing paradigm, if you will, but the fundamental influence of all of this is still months ahead,” Chronert observed.
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Citi sees emerging-market gains as US midterm results ease oil and tariff concerns