T. Rowe Price's emerging markets credit analyst Peter Botoucharov notes that with the Iran conflict lacking a clear resolution, the oil price shock is transitioning from its initial phases of panic and short-lived market expectations into a third stage, potentially evolving into a more prolonged disruption. Should the situation persist unresolved, energy supply shortages may continue, and secondary inflationary effects could become increasingly pronounced. In such a scenario, central banks might need to implement more forceful policy responses.

T. Rowe Price has turned more cautious in its view on duration, maintaining a generally negative stance toward developed markets overall. In contrast, emerging markets are presenting more selective relative value opportunities.

The firm points out that the ongoing conflict is driving up market forecasts for consumer price inflation, including core inflation. However, current monetary policy pricing has not yet fully incorporated the latest inflation expectations, suggesting the market may still perceive this shock as a temporary phenomenon. Nevertheless, recent movements at the short end of the yield curve indicate that market pricing is gradually adjusting to better align with inflation expectations.

The energy shock can also be analyzed from a recession risk perspective. While market concerns about an economic downturn have increased, the market still underestimates recession risks in the UK, Canada, and the Eurozone, while overestimating the related risks in Japan. As the situation progresses into its third stage, this factor is expected to become increasingly important for interest rate trends and the shape of the yield curve.

Overall, T. Rowe Price observes that emerging markets generally entered the crisis with higher real interest rate buffers and more robust fiscal positions. Consequently, many central banks in these regions currently prefer a "wait-and-see" approach to assess the duration and scale of the energy crisis's impact. However, as the crisis continues, some countries that initially relied on fiscal subsidies to cushion the blow are beginning to reevaluate how long such measures can be sustained.

Investors need to differentiate the risk pricing across various markets. For instance, markets like Peru and Thailand face significant risks of inflation exceeding expectations, yet current market pricing for interest rate hikes remains relatively limited. Conversely, markets such as Poland and Mexico appear to have already priced in excessive expectations for rate hikes.

Furthermore, the gradual recovery of the Asian manufacturing cycle may complicate policy responses from central banks across different regions.