US Midterms Won't Cool Oil Prices: Iran Conflict Looms for India
Emkay Global warns that US midterms won't lower oil prices, as Iran tensions could pressure India's economy and markets.
India's financial markets are bracing for continued volatility as the US midterm elections approach. Despite the political shift in Washington, a recent research report by Emkay Global Financial Services suggests that US midterms oil risks India must navigate are unlikely to diminish, with geopolitical tensions in the Middle East remaining a primary concern.
The Iran Factor and Crude Oil
The brokerage warns that the November 3 elections may not bring the desired stability to energy markets. Instead, there is a significant risk that a renewed escalation in the conflict with Iran could send crude oil prices soaring. Such a spike would place immense pressure on India's balance of payments (BOP), the foreign exchange market, and domestic equities.
According to Emkay, the possibility of a fresh US military strike on Iran is a critical trigger that could lead to a sharp increase in crude prices, making a post-election decline in oil costs unlikely.
Political Forecasts for the US Congress
The report provides a breakdown of the probable outcomes for the US legislative body:
- 60% Probability: Democrats win control of both the House of Representatives and the Senate.
- 30% Probability: Democrats take the House, while Republicans retain the Senate.
- 10% Probability: Republicans maintain control of both chambers.
While a Democratic-led Congress might increase the scrutiny of President Donald Trump's policies regarding immigration and tariffs, the report notes that tariffs will likely remain unaffected. This is because the President holds substantial executive authority over foreign policy and trade decisions.
Impact on Indian Markets
For India, the implications of the US elections are viewed as more geopolitical than directly market-driven. The domestic market remains sensitive to a few key variables: the strength of the US dollar, US bond yields, global risk appetite, and, most importantly, the price of crude oil.
While a drop in the dollar and US yields would typically support Indian assets, Emkay cautions that a "peace dividend" is not on the horizon. Any short-term optimism in the Indian markets following the elections could be fleeting.
US Equities and Global Trends
The brokerage also advises against expecting a sustained rally in US equities due to political gridlock. Although the S&P 500 has historically risen by about 6% in the 60 days following midterms, current conditions are tougher. Equities have already climbed 12% over the last six months, and Brent crude has seen a massive surge of approximately 61%.
The Silver Lining: US-India Strategic Ties
Despite the economic uncertainties, the report offers a positive outlook on the diplomatic front. Strategic cooperation between the US and India is expected to remain resilient. Bipartisan support in the US ensures that collaboration in defence, technology, and shared concerns regarding China will continue regardless of which party controls Congress.