Executive Summary

• Market reactions in Asia have been fairly tempered on Monday following the US-Israeli joint military action in Iran; Asia equities held up better than DM peers with Mainland China (CSI 300: +0.38%) outperforming Southeast Asia (-1.75% to -2.8%) and Japan/Korea (-0.90% to -2.8%); in APAC and Middle East $ credits, no panic-selling was observed with IG marked 2 to 7 bp wider, HY 25c to 75c lower, and Middle East bank T2s and quasis 5-10 bp wider; Mongolia launched a 6Y new $ bond deal despite choppy market conditions; Asia currencies traded marginally weaker against the greenback, dragged by the oil-sensitive KRW, THB, PHP as expected, while the risk-sensitive AUD recouped losses, supported by higher commodity prices.
• Looking at APAC and Middle East $ credits, we view the main transmission channels of the Iran escalation as its impact on energy prices and global risk sentiment; the severity and expected duration of the conflict are keys.
• Our global energy team expect oil prices to normalize in the $70s if (1) damage to regional energy infrastructure is minimal, (2) the OPEC+ incrementally increases production, and (3) disruptions to oil trade flows through the Strait of Hormuz are temporary, including as a result of cancellations/restrictions of war-risk coverage for vessels; the third-point is a big if, but we see significant pressure from Iran’s neighbors in the Middle East and global allies (e.g., China) to prevent this worst case scenario.