Our views
The events unfolding in Iran is not a regime shift like Venezuela, or even a broader dismantling of the country’s command structure, given that governance in Iran is institutionalised. We continue to monitor events to help map out what lies ahead for markets.
Macro - The path to a messy resolution remains open
15 April 2026
Latest reports suggest the US-Iran talks in Islamabad ended without a deal. Both sides are blaming each other for the failure, and much of the news flow now looks geared towards domestic audiences. We remain of the view that a messy resolution path is still open. But until we get there, the noise and volatility are likely to remain high.
Key points
- The key variable to watch is the Strait. Iran had reportedly agreed to keep it open during the ceasefire period but then pulled back after the Lebanon issue resurfaced. Any US optical action there, especially if it does not trigger an Iranian response, will be an important barometer of where things stand.
- We may now be entering another phase of hybrid escalation: threats alongside continued openness to talks. That may remain the dominant pattern until April 21, when the original ceasefire expires.
- We still lean towards a messy resolution. But the risk of miscalculation leading to materially worse outcomes has clearly risen.
A few points are worth staying focused on.
First, no one is signalling a break in the ceasefire, at least not yet. The US is highlighting the nuclear issue as the main sticking point, but it is clear from wider reporting and leaks that the Strait and Lebanon are also part of the negotiating equation.
So where do we go from here?
The key variable to watch is the Strait. Iran had reportedly agreed to keep it open during the ceasefire period but then pulled back after the Lebanon issue resurfaced. Any US optical action there, especially if it does not trigger an Iranian response, will be an important barometer of where things stand.
Reports also suggest that backchannels through Pakistan remain open given the strong trust the country enjoys from both parties. Iranian pushback appears to have been firm, but still respectful. President Trump has announced a “blockade” of the Strait, though it remains unclear what that means in practice (some reports suggesting it will only apply to Iranian flagged vessels) given the Strait is already effectively shut, even if some traffic resumed during the ceasefire-to-talks window.
We may now be entering another phase of hybrid escalation: threats alongside continued openness to talks. That may remain the dominant pattern until April 21, when the original ceasefire expires.
The bigger picture is this. Both the Iranian and US clocks appear to have run out. But the Israeli clock looks different, and that divergence will matter.
We still lean towards a messy resolution. But the risk of miscalculation leading to materially worse outcomes has clearly risen. I would now put that at 30%, up from 20% earlier. The oil market will also be a key variable, both as a signal and as a source of pressure for some form of resolution, especially once China’s view becomes more consequential.
All in, we remain of the view that a messy resolution path is still open. But until we get there, the noise and volatility are likely to remain high.
Central banks react to oil markets shift
Rate path clouded by evolving Middle East conflict
20 March 2026
Key takeaways
- Chair Powell noted that it’s too early to know how the conflict will impact data
- In our base case scenario of oil prices remaining high but rangebound at US$90-$110, we would expect rates to remain unchanged for longer
- In Asia, we expect most central banks to keep rates unchanged in coming quarters
- ECB, BoE move towards rises in rates
The US Federal Reserve (Fed) left rates unchanged, as expected, maintaining the Fed funds target range at 3.5–3.75 per cent. In the press statement, the Federal Open Market Committee (FOMC) made clear that geopolitical risks add an increased layer of uncertainty to both sides of the mandate, but other than that, there was little change to the consensus-driven statement. Indeed, little change was the order of the day, with a small 20 basis point increase in core inflation expectations, which wasn’t mirrored on the interest rate side, resulting in a modestly dovish tilt. However, the shift to a single dovish dissent, versus the two or three expected, added a slightly hawkish nuance. Taking it all together, the sense is of a committee constrained by uncertainty, waiting for events in the Middle East to unfold.
In the press conference, Chair Jerome Powell attempted to provide a measured and calm set of forward guidance emphasising the need not to overreact to current events, noting “it’s too soon to know how these will affect the data”, and stressing exceptionally high uncertainty. He instead placed emphasis on maintaining inflation credibility, particularly through the lens of inflation expectations. Chair Powell also made clear that the Committee is comfortable taking a wait-and-see approach as the impact of the conflict unfolds, while placing greater weight on the need for goods inflation to slow meaningfully over the year. He was explicit that any bias towards easing remains conditional on that progress materialising.
Looking ahead to the rates outlook for the rest of the year, this will unsurprisingly be dominated by developments in the Middle East. In our base case scenario of oil prices remaining elevated but rangebound at US$90-US$110/bbl, we would expect the Fed to remain on hold for longer, with the bar for near-term easing rising. That said, we do not think this environment, on its own, is sufficient to drive a renewed tightening cycle, as the growth drag should remain manageable and the shock is likely to have a one-time price effect, rather than being broadly inflationary.
By contrast, a move into an upside tail risk scenario with oil prices above US$120/bbl (a significant fat tail risk that is currently rising in probability) would create a materially more difficult policy backdrop. Such a sustained oil move would reinforce a higher-for-longer stance, particularly if transport and broader goods prices begin to reaccelerate alongside rising fuel costs. However, we would also expect the medium-term policy path to become less linear, as a deeper energy shock would raise the risk of demand destruction and recession later in the year.
Taken together, if our base case scenario plays out, then we would still expect one to two cuts from the Fed this year. But we would note that events are shifting rapidly in the Middle East with signs of escalation appearing after Iranian energy infrastructure was hit on March 18, which, if this persists, almost certainly removes the chances of cuts this year.
In Asia, where economies are generally more vulnerable to potential supply shocks and price increases due to the Iran conflict, the potential resurgence in food and energy prices reduces the probability of rate cuts in the region. An exception is the People’s Bank of China, which may still reduce rates by 10 basis points this year to support growth as China is more resilient to supply shocks and domestic demand recovery remains gradual. We expect most central banks in the region to keep rates unchanged in coming quarters while leveraging more fiscal measures to support growth.
European Central Bank: From “a good place” to “well equipped”
The European Central Bank (ECB) left rates unchanged and struck a calm and measured tone.
Christine Lagarde made clear that inflation risks were now to the upside and that the governing council would be focusing keenly on any evidence of second-round effects of the energy shock. For us this signals that the key going forward will be to closely monitor wage settlements, market inflation expectations, and company surveys to see if there are any movements in expected selling prices. Should these move upwards, the ECB will be in a clear position to hike.
In an extraordinary move, they shifted their forecast conditioning assumptions to take into account energy movements at the beginning of the US-Iran war, and as such upgraded their inflation forecasts while downgrading growth forecasts. These forecasts had inflation returning to 2 per cent in the medium term despite a near-term spike, but President Lagarde interestingly noted that these were conditional on market interest rate assumptions as of 11th March – when a little under two hikes were priced in for this year. Implicitly, this was thus not leaning against the idea of a near-term hike.
Of interest also were two scenarios published as part of the macroeconomic projections: one adverse and one severe scenario which outlined different paths for inflation depending on the scale and duration of disruption in the Middle East. Both of these scenarios had inflation firmly above baseline and are worth comparing to actual developments in the coming months to get a sense of how the ECB’s real time assessment is developing.
From our perspective we have now entered a situation of longer-run conflict with continued signs of escalation. Recent attacks on energy infrastructure bring scenarios much closer to the ECB's adverse/severe scenarios, with supply chain disruptions likely to continue going forward, placing upward pressure on energy prices. Incentives exist on both sides to de-escalate with the duration of the conflict key for longer-run expectations. Even with a resolution, permanent damage to production sites and sustained geopolitical risk premia are likely to keep commodity prices elevated.
The ECB has made clear that for now a hold is apt – but it is willing to act should evidence of second-round effects emerge, with data dependency being the order of the day in a world of clear uncertainty.
We believe that it is now more likely than not that the ECB will hike, with June a likely date for the first move.
Bank of England: A surprise hawkish twist as memories of 2022 linger
The Bank of England (BoE) struck a hawkish tone when holding rates today which surprised markets, with a clear message that the Bank is alert to increased risks of domestic inflationary pressure through second-round effects. This message, alongside the surprise unanimity of today’s vote, was taken to be a hawkish signal by markets, which are now pricing clear BoE hikes this year.
Crucially, the Bank dropped its guidance that “on the basis of current evidence, Bank Rate is likely to be reduced further” and instead stated that the Monetary Policy Committee (MPC) “stands ready to act”, removing the easing bias from the statement.
The inflation assumptions outlined in the minutes underscored the reasoning behind this hawkish pivot. Inflation is expected to be higher already in the near-term, with the Bank’s assumptions for March alone now 0.5 percentage points higher than projected in the February monetary policy report. It appears that 2022 is featuring strongly in the thinking, concerned that indirect effects may push up inflation further throughout the year.
Beneath the surface, the individual hawkish and dovish biases of MPC committee members could be seen. The hawks on the committee seemed to double down on their pre-existing concerns regarding inflation persistence, with the latest shock potentially amplifying it. On the dovish side, some members made clear that they believed a pause was prudent from a risk management perspective against a backdrop of uncertainty, but would have otherwise preferred a cut.
Divisions on the MPC suggest that going forward any attempts to hike will be hotly debated, even if all believed a hold was prudent at the current juncture. Andrew Bailey will remain the key swing vote going forward. Comments from Bailey pushed back against market pricing of hikes: “I would caution against reaching any strong conclusions about us raising interest rates”. This, for us, suggests that despite a hawkish tilt, the BoE’s statement today should be taken with the current uncertainty in mind, and hikes are not as certain as markets suggest.
It is clear that the starting point is far from 2022: rates are higher and the labour market is weaker. This should still provide the MPC with some caution going forward. While lessons from the inflation persistence of 2022 are at the forefront of the MPC’s thinking, key in their assessment will be the extent to which this start point impacts on price and wage setting behaviour against the backdrop of a weak labour market.
Bank of Japan stays put with April hike still live, as oil risks tilt the balance hawkish
The Bank of Japan (BOJ) left its policy rate unchanged at 0.75 per cent in an 8-1 vote, in line with expectations. The statement carried a mildly hawkish tilt as it continued to describe the economy as growing moderately, while flagging caution around the Middle East and the risk of upward pressure on prices.
A new line in the statement stood out, pointing to the impact of the rise in crude oil prices on the outlook for underlying inflation. In theory, this could be interpreted as both an upside or downside risk to inflation. However, the statement made no explicit reference to downside growth risks from higher oil prices, which suggests the BOJ is more concerned about upside inflation risks. The statement also reiterated that if the outlook in the January 2026 Outlook Report is realised, the BOJ will continue normalising policy, which supports our view of leaning towards a hike in April.
Governor Ueda’s press conference was balanced as expected and he continued to highlight risks on both sides from the tensions in the Middle East. However, he remarked that board members were more concerned about upside risks to underlying inflation from higher oil prices than downside risks to growth. Broadly, the signal appears to be that, notwithstanding a major shift in expectations from the conflict in Iran, the BOJ is likely to proceed with a hike in April. That said, data-dependence remains key and the non-linearity of the oil price shock means the BOJ is likely to stay cautious. This was reflected in its emphasis on risks tied to the conflict, including oil prices, global growth and financial market conditions.
Beyond geopolitical developments, several domestic releases and events will shape the case for the next hike: the Shunto wage negotiation results in late March; the Tankan survey on 1 April; and the regional branch managers’ meeting on 6 April. If wage growth and underlying inflation continue to show strong momentum, the risk of the BOJ falling behind the curve could re-emerge. In addition, the impact on financial market conditions through changes in USD/JPY and JGB yields will also matter. Overall, the Bank is maintaining a cautious stance and remains reluctant to communicate a clearer long-term policy path. For 2026, we continue to expect further rate hikes at a semi-annual pace.
Elsewhere in Asia, economies remain more exposed to supply shocks and price pressures stemming from the Iran conflict. Governments across the region have already begun rolling out fiscal measures to cushion the hit. A renewed rise in food and energy prices also lowers the odds of rate cuts across the region.
China remains the main exception. We still think the People’s Bank of China could ease by 10 basis points this year to support growth, as China is relatively more resilient to supply shocks and the domestic demand recovery remains gradual. For most of the region, we expect central banks to keep policy rates unchanged in the coming quarters while relying more heavily on fiscal support.
Multi Asset
17 March 2026
Matthew Quaife, Global Head of Multi Asset Investment Management
From tail risk to market focus
Energy disruption has moved from tail risk to a central market driver. With commodities providing the most reliable hedge and broader fundamentals still supportive, the focus is on staying flexible - ready to add risk if tensions ease while managing downside if energy shocks persist.
Key takeaways
- Energy disruption remains the key macro transmission channel. The Strait of Hormuz is heavily contested, increasing the probability of a more persistent energy shock. Oil is likely to carry a geopolitical risk premium, with sustained prices above USD $120 per barrel representing the key threshold where global growth risks would rise materially.
- We believe contained regional confrontation remains the most likely path from here. While the conflict may persist for several weeks, we continue to see incentives broadly aligned toward eventual de-escalation rather than a prolonged multi-month war.
- With the broader fundamental backdrop still supportive, markets could rally if tensions ease. A credible stabilisation scenario would likely see geopolitical risk premia unwind. Such a development could create opportunities to reassess risk exposures, assuming the broader macro cycle remains intact.
- Commodities have been the most effective hedge so far. Traditional safe-havens have behaved less reliably, while energy and diversified commodity exposures have provided more consistent protection against escalation risk.
- Portfolio positioning remains broadly constructive, but flexible. We are generally positive on equities with a small underweight to credit, diversified commodity exposure as a hedge, and modest cash levels retained to deploy should volatility create more attractive opportunities.
The conflict has entered a more complex phase, with disruption to energy flows emerging as the primary channel through which geopolitical tensions are influencing the global economy. The Strait of Hormuz remains heavily contested, with shipping flows significantly curtailed and insurers withdrawing cover, moving what had previously been considered a tail risk into a more tangible market focus. Oil prices have therefore become increasingly volatile, and a prolonged disruption could push prices materially higher, potentially generating non-linear effects on inflation and growth. While this is not currently our base case, the probability of a more persistent energy shock has increased.
Fidelity’s Global Macro & SAA team sees a central scenario of continued regional confrontation rather than swift resolution, with the Strait likely to remain contested even if selective tanker flows continue. In this environment, we expect oil to trade with a durable geopolitical risk premium, creating a supply-side shock with stagflationary characteristics as inflation pressures rise and growth moderates. Import-dependent regions such as Europe and parts of Asia are likely to face the largest terms-of-trade shock. However, the global economy enters this episode with relatively resilient fundamentals, meaning recession risks remain contained unless oil prices move materially above the $120 per barrel range for a sustained period.
Against this backdrop, markets remain highly sensitive to developments in energy supply and shipping routes in the weeks ahead. Across the Multi Asset team, our overall view is that the conflict is unlikely to evolve into a prolonged multi-month war involving broader regional escalation. Economic and political incentives across the major parties still appear broadly aligned toward de-escalation within weeks rather than months, given the significant costs that sustained disruption would impose on global growth, inflation dynamics and domestic political conditions.
The next two to three weeks are therefore a critical window in determining whether tensions stabilise or escalate further. De-escalation could take several forms. A bilateral stand-down remains the most straightforward outcome, although a unilateral declaration of success by the United States or Israel could also contribute to a cooling of tensions even if some disruption persists in areas such as the Strait of Hormuz. The path to resolution may not be linear, and markets may continue to experience periods of disruption before clearer signs of de-escalation emerge.
Staying nimble on positioning
If tensions ease meaningfully in the coming weeks, markets could experience a risk rally as geopolitical risk premia unwind. We would view such an outcome as an opportunity to add risk rather than reduce exposure, given broadly healthy market fundamentals – assuming the broader macro cycle remains intact. Episodes of geopolitical stress can create temporary positioning distortions, and a resolution could therefore provide cleaner entry points across several markets. Potential beneficiaries include financials with limited exposure to private credit risks, emerging market equities and selected cyclical value exposures, where valuations remain relatively attractive and sensitivity to global activity is higher.
Traditional safe-haven dynamics have been less consistent since the conflict began. While the US dollar has strengthened modestly, defensive currencies have not rallied significantly. Gold, which has previously been an important diversifier in portfolios, has also not provided a particularly strong hedge during this phase of the conflict. Part of this reflects the unwinding of several previously crowded market positions, including long gold, curve steepening trades and short US dollar exposures, which has tempered the typical safe-haven response. However, we continue to see an important role for gold in portfolios and would view periods of weakness as opportunities to add exposure, with the structural investment case remaining intact.
By contrast, energy and broader commodity exposures have been the most effective hedge against escalation risk so far. We have increased allocations to diversified commodity exposures, which we see as a more reliable hedge than concentrated oil positions while also offering medium-term diversification benefits.
Within fixed income, we have been selectively adding shorter-dated high-quality developed market government bonds and emerging market hard currency debt, where the recent rise in yields has created more attractive entry points. At the same time, we remain cautious on longer-dated duration, given uncertainty surrounding the evolution of term premia and the broader inflation outlook.
Against this backdrop, overall portfolio positioning remains constructive but flexible. Across strategies, portfolios retain a risk-on stance, with a moderately reduced overweight to equities, a small underweight to credit, selective government bond exposure, and some dry powder retained in cash to deploy should volatility create more attractive opportunities. In periods like this, we utilise the full flexibility of our toolkit, combining a broad range of instruments while seeking uncorrelated sources of return to help navigate volatility and evolving macro conditions.
Monitoring risks in private credit
Private credit markets remain an area of attention. Recent stresses in alternative lending, largely concentrated in the syndicated loan and high yield markets, have prompted a shift in investor behaviour, particularly among retail investors using open-ended vehicles, as redemptions begin to rise. While direct exposure across the team is limited, we continue to monitor developments around potential gating in parts of the private credit market. Should gating become more widespread, there is potential for spillover into more liquid credit markets, particularly if reduced liquidity begins to influence broader risk sentiment. At present, we see this as a background risk rather than a central scenario.
Navigating uncertainty and fast-moving markets: flexibility is key
Geopolitical shocks can generate significant short-term volatility, but they rarely alter the structural drivers of the market cycle unless they become prolonged or lead to sustained disruption in global economic activity. More broadly, these developments reinforce the longer-term trend toward a more fragmented and multipolar global economy, where energy security, supply chains and geopolitical alignment increasingly shape market outcomes. In such an environment, volatility may remain elevated and traditional diversification relationships less reliable. Dynamic asset allocation and diversified sources of return therefore become even more important in navigating uncertainty while maintaining exposure to longer-term investment opportunities. In periods like this, the ability to draw on a broad investment toolkit, supported by deep research, disciplined portfolio construction and a team-based decision-making process, becomes particularly valuable in balancing responsiveness to changing conditions with the discipline needed to avoid reacting to short-term market noise.
Fixed Income
12 March 2026
Marion Le Morhedec, Chief Investment Officer, Fixed Income
Geopolitics, inflation, and the shifting dynamics of global bond markets
Geopolitical tensions have driven sharp volatility across global bond markets, with inflation concerns outweighing traditional safe-haven dynamics. Fidelity International Global Fixed Income CIO Marion Le Morhedec reviews the impact of higher oil prices, shifting rate expectations, and so far, resilient credit markets, outlining why disciplined positioning and selective risk-taking will be critical as uncertainty persists.
Key points
- Higher oil prices have led to a repricing of inflation risks across major economies, resulting in fewer rate cuts being priced in for the US and Europe this year.
- Emerging market local currency debt has come under pressure, while absolute return and short‑duration strategies have proved more resilient, supported by lower rate sensitivity.
- Our team remains alert to heightened macro driven volatility, prioritising capital preservation and waiting for attractive entry points to add risk selectively.
Developments around the conflict in Iran and the surrounding region remain fast moving and difficult to predict. We expect volatility to remain elevated in the near term as markets respond to headlines, shifts in risk sentiment, and uncertainty around the energy outlook. As ever in such environments, our focus is on careful monitoring, disciplined risk management, and maintaining flexibility to respond as conditions evolve.
The principal transmission channel into fixed income markets has been through oil prices and inflation expectations. Higher oil prices have led to a repricing of inflation risks across major economies, resulting in fewer policy rate cuts being priced in for the US and Europe this year. That adjustment has pushed government bond yields higher and credit spreads wider as markets reprice risk. In this episode, inflation concerns have outweighed the traditional safe haven bid for duration, causing yields to rise even as broader risk sentiment has deteriorated.
The result has been mostly negative total returns across global bond markets during the first week of the conflict, with performance led by duration rather than credit. The bulk of the weakness has come from rising underlying yields rather than a sharp deterioration in credit fundamentals. However, markets have rallied strongly at the start of this week, including European government bonds, Gilts, and inflation markets. The volatility highlights the outsize impact swings in sentiment are having on markets. Liquidity remains strong, we haven’t observed a lot of activity from real money investors, and credit markets have been broadly resilient.
Strategy implications
Within our range, performance has been broadly in line with expectations for this type of scenario. Emerging market local debt and longer duration investment grade strategies have faced greater headwinds. Emerging market local has been additionally pressured by a stronger US dollar, which has reasserted itself as a key safe haven in the current crisis as consensus short dollar positions have been unwound.
At the other end of the spectrum, absolute return and short duration strategies have proved more resilient, supported by lower interest rate sensitivity and active risk management. High yield, particularly in global and US markets, has so far shown notable resilience, reflecting still solid corporate fundamentals, low duration exposure, higher weighting to the energy sector, alongside the fact that this is an inflationary rather than recessionary shock.
From a positioning perspective, we entered this period in a reasonably defensive stance. In recent days, portfolio managers have fine-tuned exposures at the margin, including reducing US dollar underweights and adding selective hedges where appropriate. Direct exposure to the Middle East remains limited across the range, which reduces the risk of idiosyncratic regional shocks materially affecting overall portfolio outcomes.
Don’t overlook other AI and private credit risks
It is also important to recognise that geopolitics is not the sole driver of markets at present. Risk sentiment around AI-related equities remains fragile, and concerns in parts of the private credit market have resurfaced. The latter is particularly relevant for European investors. Private debt has consistently ranked as the leading intended allocation in recent pan-European fund selector surveys. Should anxiety around private credit persist, we would expect some allocation discussions to tilt back towards liquid, high quality public credit. If the conflict continues to drive yields higher from here, that shift could accelerate, as more investors are drawn to the improved income available in public bond markets.
Looking ahead, the path of oil prices and the duration of the conflict will be critical in determining the path of inflation and central bank rate expectations. A sustained energy shock would present a more challenging backdrop for rates markets and for rate sensitive segments of credit. Conversely, any signs of de-escalation could allow some of the recent repricing in front-end rates to reverse. For now, we remain alert to these headwinds, continue to prioritise capital preservation, and are disciplined in waiting for attractive entry points to add risk selectively where valuations compensate us appropriately.
Oil prices surge as supply disruption intensifies
10 March 2026
Oil prices have risen sharply as disruption from the Iran conflict begins to constrain supply and restrict the flow of crude to global markets. What began as a geopolitical shock is now feeding more clearly into energy pricing. We examine what is driving the latest moves and consider the implications for energy companies and the broader market.
Key takeaways
- Oil is now reacting to physical supply disruption, not just geopolitical risk, as constrained exports and reduced production tighten the market.
- This is extending beyond the near-term, signalling that markets are reassessing the likely duration of disruption and the time needed to rebuild inventories.
- Energy stocks have lagged spot prices, but sustained strength further along the curve could star
Webinar replay: From headline risk to a priced geopolitical event
5 March 2026
Global markets have entered a period of heightened volatility following the latest escalation of tensions involving Iran, as energy prices and risk assets adjust to the prospect of a more sustained geopolitical conflict. Against this backdrop, our senior investment team assess the evolving macro risks, outline potential scenarios and discuss how portfolios are positioned to navigate near-term uncertainty while remaining focused on longer-term fundamentals.
Key points
- Our base case is an elevated geopolitical risk premium in oil rather than a structural breakdown in global energy supply.
- Cross asset implications are differentiated, with the US relatively insulated as an energy exporter, while Europe and parts of Asia are more exposed to prolonged disruption.
- Portfolio positioning remains anchored in medium-term fundamentals, with diversification, duration discipline and selectivity in credit and equities central to navigating volatility.
Salman Ahmed, Global Head of Macro and Strategic Asset Allocation
Markets have moved quickly from reacting to headlines to pricing a more sustained geopolitical event. What initially appeared consistent with past episodic Middle East flare ups has evolved into a more complex phase of escalation.
Energy remains the central transmission channel. The issue is not only production but transit. Around one fifth of global oil and refined product flows pass through the Strait of Hormuz. While it has not been formally mined or blocked, traffic has slowed materially, embedding a geopolitical premium into oil, most visibly into Brent.
Within the scenario framework outlined, markets have shifted from assuming a contained exchange to pricing a more sustained escalation, while full disruption of the Strait remains a tail risk. Duration is the key macro variable. Oil would need to remain at elevated levels for three to four months to materially affect inflation and growth. A temporary spike is manageable. A sustained period of higher prices would feed through inventories, margins and purchasing power, tightening financial conditions more meaningfully.
Unlike 2022, which marked a structural recalibration of Europe’s energy relationships, the current episode is better characterised as a disruption. Trade flows are likely to resume once tensions subside.
Political constraints also matter. The US is an energy exporter and retains tools to manage domestic price pressures. In an election year, gasoline prices are sensitive, and equity markets act as an additional constraint. For now, those thresholds have not been breached.
Niamh Brodie-Machura, Chief Investment Officer, Equities
Equities entered 2026 with multiples above long-term averages, particularly in the US, supported by expectations of robust earnings growth and AI-driven investment.
Geopolitical escalation requires reassessment of the appropriate risk premium. However, short lived geopolitical shocks tend to increase volatility and dispersion rather than permanently impair equity markets.
The key question is duration, particularly given the transmission channel from energy prices into inflation and interest rates. A prolonged rise in oil and gas prices would compress margins in energy intensive sectors and erode purchasing power. The regional impact is asymmetric. The US, as an energy exporter, is relatively insulated. Europe and much of Asia are net importers.
Sector effects are emerging. Airlines face higher fuel costs and disruption at key Middle Eastern transit hubs, while shipping markets are seeing firmer freight rates. Industrial companies warrant close attention given their exposure to input cost pressures.
The AI investment cycle remains a swing factor. Large technology companies are not indifferent to energy costs, particularly where gas and electricity prices influence data centre competitiveness.
In the absence of prolonged energy disruption, earnings growth is likely to remain the primary driver of returns. Diversification across regions and sectors remains central.
Matthew Quaife, Global Head of Multi Asset
The conflict has occurred against a backdrop of resilient global growth and ongoing investment momentum, particularly in the US. AI led capital expenditure continues to underpin nominal growth.
Markets entered this episode with constructive sentiment and extended exposures, contributing to sharper short-term adjustments.
Within multi asset portfolios, the approach has been to stay invested given resilient fundamentals, while looking to add selectively to areas that have been sold off due to positioning.
Safe havens have not behaved uniformly. Gold, where positioning had been strong, has softened in recent days but remains an important defensive allocation, and is being added to selectively. The US dollar has strengthened in line with risk aversion, though this may partly reflect prior positioning. Treasury markets have been volatile, prompting a broader search for diversified sources of defensiveness.
Regional differentiation remains central. The US benefits from relative energy independence and robust nominal growth. Europe appears more exposed in a prolonged energy shock. Japan, which has corrected sharply, retains constructive medium-term drivers.
Lei Zhu, Head of Asian Fixed Income
Oil remains central to fixed income positioning. Across most developed markets, duration exposure is neutral to underweight given the risk that sustained higher oil prices could reprice inflation expectations. Short-dated investment grade credit is favoured as a defensive allocation.
Asia presents a differentiated picture. Regional currencies have retraced some gains, though higher quality currencies have behaved relatively defensively. China stands apart. With inflation subdued and CPI at 0.2%, there is scope for policy easing. Chinese government bonds have behaved as a safe haven and duration is overweight relative to other markets.
Credit spreads in Asia have widened in an orderly fashion. Investment grade spreads have moved modestly, while high yield has seen contained widening. With a structural shortage of strong credits in the region, more meaningful spread widening would likely attract demand from investors seeking diversified income opportunities.
Currency pressures in emerging markets also warrant attention. If central banks are forced to draw down foreign exchange reserves to stabilise exchange rates, this could feed back into global bond markets. That said, the emerging market universe is far from uniform, with energy exporters benefiting from higher prices while importers face greater pressure.
Key variables to monitor
The path of oil prices remains the clearest indicator of market assessment. Brent is bearing the geopolitical premium, while US crude prices remain relatively better anchored given domestic supply flexibility.
Political signalling, particularly in the US, is also critical given domestic sensitivity to energy prices.
For now, markets are pricing a prolonged risk premium rather than a systemic supply shock. The duration of elevated oil prices and developments around the Strait of Hormuz will determine whether the macro impact remains contained.
Portfolios should remain diversified and selective, anchored in medium-term fundamentals while retaining flexibility should elevated oil prices persist.
China macro and market implications
2 March 2026
Peiqian Liu, Asia Economist
China's economy should continue to prove resilient against conflict in the Middle East, so long as the situation remains contained.
The conflict in Iran has raised questions around potential spillover into China’s economy and financial markets. While headline risk is elevated, direct macroeconomic transmission remains manageable in the very near term under a base-case scenario of contained conflict.
We see three primary channels through which developments could affect China:
1. Risk sentiment and capital flows
Market reaction in the immediate aftermath has been more measured than many anticipated. Equity volatility has remained contained and cross-border capital flows have not shown signs of systemic stress.
China’s relatively closed capital account and policy flexibility provide a degree of insulation. That said, a prolonged conflict could weigh on regional risk appetite and temporarily tighten financial conditions.
Base case: Risk sentiment remains stable unless escalation broadens geographically.
2. Inflation and energy pass-through
Sustained higher oil prices would lift producer prices (PPI) first, particularly for raw material prices. Margin pressure would likely emerge in mid- and downstream industries.
However, China has started its “anti-involution” policies to consolidate some sectors to improve corporate profitability at macro level. We expect these policies to be implemented more diligently as a buffer under the scenario of input price shock.
Meanwhile, the transmission into consumer prices (CPI) will likely be milder, as the weight of the energy component has been reduced in the latest rebase of the CPI basket, and energy prices will likely be closely regulated in domestic retail markets. The People’s Bank of China’s policy reaction function will unlikely see significant changes if inflation remains under control.
Base case: PPI sees temporary upward pressure; CPI impact remains contained.
3. Trade and current account exposure
China imports roughly 20 per cent of its total energy consumption, and oil remains a key input for industrial production. The strategic reserves provide a short-term buffer, but it will be incrementally more vulnerable if the conflict is sustained and leads to wider disruptions in both oil supply and the shipping routes through the Strait of Hormuz. Direct impact from closure of the Strait of Hormuz would cause disruptions to around 45 per cent of China’s crude oil imports. The direct oil imports from Iran take up around 13 per cent to 14 per cent of China’s total imports.
Base case: Limited disruption; tail risk lies in shipping corridor escalation.
Policy and politics
China’s diplomatic posture has so far remained measured, emphasising restraint and de-escalation. With US President Donald Trump scheduled to visit Beijing from 31 March to 2 April, both the US and China appear intent on maintaining a conciliatory tone and avoiding further escalation in bilateral trade or geopolitical tensions. Following the IEEPA tariff policy ruling, the United States Trade Representative has been cautious about reinstating alternative tariff measures - such as renewed Section 301 actions on China - while awaiting the outcomes of the upcoming leaders’ meeting. Similarly, we expect overall stability to prevail regarding the broader implications of the Middle East conflict, though the situation remains fluid and warrants continued caution.
Separately, China’s Two Sessions will commence on 5 March. We do not anticipate changes to key socio‑economic targets as a result of recent Middle East developments; however, markets will closely monitor commentary from ministerial interviews and press conferences. On this year’s growth outlook, we believe there is scope for flexibility in the real GDP target, while other core indicators - employment, inflation, and the budget deficit - are likely to remain largely unchanged to signal stability and continuity in China’s policy approach.
Bottom line
While geopolitical risk has increased, China’s macro fundamentals and policy toolkit provide resilience against immediate shock transmission. Our base case remains one of contained macro impact, with vigilance warranted around energy markets and global trade routes.
