March was dominated by a sharp escalation in geopolitical risk. The eruption of a conflict between the US/Israel and Iran led to a surge in energy prices, higher inflation expectations, and significant adverse moves for most financial assets. Commodities were the standout performer, particularly crude oil which approached $120 per barrel having been close to $70 a month ago. Concurrently, both equities and bonds came under pressure. Stock markets of those regions most sensitive to imported energy costs – such as Japan, Europe, India, and Korea – were most impacted. Bonds came under pressure as yields rose to reflect rising inflation pressures and possible rate hikes. Lastly, as volatility spiked, investors sought to raise cash, benefitting the US dollar but weighing on gold.
On 28th February, the US and Israel launched a military campaign against Iran which continued throughout March. Iran retaliated with missile and drone strikes on Israel and on infrastructure across Gulf countries. Aside from the humanitarian impact, the primary concern for investors has been the effective closure of the Strait of Hormuz, through which around a fifth of global oil flows alongside natural gas, fertilisers, and other raw materials. At present, traffic through the Strait of Hormuz remains significantly lower than normal. This leaves a severe gap in global supply and has significant implications for the price of goods globally.
The longer energy prices are elevated, the more consumers and businesses will feel the strain. As a result, stock markets have declined, reflecting higher input costs, compressed margins and hence lower future earnings. Markets most reliant on imported energy – such as Japan, Europe, India and Korea – have dropped more sharply than the US, which is closer to being energy independent. For Sterling investors, US stocks have also benefited on a relative basis from appreciation of the US dollar, the world’s primary safe-haven currency. Heightened demand for dollars also weighed on gold in the early part of the month as investors sold their previously best performing assets, before it started to recover in the closing days of March.
Bond yields have risen sharply across the globe, putting pressure on borrowers. Expectations have shifted significantly since the start of the year when rate cuts were anticipated across regions. In March, interest rates were left unchanged by central banks in the US, Europe, and UK who may have otherwise cut rates. Moreover, some markets are now pricing in hikes to fight inflation pressures over the remainder of the year. The UK interest rate market has reacted most violently and is now pricing in two interest rate increases this year. In addition, longer-dated UK bond yields increased to their highest level since 2008 as poor polling for the current government and leadership uncertainty increased political risk premiums. Despite it being a poor month for bond investors, various areas of Fixed Income, such as short-dated inflation-linked bonds and floating rate bonds, were more resilient.
Markets are no longer pricing in interest rate cuts, but this may change because central banks typically prefer to look through the effects of supply-induced inflation spikes, as long as second round effects (such as wage pressures) are limited. Furthermore, the backdrop is highly changeable, thus making any decisions on interest rate changes more difficult. Indeed, there were indications towards the end of the month that President Trump is seeking a rapid end to the war. Despite doubts over the sincerity of this news and the time it may take to return disrupted supply chains to normal, this was welcome news for investors who had been fearing a lengthy conflict.
Government support may also bring relief for investors as steps are being taken in some regions to alleviate the burden of higher energy costs. South Korea has introduced fuel tax cuts and bond purchases (to reduce borrowing costs), while EU finance ministers are considering measures such as fuel subsidies. Such support, if enacted, could help sustain household budgets and corporate earnings, restoring confidence and potentially reducing selling pressure.
Bottom Line
March 2026 saw an exogenous shock that unsettled asset markets, bringing renewed focus to the strategic importance of the Strait of Hormuz and its implications for global supply chains and investor confidence. Markets have shifted from expecting disinflation driven interest rate cuts to higher near-term inflation due to energy supply concerns. This has delayed, but not necessarily derailed, central bank support. Indications that Trump favours a quick end to the conflict are favourable, but the situation remains volatile. This can be unpalatable, but it can also present opportunities as valuations improve, and history suggests that it is best to stay invested over the long-term.
Noteworthy
Big Tech Faces a Regulatory Shift
Away from geopolitical tensions in the Middle East, two of the world’s largest companies faced growing legal pressure over a product most of us use multiple times a day. This month, a landmark US case found Meta and Alphabet liable for designing addictive features that harmed a young user, with $6 million in damages awarded. At the same time, regulators around the world are stepping up: Australia has moved to ban social media for under 16s, while the UK is considering restrictions on “addictive features”. Together, these developments point to a shift in how social media is treated, with companies increasingly held accountable for the impact of their platforms. Over time, this could reshape business models, pushing firms to prioritise safety and transparency over engagement driven growth, much like past regulatory shifts in industries such as tobacco. Despite this, markets showed little reaction. Share prices for both companies were largely unchanged, likely reflecting both the modest scale of the fine and the sheer size of these companies. With both investing over $200 billion annually, such penalties are unlikely, at least for now, to materially impact their operating models.
Russia’s Iran Dividend
One of the biggest winners of the Iran conflict is Russia. Prior to the conflict, Moscow appeared to be moving toward a genuine budget crisis, as falling oil revenues and sustained sanctions placed growing pressure on the Kremlin’s finances. Oil and natural gas revenues account for roughly a quarter of Russia’s federal budget and remain central to funding its war machine in Ukraine, so the squeeze on energy exports was highly significant. In February, exports of Russian crude and oil products fell to 6.6 million barrels a day, their lowest level since the start of the 2022 invasion of Ukraine, while export revenues dropped by around 30 per cent compared with the previous year. Yet the Iran war has transformed that picture. Higher energy prices and a reversal in Washington’s previous stance on Russian oil, including the temporary easing of sanctions on seaborne crude to keep supply flowing into global markets, have given Russia valuable economic breathing room. In that context, the Russian finance ministry’s indication that spending cuts previously expected this year will now be pushed back to 2027 is not a sign of weakness, but of renewed fiscal flexibility. Beyond oil, Russia is also benefiting from the closure of the Strait of Hormuz in other sectors. As the world’s second largest fertiliser exporter, Russia is already seeing increased orders from countries unable to source supply elsewhere, while as the second largest producer of natural gas, it could also benefit if the European Union’s efforts to phase out Russian imports are delayed.
Crucially, the conflict is shifting the military balance in Ukraine. As the US and its allies redirect attention, funding, and key military assets toward Iran, the level of support available to Ukraine, particularly air defence, is being squeezed. This risks constraining Ukraine’s defences at a critical moment. In response, Kyiv has explored alternatives, including trading interceptor drones with Middle Eastern countries for more advanced systems and seeking diplomatic backing to push Russia towards a ceasefire. Overall, this likely weakens Ukraine’s immediate defensive capacity while giving Russia a growing strategic advantage.
Month in Numbers
Change in various markets over the month
