The prospect of a prolonged Middle East conflict is unsettling financial markets, as investors weigh the potential macroeconomic consequences.
Concerns about inflationary pressure drove global equities lower, while elevated volatility and a rising risk premium across rate-sensitive assets in fixed income argue for a more conservative approach. In addition, gold fell to just above USD 5,000 per oz last week and the USD strengthened, notably against the currencies of energy importers such as the euro and the yen.
The coming week is set to be dominated by developments in the Middle East as well as the US Federal Reserve’s meeting on Wednesday. While rates are widely expected to remain on hold, investors will be listening closely to the central bank’s tone, watching for any sign that policymakers are rethinking their stance in the face of the latest energy supply shock.
Market recap
Beyond the numbers
Macroeconomics
The conflict in Iran has barely dented American consumer sentiment, at least judging by inflation expectations. Although the headline sentiment index slipped to 54.8 from a previous 56.6 - a dip largely attributed to expectations of higher petrol prices - short-term inflation expectations remained anchored at 3.4%, defying analysts who had braced for a spike to 3.7%.
Yet the resilience of consumer sentiment remains precarious. Should the conflict persist, sentiment may buckle under the weight of rising petrol prices, particularly as the labour market sits in a delicate equilibrium. Continuing claims hovered at a stubbornly high 1.85 million, while redundancies eased slightly to 1.0% and hiring rates remained flat, translating into a ‘low-hire, low-fire’ holding pattern. Without the safety net of robust income growth from the labour market, the meagre 0.1% increase in real spending in January looks increasingly fragile.
Consumers are rightly worried about rising costs. In January, the Consumer Price Index rose 2.4%, and in February the Federal Reserve’s preferred gauge, core Personal Consumption Expenditures (PCE), ran at 3.1%, both above the 2% target. Crucially, these readings do not yet capture the full impact of surging energy prices, while service prices remain sticky. With this added pressure still to come, the Federal Reserve’s plan to lower interest rates looks increasingly difficult to execute.
Across the Atlantic, the eurozone’s industrial output tumbled by 1.5% in January, wrong-footing analysts who had predicted a 0.6% recovery. This gloom was widespread among the bloc’s heavyweights, with Germany, Italy and Spain all posting declines that more than offset a modest 0.5% gain in France. The United Kingdom has proved no more resilient. The country entered 2026 with almost no momentum, leaving its economy dangerously exposed to an energy-related shock. The economy stagnated in January as the services sector - the traditional engine of British growth - lost steam against the backdrop of a cooling labour market.
Next week’s global central bank line-up, comprising the Federal Reserve, European Central Bank (ECB), Bank of England (BoE), Bank of Japan (BoJ) and the Swiss National Bank (SNB), will navigate the energy supply shock. With markets anticipating rates on hold, attention will turn to central banks’ rhetoric, looking for any change in their reaction function.
Asset allocation: strategic views as at March 2026
Investment strategy and asset allocation
At the start of 2026, our central scenario anticipated robust global growth and a moderating inflation backdrop, creating room for global central banks to cut rates during the year. This view implied modest USD weakness, a stable long-end rates environment, and a pro-risk stance across gold, equities and fixed income.
Given the magnitude of the current disruptions, a return to normal conditions in both oil and gas markets will likely be delayed until at least year-end, keeping energy prices elevated for longer. As a result, our investment strategy is being temporarily adjusted to reflect oil prices averaging above USD 80 in 2026. An update will be provided in the next edition of the UBP House View.
Equities
Global equities retreated for a second consecutive week as a risk-off mood persisted amid the Middle East conflict (MSCI ACWI total return -1.7%) and the potential spillover effects on the global economy.
Initial hopes that an end to the conflict was near lifted equities at the start of the week, but this faded as the week progressed and no evidence of such emerged, stirring inflation and interest rate angst. Furthermore, weak US macro data and continued negative news flow in the private credit market also weighed on investor sentiment.
Headlines regarding the latter contributed to weakness in the global financial sector (-3.0%), which was the worst-performing along with interest rate-sensitive and cyclical sectors (real estate -3.0%, consumer discretionary -2.8%, materials -2.8%, industrials -2.8%). Energy was once again the best-performing at +2.5% and one of the two sectors to finish the week positively.
Since the start of the conflict, and despite the largest interruption to global energy flows in history, global equities have only fallen -5.3%. Many investors appear hesitant to sell heavily because they fear missing a sudden market recovery. That ties in with President Trump’s history of backtracking under pressure from financial markets. However, with the S&P 500 down only -3.5% since the beginning of the conflict, investors may have to digest more pain before the “TACO” trade narrative (“Trump Always Chickens Out”) can start making the rounds again. Meanwhile, the global energy sector was upgraded from 3 out of 5 to 4 out of 5, as “higher for longer” oil prices should lead to upward earnings-per-share (EPS) revisions. Conversely, this is likely to prove detrimental to earnings in the global consumer discretionary sector, which has been downgraded from 3 out of 5 to 2 out of 5. In the week ahead, commentary from central banks on the future path of interest rates will be a key focal point for investors.
The “higher for longer” oil price narrative is likely to weigh on earnings in the global consumer discretionary sector.
Fixed income
A five-week window that began with the Supreme Court striking down International Emergency Economic Powers Act (IEEPA) tariffs and ended with oil above USD 100/barrel (bbl) left every major fixed income asset class in flat or negative total return territory. While spreads have been moving wider continuously since early February - naturally accelerating after the Iran conflict broke out - rates initially moved downwards through February only to reverse sharply in March. The bond market’s traditional defensive reflex was overwhelmed as surging energy prices broke the traditional flight-to-quality playbook. Month-to-date, the 10-year Treasury and Bund are up 34 basis points (bps), while Gilts are up 59 bps, with the UK’s import-dependent energy profile amplifying the move. Despite the violence of March’s repricing, year-to-date changes remain more contained, with the US 10-year up 11 bps, the Bund 13 bps, and Gilts 34 bps.
The repricing in rate expectations has been profound. Five weeks ago, markets were debating the timing of the next cut, while they now debate whether the next move from the ECB and BoE might be a hike. Fed pricing has moved from two cuts to one; the ECB from a 50% probability of a cut to nearly two hikes; the BoE from two cuts to nearly one hike - with even pricing for the Swiss National Bank shifting from some likelihood of a cut to one hike priced. Primary issuance in both investment grade (IG) and high yield (HY) slowed meaningfully this month as issuers wait for volatility to subside.
For the week, the moves described pushed IG, HY, AT1s and emerging markets (EM) down 0.9%, 0.7%, 0.6% and 0.9% respectively, tipping year-to-date performance into negative territory for all except EM, which is flat.
As the disruption in the Strait of Hormuz persists, the breakdown in correlations between rates and spreads - as well as the severe implications of an energy shock if it does not reopen for maritime traffic soon - led us to review our tactical allocation framework and pause some of the key trades we had on for the year, cutting duration across all currencies, scaling back the sterling duration overlay and cutting exposure to EM local-currency bonds, after having already reduced exposure to AT1s earlier this month. With oil above USD 100, the Strait of Hormuz effectively closed, and central banks caught between a weakening growth outlook and an energy-driven inflation shock, the traditional fixed income playbook - which is to buy duration on geopolitical risk - has failed. The key variable from here is whether the oil shock proves transitory if Hormuz reopens and the conflict de-escalates, or remains persistent with structural supply disruption and second-round inflation effects. Until the situation is resolved, elevated volatility and a risk premium on all rate-sensitive assets are the base case, and so a more conservative approach is warranted.
Duration was reduced across all currencies, while exposure to emerging-market local-currency bonds was trimmed.
Forex & Commodities
The USD rose across the board last week as the currencies of energy importers such as the euro and yen weakened due to changes in their respective terms of trade (ToT). These effects are consistent with previous energy price shocks, and investor positioning suggests some scope for further position-squaring, favouring the USD. This week’s Federal Open Market Committee (FOMC) meeting is unlikely to see a change in the stance on rates, and markets will look for any comments regarding the recent deterioration in US labour market data. Such comments are unlikely to weaken the USD, given the external situation.
There are also major central bank meetings for the European Central Bank, the Bank of England, the Swiss National Bank and the Bank of Japan. Rates are likely to remain unchanged for each central bank, given the huge change in interest rate pricing due to the conflict in the Middle East. There is some scope for a surprise with the Bank of England meeting, given heavy expectations of a rate cut before the outbreak of the conflict. The Bank of Japan meeting will also be interesting to see if there is any hint of future potential rate hikes. In the near term, ToT changes should determine short-term trading ranges, and that implies further potential weakness for the euro and the yen in particular.
Gold fell to just above USD 5,000 per oz last week, while ETFs have been sellers over the last two weeks. The rise in ETF outflows simply reflects risk reduction on the part of retail investors, and such price action is consistent with significant equity market drawdowns. Any decline in gold should be relatively short-lived, given the underlying robust demand narrative and the prospect of higher inflation over time. Gold tends to perform admirably as an inflation hedge during oil price shocks, suggesting only limited downside from current levels. Our constructive long-term stance on gold remains, with a year-end forecast of USD 6,000 per oz.
In the near term, currency trading ranges are likely to be shaped by terms of trade, pointing to potential weakness in the euro and the yen.
Energy
The Strait of Hormuz has remained closed for over two weeks. The Gulf Cooperation Council (GCC) is estimated to have storage capacity covering only 20–25 days, limiting the ability of regional exporters to offset blocked shipments. Current supply disruptions are now becoming significant. More than 8 million barrels per day (mb/d) of crude oil production and 2 mb/d of refined products are estimated to be offline, according to the International Energy Agency (IEA), in addition to roughly 15 mb/d of oil that would typically transit the Strait of Hormuz but cannot currently move. Refining capacity losses exceed 3 million barrels of oil equivalent per day (mboe/d), compared with around 5 mb/d of Gulf exports in 2025. Although there has been no structural damage to key oil infrastructure, normalisation is likely to take months once shipping resumes. Hoarding behaviour has also emerged, with countries restricting exports (such as China), imposing export taxes (Brazil), and implementing fuel rationing (India). While the IEA has announced the release of 400 million barrels from strategic reserves, the practical delivery pace, estimated at around 3 mb/d during the first 100 days, limits its ability to fully compensate for disrupted flows.
As a result, higher-for-longer prices, averaging roughly USD 85 per barrel (USD 85/bbl) for 2026 are expected. The key condition for this forecast is the extent and duration of the disruption to flows through the Strait of Hormuz. The updated oil price forecast supports our decision to upgrade the Energy sector to 4 out of 5 from a baseline stance of 3 out of 5. At an average price of US 85/bbl in 2026, approximately 50% earnings per share (EPS) growth for 2026 is expected, versus 0% growth under the beginning-of-year assumption of US 62/bbl, with roughly half of the potential re-rating still not reflected in current valuations. Upward revisions to earnings and cash flow are expected, driven by stronger commodity prices and refining margins, partially offset by production outages or lower refining throughput. Given the scale of current disruptions, normalisation in both oil and gas markets will likely extend into the end of the year at least, resulting in higher-for-longer energy commodity prices and creating sustained tailwinds for the sector.
Stronger commodity prices and refining margins should lead to upward revisions to earnings in the sector.
The opinions expressed herein are correct as at 16 March 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
