• An overview of asset class performance since the beginning of the Iran war
• The correlation between bonds and equities is back up
• The Fed is the only central bank left for which a rate cut is still priced in
No place to hide.
A look at the performance across asset classes since the beginning of the Iran war is particularly interesting. We are indeed observing a severe scarcity of defensive assets. Obviously, the oil price has been the clear winner, up by over 40% since the beginning of the crisis.1 The US dollar has also staged a rebound, albeit a fairly modest one. The DXY index has gained about 2.6% during the period.2 Only a couple of currencies have managed to be up against the dollar over the past two weeks, including the Colombian peso and, to a lesser extent, the Israeli shekel. Otherwise, every other major asset class was down, with some of them quite significantly. EM equities, Euro equities and EM local currency debt stand at the bottom of that leaderboard. Gold, which for a while was the shining star of global markets, has suffered losses in excess of 5.5% since the beginning of the conflict.3 Duration has not done well either, with both the UST and the Bund index down by about 2%, mainly to the upside pressure on government bond yields.4 Looking ahead, we are facing a highly volatile environment given the extreme level of geopolitical uncertainty. With that in mind, some sharp reversal of the recent moves cannot be ruled out, although it remains dependent on the duration of the geopolitical crisis. At this juncture, the oil price has become the single most important global market barometer. A correction down to below 80 dollars per barrel will likely send a strong bullish signal for global markets, but that can only be achieved if the oil supply bottlenecks can be addressed.
The Correlation break is taking a break.
The correlation between bonds and equities was in clear downward correction mode earlier this year. In fact, the recent trough was reached in January when the UST/S&P correlation coefficient fell to 0.28, a four-year low.5 Things have markedly changed, however, compliments of the geopolitical crisis. The correlation between bonds and equities is now back up, reflecting higher stagflation fears as a result of the sharp spike in oil prices. Stagflation is on paper bad for both bonds and equities, and as we discussed above, most asset classes have struggled since the beginning of the crisis. Looking ahead, the bounce in correlation may be a short phenomenon if the stagflation fears ultimately subside. Some of the recent moves we have observed in core fixed markets look excessive to us, like for instance the front-end of the UK gilt curve. It is hard to fathom that the local rates market is now leaning towards pricing in some policy tightening by the Bank of England. Same story for the Eurozone. Ultimately, we believe that this could turn out to play out as a great entry point for establishing long duration positions in some selective markets.
The rate cut club is losing members fast.
At this juncture, the Fed is alone as the only central bank in the developed market universe where a rate cut is still priced in. Everywhere else, the rates market is now betting on some rate hikes, even in Canada and the UK. The Fed is meeting this week in the context of elevated macro and geopolitical uncertainty. As we see it, the only consideration that matters for this week’s FOMC is the Fed’s assessment of stagflation risks and whether the Fed will opine on the impact in the recent spike in oil prices on the inflation outlook. For now of course, the rate cuts have been put in the freezer. The probability of an imminent rate cut is now extremely low, with the market projecting the next rate cut to be not before December. Like in many other places, it feels to us that the US rate market has switched into overreaction mode.
[1] Sources: Bloomberg, generic 1st crude oil, Brent. Data as of 16 March 2026
[2] Sources: Bloomberg. Data as of 16 March 2026
[3] Sources: Bloomberg. Data as of 16 March 2026
[4] Sources: Bloomberg. UST and Bund indices. Data as of 16 March 2026
[5] Sources: Bloomberg. Correlation based on the 2-year rolling correlation of monthly UST and S&P500 returns. Data as of 16 March 2026
