Week ended March 13, 2026: war weighs on markets

Global risk markets were volatile last week, not surprising given ongoing Middle East conflict.  Stocks were weaker globally although the real pain continues to be felt in the bond and oil markets.  The yield on the 10-year US Treasury rose 13bps last week, and is 31bps higher since the Middle East conflict began.  Higher yields are chipping away at the now-modest YtD gains in intermediate- and long-duration UST bonds.  Oil prices spiked, the US Dollar strengthened (safe haven trade), and gold was flattish (and remains in a slight overbought position).  Both yields and spreads widened further on investment grade and high yield corporate bonds due to ongoing supply and credit quality concerns, along with higher underlying yields.  Having said this, my assessment is that the US stocks and high yield bonds could be getting hammered much more.  Below is a summary table for the indices and assets tracked by EMC showing price action over the last week and year-to-date.  More detailed tables can be found at the bottom of this update.

The weekly update addresses the following:

• Increases in global oil prices; prices at the pump gap higher

• The US CPI report for February, the “pre-war” period

• Private credit: a growing concern

• “Buy the Dip”; is this a TACO opportunity?  (I think not!)

• Judge blocks the Trump-inspired Justice Dept’s suit of Chairman Powell and the Fed (not surprising since it was politically motivated)

Oil prices continue to move higher

As we settle into the war in the Middle East that could either be long or short – depending on what the last person in the Trump Administration says to the press – markets remain volatile with gyrations largely wrapped around the direction of oil prices.  Shipments of oil through the Strait of Hormuz have ground to a halt, which Iran said all along would be part of their response to being attacked.  To ease prices, the IEA agreed to release 400 million barrels from its strategic reserves on Wednesday.  For context, approximately 20-21 million barrels of liquid petroleum products normally pass through the Strait of Hormuz each day which is 20% of global demand (source: IEA here), with the majority of the product destined for Asia.  My memory is that the positive effects of the release of oil from strategic reserves is usually short-lived.  In fact, the positive benefit in this case was nil – oil closed higher every day since the announcement by the IEA.    The graph below shows the price action of WTI crude (US benchmark) and Brent crude (international benchmark) since mid-February.

The sharp increase in the price of oil is being quickly passed through to consumers.  As of Friday, the average price/gallon of petrol (gasoline) at the pump in the US was $3.63/gallon according to the AAA, up from $2.94/gallon one month ago (+23.5%).   This sharp increase in petrol prices since the beginning of this conflict is yet another kick-in the-knee for those Americans who are already struggling with an affordability crisis. 

US inflation report

The CPI report for February in the U.S. came in right as expected and flat to January, with core CPI running at 2.5%/annum, and headline CPI at 2.4%/annum.  The data suggests that inflation is inching back towards the Fed’s 2%/annum target, but keep in mind that this inflation report is for February which is before the US and Israel attacked Iran.  With higher oil prices likely to keep inflation elevated, there is near certainty that the Fed will sit tight at next week’s FOMC meeting (although this was largely a foregone conclusion before the conflict began).  However, the number and timing of expected rate reductions in 2026 has changed, according to the CME FedWatch Tool.  The prediction tool is suggesting now that there will only be one reduction in the Fed Funds rate this year (rather than two), and that this reduction will not occur until September (rather than June).  Welcome to oil-induced inflation.  And for the non-economists that read my gibberish, keep in mind that changes in the policy rate by the Fed influence the short end of the curve, not the intermediate and long end which instead responds to market dynamics like supply/new issuance, fiscal integrity (meaning debt / deficits) and long term inflation expectations.  The Fed will stick tight for good reason, but I still expect President Trump to jump up and down like a 2-year old when the FOMC decision is announced.  As an aside, Personal Expenditure data released on Friday, including the much-monitored PCE for January, was largely in line with expectations.  I consider this a very dated data point in any event.

War takes centre stage, but private credit is a growing concern

The Middle East war has taken other concerns / issues off the front page, including the economic effects of the Trump tariffs, growing difficulties in the private credit market and – of course – the “drip feeding” (and potentially manipulation) of the infamous  Epstein files.  As far as private credit, the issue seems to be investors wanting their money back more aggressively than the scheduled quarterly distributions generally allow in the documentation.  This in turn means that private credit asset managers have to sell loans to raise liquidity in what is a relatively illiquid market to begin with (especially when everyone is going the same direction).  “Forced selling” can also lead to (unrealised) mark-downs of existing loan assets so as to mark the portfolio to market, precipitating a downward spiral.  Whether there is really credit deterioration in underlying private loan portfolios is unknown because of the opaqueness of the private credit market.  However, what is certain is that investors’ concerns are broadening, and this is creating as issue that seems to be becoming systemic across the private debt asset class.  These sorts of cascades can be difficult to halt, especially in an environment like now that is firmly risk-off.

“Buy the dip”; could this turn into a TACO opportunity?

Going into the conflict - meaning if you knew then what you know now - you would certainly have rearranged your stock portfolio and skewed it towards defensive sectors, defence companies and energy companies.  These are the sectors that have done the best relatively speaking since the beginning of March when Israel and the US attacked Iran.  As I said last week, I do not think this is a “buy the dip” opportunity.  The circumstances are too complicated to believe a “TACO” (Trump Always Chickens Out) event could save the day, especially since the instigator of this war is none other than President Trump himself.  I look at it this way: should Mr Trump try to climb down, the Iranians will claim victory and retain their ability to menace Israel and the rest of the Middle East, and they are likely to rebuild their weapons programme.  Should the U.S. and Israel continue to bomb Iran, this war could drag on for many months, disrupting the energy market and leading to higher inflation and slower economic growth globally.  This war is bigger than President Trump now, and try as his administration may to spin the successes of this campaign, getting out of this pickle will likely be bad for Mr Trump regardless of which path he chooses.

US judge throws out Justice Department subpoenas to Federal Reserve

 Ah, what joy this gives me!  The excerpt below from the #FT summarises what happened late Friday afternoon, and just how frivolous the Trump inspired criminal investigation of Chairman Powell and the Federal Reserve is. 

MARKET DATA AND TABLES

Below are tables of key indices and asset prices that have been updated for the past week. There's a lot of red in these tables, indicative of the poor week.

_________________

**** Follow E-MorningCoffee on Twitter, and please like and comment on my posts right here on my blog. You need to be a subscriber, so please sign up. Thanks for your support. ****