Week ended March 20, 2026: markets weaken further, nowhere to hide

Financial markets were rattled further by escalating tensions in the Middle East.  With little to lose, the Iranian government has no qualms about unleashing a “scorched earth” strategy.  The regime’s objective is not only to maintain control over oil shipments through the Strait of Hormuz, but also to extract a quid pro quo “price” for damage to Iranian energy infrastructure if and when it’s bombed.  Israel bombed two key gas facilities in Iran (South Pars and Asaluyeh) mid-week, which sparked a retaliatory attack by Iran of Ras Laffan in Qatar, which is the world’s largest producer and refiner of LNG (circa 20% of global LNG capacity).  The Iranian attack appeared “successful” in that roughly 17% of the capacity of Ras Laffan appears to have been knocked out of commission.  Restoring this capacity will apparently take three to five years.  

With the backdrop of a broadening Middle East conflict, oil prices remain elevated and highly volatile, un-nerving investors.  At one point last week, Brent crude (international price) touched $119/bbl, and WTI credit (US price) rose above $100/bbl.  US stocks fell for the fourthconsecutive week, and bonds sold off, too, with yields rocketing higher, especially at the short end of the curve.  It should go without saying that investor sentiment is very risk-off at the moment.  Even safe haven assets are under pressure, with investors starting to favour cash.  This is not really surprising.  Should oil prices remain elevated, developed economies are staring stagflation right in the face, with inflation likely to accelerate just as economic growth slows because of higher energy prices and higher borrowing costs.  One needs to look no further than the seven or so central banks that provided monetary policy decisions last week.  Not a single central bank lowered its policy rate, and one – the Reserve Bank of Australia – surprisingly raised its policy rate in an effort to get ahead of higher future inflation.  Several of the central banks made it crystal clear that their next policy move might be an increase – not a decrease – in policy rates should inflation accelerate as expected.  

You can find below in the "Markets Data And Tables" section updated tables with the indices and asset prices tracked and updaged weekly by EMC. There’s a lot of red in these tables, illustrating how few places there are to hide at the moment. 

The market backdrop is not a context I like as an investor.  I hope that this war proves worth it for Israel and the US, and that it ends very soon.  As much as I hate to be sceptical, I have my doubts regarding both.  As a result, I have also raised more cash in my portfolios by selling a portion of my leveraged loan ETF holdings, just to have more liquidity at hand should this crisis worsen.  I am largely staying the course – as I always do – as far as equities. 

The Fed’s decision……and dilemma

As expected, the Federal Reserve held its policy rate steady at its midweek FOMC meeting, citing continued inflationary pressures and a not-bad labour market.  The FOMC vote was 11-1, with Trump stooge Stephan Miran being the only FOMC member to call for a 25bps reduction in the Fed Funds rate.  You can find the Monetary Policy statement here. The FOMC also published an updated set of Economic Projections, which you can find here.  As usual, Chairman Powell’s statement and media Q&A following the decision garnered most attention.  I took two things away from his comments, which you can watch here (transcript  here). 

• The Federal Reserve is uncertain as to how the war might alter economic parameters going forward.  However, in the minutes and revised Economic Projections you will read a reasonable approach, with economic growth and jobs remaining firm (albeit the latter showing some signs of weakness) and inflation remaining above target.  With this in mind, and the expected effects of higher oil prices on inflation, the revised dot plot of Fed Funds expectations suggests little relief over the next two or three years, at least in terms of the policy rate.

• Mr Powell, in his usual dignified manner, made it clear that he would remain Fed chairman until Trump chairman-nominee Kevin Warsh is confirmed as the new chair.  He also said that he would remain a voting member of the FOMC even after a new chair is approved until a decision is made by the courts regarding the Trump-inspired DoJ criminal investigation of Mr Powell and the Federal Reserve. 

Now let’s turn to the dilemma that the Fed will likely face.  Most central banks have one mission: to keep inflation in check.  However, the Fed has a dual mandate, which is to keep inflation in check and to ensure that the US economy is at full employment.  Inflation is likely to inch higher and the job markets (and the overall US economy) is likely to weaken, both due to higher oil prices.  This is a classic case of economic stagflation.  Tighter monetary policy is the tool normally used to address inflation, and looser monetary policy is normally the tool used to address a weak jobs market (and weakening overall economy).   Monetary policy will need to be carefully calibrated by the Fed to address both higher inflation and a worsening jobs market, and the path forward will not prove easy.  We will need to see what happens in the coming weeks as inflation data and jobs data trickle in. 

As I wrote earlier in this update, the U.S. is not unique in terms of developed economies as far as potentially having to address a stagflation scenario.  However, the key difference between the Fed and other central banks is that the Fed has one eye on inflation and the other eye on the jobs market, whereas other central banks have their sole focus on inflation. This will make it more likely that other central banks (e.g. the Bank of England, the ECB and the Bank of Japan) will more aggressively and quickly raise their policy rates if inflation heads higher as expected.

Oil prices and inflation

The key measures of inflation in most developed economies are:

• Headline inflation, which is a comprehensive basket of goods and services, and

• Core inflation, which is a similar basket of goods and services but excluding energy and food prices.

As I explain in a very old article on my website (“Inflation”, Feb 2021),  policy makers and economists tend to focus mostly on core inflation, since it strips out more volatile changes in oil and food prices, both of which are global commodities and have their prices influenced by factors other than monetary policy.  As we are likely to see in the months ahead, headline inflation will increase due to higher oil prices because of the war in Iran, not because of anything that the Fed or any other central bank is doing.  Core inflation might prove less volatile because it excludes oil prices, but this metric does not spare people that will have to pay more for petrol and fuel oil regardless of the economic measure of inflation.  Moreover, higher oil prices filter through to other goods and services that are affected indirectly, including logistics costs (e.g. the cost of deliveries from Amazon, which will be more expensive due to higher fuel costs), air travel (e.g. higher fuel prices reduce airline margins/raise airline travel costs), and the manufacture of a variety of textiles, plastics and other things (e.g. toys, containers, wax, detergents, fertilizers, asphalt, propane, butane, etc) that use oil derivatives in their production.  Circa 13% to 15% of refined oil products goes to things other than fuel costs, meaning that higher oil prices splatter headline inflation also. 

Putting aside this economic discussion, the reality is that prices for consumers are likely to increase, and this will put further pressure on economic growth and the jobs market.  Should higher oil prices not be short-lived, this will certainly be yet another kick in the backside of middle class folks around the world that are already struggling with higher costs, a reminder of the severity of the current affordability crisis. 

MARKET DATA AND TABLES

Below are tables of key indices and asset prices that have been updated for the past week.

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