Week ended March 6, 2026: war breaks out, global assets trashed

The joint attack by Israel and US on Iran – and the spread of the conflict to include Lebanon and several Gulf states since then – has dramatically shifted the calculus for global investors.

Global stocks: rotation galore

In global stock markets, the most profound and sudden change has been investors fleeing from stock markets in countries that are the closest to the conflict zone and / or reliant on the Middle East for energy supplies.  Since the war broke out last weekend, we have seen the following:

• The greenback – which has done poorly since President Trump was elected – has suddenly regained appeal as a safe haven currency.  The reality is that there is no alternative (“TINA”) to the US Dollar when shit hits the fan  ® US Dollar up 1.3% WoW

• The collateral effect of a stronger US Dollar is increasing concerns about the fiscal position of many emerging markets countries.  The effects are twofold.  Firstly, imports of goods denominated in US Dollars have suddenly gotten more expensive (which is inflationary).  Secondly, emerging markets countries with US Dollar denominated foreign debt now have to pay more for Dollars to service their foreign debt ®  MSCI EM index down 6.9% WoW

• The closer to the conflict zone and the more profound the effects of rising prices of oil and natural gas on a country’s economy, the worse the local stock market has performed.  European equities have been hit especially hard, reminiscent of the steep price these countries paid at the onset of the Ukraine-Russia war as oil and natural gas prices soared.  Stock markets in those Asian countries that are heavily reliant on the Middle East for their energy supplies have also sold off sharply because of the disruption of oil and gas shipments through the Straits of Hormuz. ® FTSE 100 down 5.7% WoW, EURO STOXX down 5.5% WoW, and the Nikkei 225 (Japan) down 5.5% WoW

• Since the U.S. is effectively energy-independent and is far removed from the conflict zone, US stocks suddenly appear to be a better relative bet in spite of the US initiating this conflict alongside Israel (and in spite of ongoing A.I. bubble/valuation concerns) ––>  The benchmark S&P 500 down (only) 2.0% this week, far outperforming most international stock markets (aside from Chinese equities)

• Drilling down further into sectors (US-centric), you might not be surprised to see that only one sector ended the week in positive territory: energy.  All other sectors lost ground, with the worst three performers being materials (chemicals, building materials, mining), consumer staples (retailers, beverages, food, personal products) and healthcare (pharmaceuticals, hospitals).  The energy sector delivered gains off the back of sharply higher oil prices – the price of WTI crude increased 35.6% last week.  However, the three worst performing sectors mentioned above were – in my opinion – the most inflated from a valuation perspective before the conflict began.  The onset of this war was the catalyst to reign in some of the high flying stocks in these sectors, although I would have thought less cyclical and more US-centric names might have proven to be more resilient.  This all goes to show though that when things get difficult, there are few places to hide.

What about bonds?

Although equity flows are interesting, the more profound and lasting effects of this conflict could be on global economic growth and inflation.  Higher energy prices and potential  supply disruptions are likely to reignite inflation, even if this ultimately proves to be transitory should the conflict be short.  Higher inflation expectations will cause central banks in developed countries – including the Fed – to remain neutral for the time being since inflation could see an uptick.  Or even worse, hotter-than-expected inflation data might encourage central banks to pivot to a more hawkish stance.  Higher interest rates and higher oil prices act as fiscal constraints, and both will have adverse effects on future economic growth.  Whether or not this economic reality is being properly priced into stocks, especially in the US, is unclear.  The yield on the 10-year US Treasury increased 18bps this week closing Friday at 4.15%.  Most global bond yields were higher: the yield on the 10-year Bund (Eurozone) increased 19bps to 2.85%, the 10-year Gilt (UK) 25bps to 4.48%, and the 10-year Japanese Government Bond (JGB) 5bps to 2.11%. 

Jobs report for February

The US jobs report for February was released Friday morning before the US open.  Consensus estimates was for 50,000 jobs to have been added, but in fact the US economy shed 92,000 jobs in February.  As you can see in the graph below, the US jobs market has been in a funk since the beginning of 2025 although the US economy has otherwise performed reasonably well.

The unemployment rate rose slightly to 4.4% in February.  Were a war in the Middle East not raging, I suspect this unexpectedly weak jobs report would have been used as fodder by the Trump Administration to step on the neck of Fed Chairman Powell (to press the case for lower policy interest rates).  Instead, Mr Trump and his merry men must be struggling now as to how to spin this unexpected datapoint, especially with Americans worried increasingly by an affordability crisis.  And if a new war weren’t enough, the weak jobs data was another excuse to dump stocks on Friday.  Rather strangely though, the bond market – which might have been expected to see the news as a harbinger of more dovish monetary policy –– instead went the other direction as inflation fears from higher oil prices and supply chain disruptions proved more influential.

How long will this war last?

I do not want to drift too much into geopolitics, but the decades-long focus of Israel on Iran (for good reason) and the fact that the US president more or less listens to the last person that has his ear (Netanyahu in this case) is now on full display. The Iranian regime has been a thorn in the side of the Middle East for many decades, and their destruction (should it ultimately come to pass) and the rebirth of Iran as a more “friendly” and stable country in the region could bolster the economies of countries throughout the Middle East.  I want to be positive about this, but I ascribe only a 25% probability of this outcome, with the greater risk being that the US once again finds itself bogged down in an unpopular war with “fuzzy” objectives.     

I have read that around 20% of Iranians were (and I presume remain) supporters of the existing Iranian regime led by the late Ayatollah Khamenei.  I would reckon many of these supporters are hardcore members of the Islamic Revolutionary Guards (“IRG”).  Even though the Iranian leadership was effectively decapitated at the beginning of this war, is it reasonable to expect the hardcore IRG to quickly capitulate?  I have doubts, simply because I think about this question in the context of something I understand slightly better – US politics.  In the US, the hardcore right (many MAGA supporters) and the hardcore left both often turn a blind eye to the questionable histories and activities of their leadership.  Look no further than President Trump, who has shown that he can sustain his core support base even with a rather unsavoury past (at least for my taste) – including a string of moral “compromises” and business failures – not to mention the visible graft for which he uses his position to enrich his family and friends.  Keeping this in mind, why would the hardcore supporters of the existing regime in Iran behave any differently?  While bombs from the air and missiles might eventually soften them up and break their spirit, I fear that the only way to fully dislodge the remnants of the former supreme leader might be Israeli and American boots on the ground. 

My hope of course is that I am wrong and that this does not happen. I also hope that the Trump Administration was not so naive to believe that the base case would be to “decapitate the leadership and the IRG would stand down”.  Rather, I want to believe that the administration correctly anticipated the potential for a drawn-out war leading to significantly higher oil prices because the Strait of Hormuz is effectively closed.  And that US leadership is also prepared for a scenario in which the IRG might not simply roll over but instead hunkers down, forcing Israel and the US to send in ground troops to dislodge them.  Polls clearly indicate that most Americans are not in favour of this war.  Naturally, the Trump Administration is painting a rosy picture of the progress, and I badly want to believe this.  However, global markets are presenting a much less positive picture.  Put your political affiliation aside and ask yourself a simple question: who are your more likely to believe – the Trump Administration or global investors?  Given the facts, you decide.

What should an investor do now (noting that this is not investment advice)?

I outlined what happened to investment flows during the first week of this conflict.  However, I would not advocate a portfolio rebalancing just yet because there is too much uncertainty on the horizon.  US stocks have performed surprisingly well relatively speaking since the conflict began, and I suspect the US will continue to be the “go to” for investors seeking safety until this conflict ends or settles into a more predictable pattern.  Having said this, US stocks have gotten relatively more expensive again (as foreign markets have become cheaper).  Also, the overhang of A.I. uncertainty across the tech universe has not gone away, although it has faded into the background over the last week.  I am not convinced at all that “buying the dip” makes much sense in an environment in which sentiment swings amongst retail investors are not the primary driver of the dip (for a change), but rather the negative effects of this war on global economies are the real culprit.  Having more cash on hand, or ramping up hedges, might be the best outcome if you are worried, but I would not advocate wholesale portfolio shifts until there is more clarity as to where this conflict goes next.

Another collateral effect of this war

This war is certainly not positive for those folks from high tax countries who have relocated to the Gulf states to take advantage of no (or low) tax regimes, along with good weather and “everything shiny”.  The Gulf region was viewed as relatively safe, which suddenly looks like a myth in that this conflict – whether it is long or short – has likely shattered this perception.  It appears that many expats are leaving the region when they get the chance now, and whether they will return after the war ends or are gone for good remains to be seen.  This war might halt or even reverse the migration of people from countries like the UK, a welcome relief perhaps to many developed countries with less favourable tax regimes.  London could be a beneficiary if this migration comes to pass, which would certainly help the beleaguered Labour government as it continues to toe a precarious fiscal line.  Stay tuned - war is highly unpredictable.  

 

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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