30 Mar 2026
The events in the Middle East are, above all, a human tragedy, and we extend our deepest sympathies to those directly affected.
For markets, the conflict adds a fourth major driver to an already complex backdrop. Investors are weighing AI-driven disinflation and potential labour market weakness, the path of US inflation and monetary policy, emerging stresses in private credit, and escalating tensions in the Middle East. Each points in a different macro direction, increasing uncertainty and complicating asset allocation.
Attention is currently fixed on the Middle East. Our base case is that markets will look through the conflict over time, with energy prices reflecting a risk premium rather than a structural repricing. However, fiscal consequences may prove more persistent. A prolonged conflict would likely widen deficits as governments fund higher defence spending and cost-of-living support, leading to increased sovereign issuance.
We remain cautious given the scale of the conflict and the lack of a clear resolution path. Further downside is possible, particularly if US economic resilience falters. Heightened geopolitical risk and shifting policy signals may delay corporate investment and hiring, reinforcing economic softness.
US Treasuries are caught between safe-haven flows and inflation concerns. The labour market remains pivotal: weaker data would support a more accommodative Federal Reserve and benefit duration. Markets have already reduced expected Fed easing this year from two 25 basis point cuts to one. Absent an inflation spiral, central banks are more likely to delay easing than materially alter reaction functions. In Europe, volatility and firm inflation have similarly reduced the likelihood of ECB cuts this year.
Recent price action has often reflected positioning rather than fundamentals. Heavily owned assets have seen the sharpest moves regardless of direct exposure. The South African rand, for example, sold off despite limited Middle East linkage, largely due to crowded positioning. Distinguishing between fundamental risk and crowding remains essential.
In credit, we anticipate a heavy issuance calendar as delayed deals come to market, potentially creating attractive concessions. Even so, we remain opportunistic given structural vulnerabilities, particularly liquidity risks in private markets.
A more constructive element has been the measured response from emerging markets. Egypt has allowed its currency to weaken while supplying dollars to manage outflows, and Turkey has stabilised conditions by repricing the front end. Elsewhere, policy adjustments have been limited.
With four divergent narratives in play, disciplined risk management, selectivity in credit and a focus on liquidity are paramount. In this environment, resilience matters more than reflex.
Marion Le Morhedec
Global CIO, Fixed Income
Or
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