Global equities have fallen 10% since the start of the U.S.-Iran war, but history suggests geopolitical sell-offs are usually temporary unless energy disruptions persist. In this environment, diversification and disciplined risk management remain essential.
Our base-case scenario
Our base case remains one of de-escalation within one month. The broader backdrop remains supportive, with easing tariff pressures, expected Fed rate cuts, pro-growth policies, and continued investment in AI, defense, and resources supporting earnings through the rest of 2026.
How SystematicEdge manages portfolios in this context
We stay invested because our core scenario remains constructive for global equities and quality bonds. Our wealth management portfolios are highly diversified, which helps absorb volatility. However, we are waiting before increasing equity exposure. We do not buy into markets that are falling sharply. We use quantitative momentum indicators to identify a more favourable and less risky re-entry point. In practice, this means gradually increasing exposure to assets that have declined once volatility begins to stabilise.
In summary, the objective of disciplined risk management is to preserve capital, maximise returns within a defined risk framework, take profits regularly, and then methodically rebuild target allocations when entry points become attractive again.
Market Movers in 2026 to date
Key Market Drivers in 2026
Key Risks
The Middle East conflict creates clear economic risks, as lower oil supply than demand pushes energy prices higher. This may weaken consumer spending, although households in developed markets could temporarily absorb part of the shock by saving less. Fiscal support, energy price caps, and changes in energy use, including greater reliance on renewables, could help soften the impact. If the conflict is resolved by the end of April, central banks are likely to return to their pre-war path of cutting rates or keeping policy accommodative.
In the U.S.: Resilient growth at 2%, war impact limited so far
U.S. private demand remained strong in Q1, up 1.9%, with GDP growth tracking around 2% and expected to stay above 2% through 2026, supported by fiscal stimulus, tax cuts, household refunds of up to USD 100bn, and AI investment. Inflation remains manageable, with CPI at 2.4% YoY in March, while tariff-related pressure on goods prices should ease after mid-year as overall tariff levels have fallen by 3 percentage points. As services inflation continues to moderate, helped by softer rents and contained wage growth, we expect the Fed to cut rates twice from mid-2026, bringing the policy rate to 3.00%.
In Europe: Limited war impact, moderate inflation, rates likely on hold
In our base case, the Iran conflict ends by May and the economic impact remains limited, with GDP growth forecast at 1.2% in 2026. Activity should be supported by fiscal easing in Germany, past rate cuts, a resilient labor market, high household savings, and low corporate leverage. Inflation is expected to stay close to the 2% target, with any short-term energy-driven spike likely temporary, while the European Central Bank (ECB) is expected to keep rates at 2% for an extended period.
In China: Solid growth momentum despite higher oil prices
Activity improved in January-February, with retail sales up 2.8% YoY, investment up 1.8% YoY, and exports up 21.6% YoY, supporting upside risk to Q1 GDP growth and keeping full-year growth on track for the official 4.5%-5% target. Higher oil prices should have a limited impact on growth, thanks to China’s large oil reserves, coal-heavy energy mix, and domestic fuel price controls, while fiscal and monetary policy remain supportive with scope for policy rate cuts. Inflation should remain manageable, with CPI forecast around 1% YoY in 2026, even if oil stays above USD 100/bbl.
March 2026 has been marked by escalating Middle East tensions. The ongoing military conflict involving Iran, the U.S., and Israel has significantly impacted global energy prices and inflation expectations. Attacks on oil infrastructure near the Strait of Hormuz have disrupted supply routes, causing oil prices to surge and raising concerns about stagflation. These developments have weighed heavily on equities, bonds, and gold, as investors reassess risk across major asset classes amid heightened geopolitical uncertainty.
Equity: Global equities came under pressure this month due to heightened geopolitical uncertainty. South Korea’s Kospi 200 (-20.2% MTD; +22.9% YTD) and Japan’s Nikkei 225 (-13.2% MTD; +1.4% YTD) recorded the largest declines, although both remain positive year to date. In Europe, the Euro Stoxx 50 was also significantly affected (-9.3% MTD; -3.8% YTD). Similarly, U.S. equities declined during the month, with the S&P 500 (-5.1% MTD; -4.6% YTD) and Nasdaq 100 (-4.9% MTD; -6.0% YTD) both declining.
Fixed Income: 10-year government bond yields trended higher in March, with the U.S. yield up 37bps MTD to 4.32% (+15bps YTD), the German yield up 35bps MTD to 3.01% (+15bps YTD), and China’s 10-year yield was up 1bp MTD at 1.83% (-3bps YTD).
Currencies: The USD strengthened in March amid geopolitical tensions. As a result, EUR/USD and AUD/USD declined 2.2% MTD to 1.1552 (-1.6% YTD) and 3.0% MTD to 0.6900 (+3.4% YTD), respectively. At the same time, USD/JPY and USD/RMB rose 1.7% MTD to 158.71 (+1.3% YTD) and 0.4% MTD to 6.8871 (-1.3% YTD), respectively.
Commodities: The Middle East conflict pushed oil prices higher and led to a liquidation of gold positions. WTI oil rose 51.3% MTD to 101.38/bbl (+76.6% YTD), while gold and copper declined 11.1% MTD to 4,648/oz (+7.4% YTD) and 6.9% MTD to 12,318/mt (-0.8% YTD), respectively.
Crypto: In March, cryptocurrencies outperformed overall but remained sharply negative year to date, with Bitcoin at USD 68,196 (+4.1% MTD; -22.2% YTD), Ether at USD 2,106 (+9.6% MTD; -29.3% YTD), and Solana at USD 83 (+2.4% MTD; -33.1% YTD).
After a strong start to the year, global equities gave back gains as the U.S.-Iran conflict escalated, with Europe and Asia hit the hardest and energy outperforming. History suggests oil spikes from geopolitical shocks are usually short-lived, but a prolonged closure of Hormuz would raise risks for growth, inflation, and central bank policy. Our base case is for de-escalation in the coming weeks, which should limit the damage to equities, so we keep an attractive view on global equities and remain broadly diversified. Once volatility fades, we expect markets to refocus on cyclical recovery, AI, and tech, with structural themes, solid macro support, and expected 12% global EPS growth underpinning markets.
In the U.S.: Resilient despite headline risk
Despite tariffs, AI concerns, war, and an oil shock, the S&P 500 is down only 4.6% YTD, highlighting the resilience of the U.S. equity market. The backdrop remains supportive, with healthy earnings growth, likely Fed rate cuts later this year, and AI adoption continuing to support shareholder value. Our base case is for only moderate disruption to energy supplies, which should allow oil prices to ease and equities to recover, although a prolonged Persian Gulf disruption would remain the key downside risk.
In Europe: Euro Stoxx 50 down 3.8% YTD, near-term volatility, improving outlook
European equities have been driven by a stronger cyclical backdrop, fears of AI disruption, and renewed Middle East tensions weighing on energy security. In our base case, energy disruptions are short-lived, which supports further upside as earnings recover, with Eurozone EPS expected to grow 6% this year and 10% in 2027. We expect the ECB to look through this temporary shock, while high household savings, better energy efficiency, and existing fiscal support should help Europe absorb the impact.
In China: Solid fundamentals despite geopolitical disruption
China equities are down 6.1% YTD as Middle East tensions and higher oil prices have revived volatility, but under our base case of only temporary energy disruption, we estimate the impact on corporate earnings at just 3%. The longer-term AI story remains strong, supported by China’s role in chips, memory, hardware, and AI infrastructure, while policy support for technology and innovation remains clearly in place. With valuations below historical averages, much of the bad news already priced in, and more companies increasing dividends and buybacks, downside looks contained and the potential for positive earnings revisions remains real.
The U.S. dollar has strengthened on safe-haven flows, higher energy prices, and the conflict in the Middle East, but we expect this move to reverse over time.
FX volatility has risen sharply as risk aversion and energy market uncertainty have increased. In this environment, active currency risk management and disciplined hedging are essential to protect capital and support growth.
EUR/USD at 1.1525, testing key 1.15 support, reinforces the case for hedging
The U.S. dollar has strengthened on U.S.-Iran tensions, higher oil prices, and broader risk aversion. As a net energy exporter, the U.S. benefits from elevated energy prices, which could support further near-term USD gains. The euro, by contrast, is pressured by rising energy costs, with low gas reserves, leaving Europe more exposed to this type of shock. If energy prices stay high, EUR/USD could fall to 1.10 in the coming weeks, reinforcing the importance of active FX risk management and hedging.
USD/RMB at 6.8850, down 1.6% YTD (i.e. RMB up), with further RMB upside
China is relatively insulated from the energy shock because oil accounts for less than 20%, and gas less than 10%, of its energy mix. The main impact is indirect, through higher logistics and manufacturing costs, while the broader trend remains one of renminbi appreciation. Since April 2025, around “Liberation Day,” USD/RMB has fallen from 7.30 to 6.8850, a 6% move over 12 months, or about 0.5% per month, driven by tight PBoC management and stronger Chinese fundamentals. With China seeing its GDP grow around 4.5% and posting a monthly trade surplus of over USD 100 bn – versus moderate U.S. GDP growth of 2% and a USD 70 bn monthly trade deficit – the renminbi could strengthen further toward 6.30, implying about 10% upside from current levels.
USD/JPY at 159, remains supported by oil prices and U.S. yields
Higher global energy prices have supported USD/JPY, as the U.S. is a net energy exporter while Japan is a major net energy importer. With oil prices likely to remain elevated in the near term, and U.S. yields still high, USD/JPY could stay near current levels, just below its historical high. However, once the U.S.-Iran conflict eases and global energy flows normalise, we expect the pair to trend lower. Over the next 12 months, USD/JPY could move back toward the 140 support level.
We maintain our attractive view on major bank bonds. Geopolitical tensions and disruptions through the Strait of Hormuz have increased volatility, kept oil prices elevated, and widened both bank credit spreads and Treasury yields, pushing bond prices lower and creating an opportunity to lock in higher yields, with some bank bonds now approaching 6%, near 20-year highs.
Central banks are well positioned to look through a temporary oil spike, given softer growth, weaker labor markets, and inflation close to target. Markets may be overpricing a higher central bank rate path, while an easing cycle could resume later this year, supporting allocations to 6- to 10-year bonds. Despite higher yields, bank bond fundamentals remain solid, demand for quality remains firm, and elevated starting yields create an attractive setup for forward returns.
Commodities continue to offer strong diversification benefits, supported by favourable structural trends. The broader geopolitical and macroeconomic backdrop also remains supportive.
Gold at USD 4,650/oz: short-term profit taking, long-term support remains intact
Gold has fallen sharply (around -20%) from its January peak of USD 5,600/oz. Although gold is often viewed as a safe-haven asset during geopolitical crises, it has declined since the start of the Iran conflict as higher USD yields weighed on prices and a number of investors liquidated some of their gold positions to meet margin calls on other risk assets. We believe gold is likely to move toward USD 6,000/oz within the next 12 to 18 months. In our view, gold is primarily a hedge against monetary risks such as currency debasement, rising fiscal deficits, and economic slowdowns, all of which can be amplified by geopolitical conflicts. Structural demand also remains supportive, particularly as central banks and global investors continue to diversify away from the U.S. dollar.
Oil: +67% YTD to USD 95/bbl, including +50% in March, driven by the blockade of the Strait of Hormuz
Oil rallied 50% in March as Iran’s blockade of the Strait of Hormuz amid the ongoing war with the U.S. and Israel had a significant impact on global oil supply. However, the recent announcement of a ceasefire agreement between the U.S. and Iran – which will include the temporary opening of the strait for oil tankers – has pushed oil prices down from USD 113/bbl to around USD 95/bbl (-16%) within a day. Nonetheless, we remain cautious and continue to see near-term upside risk for oil and gas prices as long as the war is not officially over and the passage of oil tankers through the Strait of Hormuz is not secure for the long term. We note that prior to the ceasefire, even after rerouting by Saudi Arabia and the UAE, continued Iranian exports, and emergency reserve releases, the oil supply shortfall remained very large at around 9 million bpd. If the ceasefire does not lead to a lasting peace agreement and disruptions persist while inventories keep falling, oil prices could move higher this month and potentially rise above USD 150/bbl.
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