What has happened in March and up to mid-April?
While global equities fell by a full 5% in March, all of this decline—and more—was recovered in the first weeks of April, so global equities are now up by just over 2.5% so far this year.
While energy and defensive stocks performed best during the downturn in March and cyclical and technology stocks performed worst, the roles have reversed in April.
Short-term interest rates have risen significantly this year and long-term rates somewhat less, and therefore both short- and long-term bonds have delivered negative returns of around -1% so far this year. Corporate and high-yield bonds have followed the ups and downs of the equity markets since year-end and are now at a total return of around 0%.
Energy prices rose sharply in March, while many metal prices—including gold—first fell and then increased again.
Why? The war in Iran is completely driving the markets—for now
News flow about developments in the war between the US/Israel and Iran, changes in oil prices, and risk assessments related to stagflation have completely driven all movements in global financial markets.
In the coming weeks, investors will likely also look more closely at company earnings reports from around the world, which show how financial performance has been in the first three months of the year. This could also affect prices in both directions.
Three scenarios for the war in Iran – investors lean toward the positive ones
Many financial institutions work with different—typically three—scenarios for how the war in Iran may develop. These vary somewhat between institutions but are roughly as follows:
1: Gradual de-escalation, quick recovery
The ceasefire becomes a frozen step toward gradual de-escalation. Shipping through the Strait of Hormuz returns to normal within a month, oil prices stabilize at $80–90, stock markets—and especially price-sensitive stocks—rise, interest rates fall and the euro strengthens, but nervousness remains due to fear that the conflict could escalate again.
2: Continued restrictions, gradual improvement
It takes several months before shipping normalizes, and Iran continues to control the Strait of Hormuz, so uncertainty remains high. Oil prices stay around $110–120, central banks cannot cut interest rates. Stocks may rise, but only modestly and with considerable volatility, led by high-quality stocks.
3: Continued conflict and closure of the strait
The conflict continues, the strait remains closed for several more months, oil prices surge to $150–180 and significantly weaken global growth. The focus of economic policy shifts from fighting inflation to supporting growth and employment. Central banks cut rates significantly, and investors move toward recession-oriented investments such as energy and defensive stocks, safe bonds, and USD and CHF.
The positive trend in markets indicates that global investors still expect scenario 1, and that we have therefore likely already seen the worst price declines in this cycle.