What happened in February?
Global equities rose by 2.1% in February, but with significant volatility. Many stocks saw daily price swings of 5–10%, which is unusual. The shift away from the U.S. and technology stocks continued, but reversed again in early March, which has also led to noticeable declines in stock prices. After several strong months, Danish equities fell as much as 9% in February—primarily due to Novo.
Interest rates declined somewhat in February, resulting in fairly good returns across all types of bonds. However, in early March, rates have risen slightly again, and the dollar has strengthened after a weaker period. Oil prices continue to rise, while prices for precious and industrial metals have fallen again, though they remain highly volatile at elevated levels. Cryptocurrencies continue to decline.
Why? Tech uncertainty and war in the Middle East, and risk of economic stagnation
Initially, massive artificial intelligence investments by tech companies made an impact on the markets. Investors are concerned about whether these large investments will be profitable. If not, some of the world’s largest companies could face difficulties.
At present, however, markets are largely driven by developments in the conflict between the U.S./Israel and Iran—particularly the impact on oil prices and the risk of economic stagnation occurring alongside rising inflation.
Geopolitical instability also tends to hit markets with heavy speculation and high levels of leveraged investments. When these are affected by falling prices, it can trigger forced selling of other assets to cover losses, which in turn can lead to further declines. The largest stock market drops have been seen in Asia and Europe, which are more dependent on imported energy than the U.S., which is self-sufficient. Many stable, so-called defensive stocks in sectors like food and beverages, healthcare, and utilities have performed best during the turbulence.
The situation in the Middle East and its impact on financial markets
Financial markets are primarily focused on how the conflict may affect global energy prices, but also indirectly fertilizer and food prices. A large share of raw materials is extracted in the region and must pass through the Strait of Hormuz. It is estimated that 20% of global oil production and up to 40% of key raw materials for fertilizers are transported through this critical passage.
Most geopolitical experts and financial institutions expect the conflict to be short-lived, with limited and temporary effects on oil and gas prices, equities, and interest rates.
However, if the conflict drags on or significantly impacts key energy infrastructure—limiting the supply of oil or liquefied natural gas (LNG)—oil prices could quickly rise to $100–120 per barrel. In that case, we could be facing a serious economic shock—similar to the downturn following Russia’s invasion of Ukraine in 2022 or the oil crises of the 1970s. This would mean a negative shock that reduces consumers’ purchasing power, slows economic growth, and increases inflation.
Such a scenario would be negative for both equities and bonds and would particularly impact many countries in Europe and Asia, while oil-producing nations such as Norway, Brazil, and Russia would benefit. That is why all attention is currently focused on developments in the Middle East, especially what happens to oil prices.