When looking at performance across asset classes since the beginning of the Iran war, what’s becoming increasingly evident is the scarcity of defensive assets.
While oil has been a clear winner, with the price up by over 40% since the three-week-plus war between the United States, Israel and Iran began, gold – previously the darling of global markets - has suffered losses of around 14% since late February.
Admittedly, the US$ managed to stage a modest rebound, but every other major asset class was down, with emerging market (EM) equities, Euro equities and EM local currency debt sitting at the bottom of that leaderboard.
Duration in bonds – a measure of their price sensitivity to interest rate changes, expressed in years - has not done well either, with both the U.S. Treasury (UST) and the Bund index – which track German government bonds - down by around 2% due to upside pressure on government bond yields.
Given that we’re facing a highly volatile [trading] environment, fuelled by extreme levels of geopolitical uncertainty, Benoit Anne, a senior managing director at MFS Investment Management, reminds the market that a sharp reversal of the recent moves cannot be ruled out.
“At this juncture, the oil price has become the single most important global market barometer,” Anne noted.
“A correction down to below 80 dollars per barrel will likely send a strong bullish signal for global markets, but that can only be achieved if the oil supply bottlenecks can be addressed.”
Courtesy of the geopolitical crisis raging in the Middle East, Anne also reminds investors that the correlation between bonds and equities - clearly in a downward correction mode earlier this year - has markedly changed.
“The correlation between bonds and equities is now back up, reflecting higher stagflation fears as a result of the sharp spike in oil prices,” he warns.
The poor or positive correlation between bonds and equities - where both assets fall or rise simultaneously - is primarily driven by high inflation, interest rate volatility, and shifting monetary policy.
Reflecting higher stagflation fears as a result of the sharp spike in oil prices, notes Anne, the correlation between bonds and equities is now back up.
With all asset classes having struggled since the beginning of the crisis, and with traditional asset correlations looking to break, Anne flags what could be a perfect storm for stagflation - characterised by stagnant economic growth and high inflation.
However, looking ahead, he suspects the bounce in correlation may be a short phenomenon if the stagflation fears ultimately subside.
“Some of the recent moves we have observed in core fixed markets look excessive to us, like for instance the front-end of the UK gilt curve,” said Anne.
“It is hard to fathom that the local rates market is now leaning towards pricing in some policy tightening by the Bank of England. Same story for the Eurozone.”
Ultimately, Anne believes that this could create a great entry point for establishing long-duration positions in some selective markets.
Meanwhile, as a notable outlier in the developed market universe, the U.S. Federal Reserve (The Fed) is the only central bank to have a rate cut still priced in.
Everywhere else, the rates market is now betting on some rate hikes, including Canada, the UK and here in Australia.
While the Fed is expected to hold interest rates steady when it meets on 28–29 April 2026, the market still expects one 25-basis-point cut by the end of 2026.
“The probability of an imminent rate cut is now extremely low, with the market projecting the next rate cut to be not before December,” said Anne.
"Like in many other places, it feels to us that the U.S. rate market has switched into overreaction mode.”
