Theme and Background
This chapter focuses on market behavior patterns in March 2026 following the outbreak of the Iran war. The report notes that the war triggered a surge in oil prices and a decline in stock markets, but the core characteristic is extreme uncertainty — the duration of the war, permanent changes in oil prices, and government and economic responses are all unclear. The author argues that during periods of high uncertainty, investors should return to fundamentals, extracting consensus narratives from market behavior rather than relying on expert forecasts.
Core Views
- Market Narratives Outperform Expert Forecasts: The author clearly asserts that the market's judgment under complexity and uncertainty far exceeds that of experts. Investors should listen to market signals rather than expert predictions based on political biases.
- Oil Price Shock Viewed as Temporary: Futures prices indicate that the market views supply disruptions as temporary, though with lasting effects (December futures are approximately 25% higher than pre-war levels).
- Inflation Expectations Rise but Short-Term Rates Unchanged: Long-term rates (10-year Treasury) have risen significantly, while short-term rates (3-month T-bill) have barely moved, suggesting the market expects inflation to be persistent rather than a short-term shock.
- Risk Premiums Rise Moderately: Despite the outbreak of war, equity risk premiums and bond default spreads have only increased modestly, indicating that the market has not entered a panic sell-off.
Key Arguments and Data
1. Oil Price Shock:
- Brent Crude rose 49.9% in March, and WTI rose 48.6%.
- The spread between the two nearly doubled in the second half of March, reflecting that U.S. oil production (13.58 million barrels per day in 2025, accounting for 16% of global output) is less affected by the blockade of the Strait of Hormuz.
- December futures are approximately 25% higher than pre-war levels, but the increase is lower than spot prices, indicating the market views the disruption as temporary.
2. Interest Rates and Inflation:
- The 3-month T-bill rate edged up from 3.67% to 3.70% (nearly unchanged), while the 10-year Treasury rate rose from 3.97% to 4.30% (an increase of 0.33%).
- 2-year and 5-year rates rose by 0.41%, with the largest increases in intermediate maturities.
- Global rates rose in tandem: 10-year rates in the euro and yen increased significantly, but the renminbi rate remained unchanged.
3. Risk Premiums:
- The S&P 500 implied equity risk premium rose from 4.37% to 4.77% (an increase of only 0.40%).
- BBB-rated bond default spreads rose from 1.07% to 1.15% (an increase of 0.08%); CCC and below high-yield spreads rose from 9.50% to 10.10% (an increase of 0.60%).
Companies/Assets Involved
- S&P 500: Equity risk premium rose moderately, with no panic selling.
- U.S. Treasuries: Short-term rates stable, long-term rates rising, reflecting persistent inflation expectations.
- Brent Crude & WTI: Spread widened, with U.S. oil production relatively benefiting.
- Euro, Yen, Renminbi: Global rates diverged; the renminbi rate remained unchanged, suggesting China is less affected by the shock.
Investment Implications
- Short-Term Bullish on U.S. Oil Producers: As the Strait of Hormuz blockade has a smaller impact on the U.S., U.S. oil producers (13.58 million barrels per day) may benefit from rising oil prices and widening spreads.
- Beware of Persistent Inflation: Rising long-term rates indicate the market expects inflation to persist. Investors should reduce exposure to long-term fixed-income assets and increase holdings of inflation-protected assets (e.g., TIPS).
- Risk Assets Not Overly Panicked: With equity risk premiums and bond spreads only modestly rising, current market pricing does not fully reflect the risk of a prolonged war. Investors can maintain moderate risk exposure but should be alert to narrative shifts.
- Focus on Chinese Assets: The renminbi rate remained unchanged, suggesting China is less affected by global inflation transmission and may become a safe-haven choice.
Theme and Background
This chapter focuses on the changes in market risk indicators (VIX, gold, Bitcoin) during the March 2026 Middle East war, as well as the differentiated impact of the war on stock markets and sovereign credit risks across various regions. The author attempts to determine from market behavior whether the current situation is a panic sell-off or a rational revaluation, and assesses the long-term impact of the war on global capital flows and the political landscape.
Core Views
- The market decline is not a panic sell-off: The VIX rose from 19.86 at the beginning of the month to 25.25 at the end, an increase far smaller than those seen in March 2020 (COVID) and April 2025 (tariff week), indicating that the stock market decline stems more from "genuine concerns" about inflation and economic damage than from collective panic.
- Gold behaves abnormally, Bitcoin fails as a safe haven: Gold fell by 10.42% during the crisis month, breaking historical patterns; Bitcoin rose by 3.30%, but the author believes its trend is independent and has yet to prove itself as an effective hedge.
- Regional performance divergence stems from the double-edged sword effect of oil prices: Markets in Africa & the Middle East, and Eastern Europe & Russia saw only about a 2% decline in market capitalization, performing the best, as high oil prices offset the direct impact of the war on oil-producing countries.
Key Arguments and Data
1. Risk Indicator Comparison
| Indicator |
Change in March 2026 |
Historical Comparison |
| VIX |
19.86 → 25.25 (+27.1%) |
Far smaller than March 2020 (COVID) and April 2025 (tariff week) |
| Gold |
Down 10.42% |
Rare decline during a crisis month |
| Bitcoin |
Up 3.30% |
Independent trend, no safe-haven characteristics shown |
2. Regional Market Cap Changes (USD, March 2026)
- Africa & Middle East, Eastern Europe & Russia: Market cap down about 2%, best performers
- Other regions saw larger declines, but the original text does not provide specific figures
3. Sovereign CDS Spread Changes
- CDS spreads in the Middle East generally rose, with Qatar, UAE, and Turkey seeing larger increases than Saudi Arabia and Kuwait
- US sovereign CDS spreads also rose significantly
- Global sovereign CDS spreads rose by about 12% in Q1 2026
- The author notes that sovereign ratings have not yet been adjusted (e.g., Iran), but market CDS data better reflects actual risk
Companies/Assets Involved
- Gold: Fell by 10.42% during the crisis month, breaking historical safe-haven patterns; the author implies its safe-haven function is temporarily ineffective.
- Bitcoin: Rose by 3.30%, but the author believes its trend is independent and it has yet to become a reliable hedging tool.
- Sovereign CDS: CDS spreads for Qatar, UAE, and Turkey rose significantly; US CDS spreads also rose; global CDS spreads rose by 12% in Q1.
Investment Implications
- Short-term direction: If the war ends quickly (days to weeks), oil prices could fall below pre-war levels (due to the resumption of Russian and Iranian oil supply); investors should be wary of a pullback in energy stocks and assets of oil-producing countries. If the war lasts for months, oil prices will remain high or even higher, global supply chains will be damaged, and some Middle Eastern business hubs (Dubai, Abu Dhabi) will face structural challenges.
- Long-term impact: Capital outflows from oil-rich nations (from AI startups to Premier League clubs) will contract significantly, with funds shifting toward pipeline construction and oil transport security. Global political alliances and security agreements will be damaged, and geopolitical risk premiums may persist long-term.
- Risk pricing: Sovereign ratings lag behind the market; it is recommended to use sovereign CDS spreads instead of traditional ratings to estimate the equity risk premium (ERP), especially for Middle Eastern countries.