Hope, Disappointment and the Demand Destruction Question

Markets spent the week caught between fleeting optimism over peace talks and the grinding reality of an escalating conflict. The net result was ugly: the S&P 500 fell 2.1% on the week, the Nasdaq shed 3.2%, and Europe fared worse still with the DAX down nearly 1.4% on Friday alone after a mid-week bounce evaporated. The Nikkei lost 1.1% across the five days, and the ASX 200 gave back 0.9%.

The week began with a sugar hit. President Trump extended his 48-hour Hormuz ultimatum by five days, claiming talks with Iran were progressing. Oil dropped 10% on the news, the S&P rallied 1%, and bond yields retreated. But Iran denied any negotiations were taking place, and whatever hope markets had clung to was swiftly undercut by events. By Wednesday, the Wall Street Journal reported 3,000 US troops were being deployed to the region, Iran launched fresh attacks against Israel, Kuwait, Bahrain and Saudi Arabia, and oil was climbing again. Brent crude, which briefly touched $97 mid-week, finished Friday back near $113, a 16% gain over five trading days. WTI rose a similar amount, closing just shy of $100.

The bond market told the most nuanced story. Early in the week, yields fell as talk of an off-ramp lifted sentiment. But by Friday, 10-year Treasury yields were back at 4.44%, up 7 basis points on the day and roughly 5 basis points higher on the week. UK gilt yields rose nearly 6 basis points over the five days, and Australian 10-year yields pushed above 5.1%, some 36 basis points higher than the start of the month. Notably, though, the curve began to twist on Friday: two-year US yields briefly breached 4% before buyers stepped in, pulling front-end yields lower even as longer-dated bonds sold off. This shift hints at the emerging debate that may define the next phase, inflation versus demand destruction.

That tension was visible throughout the week's data. Flash PMIs showed services activity weakening everywhere: German services PMI fell to 50.1, UK services dropped from 53.9 to 51.2, and even US services slipped to 51.1. Input price indices surged, with businesses reporting cost increases of 25–30% in some cases that are impossible to absorb. European consumer confidence sank to its lowest since October 2023. New Zealand consumer confidence tumbled from 100.1 to 91.3. And the University of Michigan sentiment survey fell to a three-month low, though one-year inflation expectations rose to 3.8%.

Central banks continued to talk tough. Lagarde warned the ECB would not be paralysed by hesitation. The Norges Bank pivoted from easing guidance to signalling rate hikes. The OECD lifted its inflation forecast for member countries to 4%. But Lagarde also cautioned that markets may be overly optimistic about the duration of the conflict and that it could take years to repair the damage.

The Australian dollar slipped below 69 US cents for the first time this month, finishing the week at 68.7 cents. The VIX broke above 30 and held there, a level that historically precedes deeper risk-off moves. As the week closed, the 31st Marine Expeditionary Unit arrived in the Middle East and Houthi involvement threatened to open a second front in the Red Sea. The question for markets is no longer whether inflation will rise; it is whether the demand destruction that follows will be the greater force.

The Month That Changed Everything

March 2026 will be remembered as the month geopolitics seized control of global markets. The US-led military intervention in Iran, which began on 1 March, evolved over four weeks from a shock event that most investors expected to be short-lived into what the IEA has labelled the greatest energy security threat in history. It has redrawn the map for equities, bonds, currencies and commodities in ways that will reverberate well beyond the month's end.

Equities: A sea of red. Not a single major share market escaped unscathed. The Nasdaq fell 7.6% for the month, the S&P 500 lost 7.4%, and the Dow shed 7.8%. European markets suffered more, with the Euro Stoxx 50 down 10.3%, the DAX off 11.8%, and the FTSE 100 down 8.6%. Asia was hit hardest of all: the Nikkei plunged 13.5% and the Hang Seng lost 8.3%. Even the ASX 200, buoyed by Australia's status as a net energy exporter, gave back 8.4%. The Bloomberg World Large/Mid index fell 8.9%. The only sectors consistently in the green were energy and, intermittently, financials. Technology stocks were pummelled by concerns that rising energy costs and disrupted helium supplies could slow the advance of AI, while the private credit sector saw multiple funds restrict withdrawals as yields surged and refinancing costs ballooned.

Bonds: The hawkish pivot. The bond market repricing was extraordinary. US 10-year Treasury yields rose 36 basis points over the month to 4.44%, having started March just above 4%. But the moves in Europe were far more dramatic: UK 10-year gilt yields surged 60 basis points, breaching 5% for the first time since 2008. Italian BTPs widened by 69 basis points, French OATs by 54 basis points, and German bunds by 38 basis points. Australian 10-year yields climbed 44 basis points to above 5.1%. The catalyst was a coordinated hawkish pivot from central banks. In a single week in mid-March, the Fed held but warned of rate hike scenarios, the Bank of England delivered a unanimous hold that shocked doves, the ECB leaked discussions of April rate hikes, and the RBA raised its cash rate to 4.10% with Governor Bullock explicitly acknowledging the possibility of recession. The Norges Bank went further, pivoting from easing guidance to signalling imminent tightening. Markets ended the month pricing roughly 73 basis points of BOE hikes and actively debating whether the Fed's next move would be up rather than down.

Commodities: Oil's relentless climb. Brent crude surged 60% for the month, from around $70 to nearly $113. WTI rose 53%. The drivers were cumulative: the closure of the Strait of Hormuz to commercial shipping, attacks on the South Pars gas field, retaliatory Iranian strikes on Qatari gas facilities (potentially removing 17% of Qatar's output for three to five years), and collapsing Iraqi production from three million barrels a day to just 250,000. European gas prices spiked 70% at one point before settling lower. The OECD raised its inflation forecast for member countries to 4%. Notably, gold — the traditional crisis hedge — rose early in the month before reversing sharply, falling nearly 15% from its peak as investors sold liquid assets to meet margin calls and cover losses elsewhere. Silver fell 26%.

Currencies: Dollar strength, Antipodean weakness. The US dollar strengthened in the month, reflecting both safe-haven demand and the relative insulation of the US economy as a net energy exporter. The DXY pushed back above 100. The Australian dollar suffered most, falling from above 71 US cents to 68.7 cents, caught between its commodity-currency tailwinds and its vulnerability to risk-off sentiment. The yen tested 160 against the dollar despite Japan's acute exposure to imported energy, while European currencies weakened broadly.

The outlook. As March closed, the 31st Marine Expeditionary Unit had arrived in the Gulf, Houthi rebels had entered the conflict threatening Red Sea shipping, and peace talks — if they existed at all — were going nowhere. Consumer confidence was collapsing across Europe, the UK and Australasia. PMI data showed services activity contracting and input costs surging. The fundamental question facing markets has shifted: the initial fear was inflation, but the emerging concern is demand destruction. With central banks focused on preventing inflation expectations from de-anchoring and fiscal pressures building everywhere, from Italian fuel excise cuts to Spanish support packages, the risk of a policy error is rising on both sides. Bloomberg's survey of US economists lifted its PCE inflation forecast to 3.1% (from 2.6%) and trimmed growth to 2.3% (from 2.5%). If the conflict persists into the second quarter, both numbers are likely to move further in the wrong direction.