As the Iran conflict upends market narratives, our Global
Head of Fixed Income Research Andrew Sheets offers his take on
how to view the historic disruption happening in March and what
the next few weeks could bring.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Global Head of Fixed Income Research
at Morgan Stanley.
Today on the program, a survey of just how quickly key narratives
have changed and how lasting that might be.
It's Friday, March 20th at 2pm in London.
The NCAA basketball tournament, also known as March Madness, is
one of my favorite times of the year. The single elimination
tournament of 64 teams is wonderfully chaotic with plenty of
surprises, especially in the early games. And basketball is one
of those sports where momentum often seems real. A team that has
somehow forgotten how to shoot in the first half of the game can
suddenly look unstoppable in the second.
As I said, March is one of my favorite times to watch sports. It
is often not one of my favorite times to forecast markets. In
2005, 2008, 2020, 2022, 2023, and 2025, March saw outsized market
volatility. And it’s the case again this year. I'm sure, it's
just a coincidence.
This time, it's not just about a historic disruption to the
energy markets, which my colleague Martijn Rats and I discussed
on this program last week. It's also a major reversal of the
market storyline. If this were a basketball game, the momentum
just flipped.
In January and February of 2026, there were strong overlapping
signals that the U.S. and global economy were in a good – even
accelerating – place, boosted by cheap energy, stimulative
policy, and robust AI investment. Oil prices were down as metals,
transports, cyclicals and financial stocks, all rose. Europe,
Asia, and emerging market equities – all more sensitive to global
growth – were outperforming. Inflation was moderating. Central
banks were planning to lower interest rates. The yield curve was
steepening and the U.S. dollar was weakening. The January U.S.
Jobs report was pretty good.
And then … it all changed. In a moment, the Iran conflict and the
subsequent risk of an oil price shock flipped almost every single
one of those storylines on its head. Now, oil prices rose and the
prices for metals, transports, cyclicals and financial stocks all
fell. Equities in Europe and Asia – regions that rely heavily on
importing oil – underperformed.
The U.S. dollar rose as investors sought out safe haven.
Inflation jumped following oil prices. The yield curve flattened
on that higher inflation, as we and many other forecasters
adjusted our expectations for what central banks would do. And,
as it happens, the last U.S. Jobs report was pretty bad.
If the Iran conflict ends and oil resumes flowing through the
Strait of Hormuz, it's very possible that this story could once
again swing back. But until it does, the speed of which this
momentum has flipped means that almost by definition, many
investors have been caught off guard and left poorly
positioned.
If you couple that with the challenge of diversifying in this new
environment – where the prices for stocks, bonds, and even gold
have all been moving in the same direction – the path of least
resistance for investors may be to continue to reduce their
exposure to ride out the storm, driving further near term
weakness.
Unfortunately, that could make for an uncomfortable few weeks. At
least, there's some good basketball on.
Thank you as always, for your time. If you find Thoughts on the
Market useful, let us know by leaving a review wherever you
listen. And also tell a friend or colleague about us today.
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