Market Review 16th March 2026

Everything you need to know, Simplified!

Summary

• The escalating conflict in Iran kept markets volatile, with Brent crude briefly reaching $120 per barrel (bbl) before ending the week up 10.8%, leaving the Iran war responsible for roughly one-third of the current oil price

• Rising energy prices pushed short-dated bond yields sharply higher, particularly in the UK, where the two-year gilt (UK government bond) yield has risen 61 basis points (bps) since the end of February as markets reassess inflation risks

• The Strait of Hormuz has become the central variable for markets, with around one-fifth of global oil and liquefied natural gas (LNG) flows passing through the waterway, meaning prolonged disruption would represent a significant global supply shock

• Outside of energy, defence and utilities markets struggled, with the US dollar acting as the primary safe-haven while technology stocks continued to correct amid a broader rotation in equities

• In the week ahead, attention turns to a trio of central bank meetings, with the US Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) all expected to hold rates while assessing the inflationary implications of higher energy prices

• Updated economic projections from the Fed and policy guidance from the BoE and ECB will be closely watched for signals on the extent to which the energy shock delays the expected path of rate cuts.

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Market Review

The battle for the Strait of Hormuz

Volatile markets remained fixated on the war in Iran. Brent crude surged to $120/bbl on Monday before ending the week at $103.1, up 11.3% on the week and 67% year-to-date. The Iran war shock is one-third of today’s oil price.

President Trump suggested early in the week that the conflict was progressing ahead of schedule and could end soon, briefly lifting risk sentiment. Those hopes quickly faded with reality as no such certainty can be given in the fog of war. Iran seems to be hoping that a prolonged conflict that keeps oil prices elevated will erode the US’ resolve for war and increase international and domestic pressure to strike a deal.

The upward pressure on short-dated bond yields has been severe, with the UK the main pressure point. The two-year gilt yield has risen from 3.52% at the end of February to 4.13%, an increase of 61bps. This compares with a 34bps rise in the two-year US Treasury yield and a 44bps increase in the two-year German bund yield.

For markets, the central concern remains inflation, and the key variable is the Strait of Hormuz. Roughly one fifth of global oil and liquefied natural gas flows through the Strait, alongside around 5% of global trade. Its effective paralysis therefore represents a significant global supply-side shock and has become the linchpin of the war. The longer the Strait remains disrupted, the greater the risk that this energy shock spreads through supply chains and begins to generate broader inflationary pressure.

A battle for control of the Strait increasingly appears inevitable. Iran and its Houthi proxy in Yemen continue to threaten shipping routes, while the US and its allies attempt to neutralise their ability to strike commercial vessels. Although US and Israeli forces have reportedly made progress in degrading Iran’s missile capabilities, the country’s large stockpile of relatively inexpensive Shahed drones may prove more difficult to eliminate. Their ability to be launched from unmarked civilian vehicles makes them particularly challenging to detect and destroy.

Interestingly, President Trump has recently shifted from celebrating low energy prices to suggesting that higher oil prices are good for the US, a U-turn that may hint at expectations for a longer conflict and the President’s determination to see the Islamic Revolutionary Guard Corps (IRGC) destroyed.

With central banks now confronting this new and unpredictable world, the outlook for interest rates has too become increasingly uncertain. The BoE had previously been expected to cut rates at this Thursday’s meeting, but that now appears unlikely. Markets have even begun pricing the possibility of a rate increase later this year. That seems premature given the negative momentum in the UK economy, despite the country’s sensitivity to energy prices (see last week’s note).

The Fed appears more comfortable looking through the shock. The US economy is also more insulated from the shock given its domestic energy production and large strategic reserves. Governor Christopher Waller suggested that the energy spike is likely to prove a one-off event rather than the beginning of sustained inflation. This comes as US labour market data surprised to the downside, with February payrolls showing a loss of 92,000 jobs against expectations for a gain of 55,000. While the labour market is softening, solid corporate profit growth is still expected to keep it from deteriorating dramatically in the short-medium term.

The ECB sits somewhere between these two positions. Having already reached what it considers a neutral policy rate, the ECB has paused its easing cycle. However, President Christine Lagarde has struck a more hawkish tone in response, emphasising that the ECB would act to prevent a repeat of the previous inflation surge. Governing Council member Peter Kazimir suggested that rate hikes could occur sooner than markets currently expect.

In terms of market performance last week, outside of energy, utilities & defence there were, once again, few places to hide. The US dollar has remained the purest safe haven trade, strengthening from 1.385 against sterling at the end of January to 1.323. US dollar strength has helped offset losses in US equities when converting returns back into sterling. In US dollar terms, the rotation out of tech has seen the Magnificent 7 hit correction territory (a decline of >10%) as measured by the Bloomberg Mag 7 index, a correction is seen as a healthy pullback within a long-term positive trend while bear market territory is defined as a decline of greater than 20%.

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The week ahead

Wednesday: Fed rate decision

The Fed is widely expected to hold rates after cutting at the final three meetings of last year. A rate cut would likely be welcomed given the recent deterioration in labour market data, but the oil shock provides the Fed with an additional reason to pause. This meeting will also include an updated Summary of Economic Projections. Markets expect growth forecasts to be revised lower, inflation slightly higher and unemployment modestly higher.

Thursday: BoE rate decision

The BoE will likely hold Bank Rate at 3.75%. The sharp rise in energy prices since the last meeting complicates the outlook and will likely force Governor Bailey to soften his previously dovish tone. While the Bank still intends to cut rates later this year, the timing of those cuts now depends heavily on the trajectory of oil prices and the Iran conflict.

Thursday: ECB rate decision

The ECB is also expected to leave rates unchanged at what it considers the neutral level. However, President Lagarde has recently adopted a more hawkish tone in response to the energy shock, emphasising the ECB’s determination to prevent a repeat of the previous inflation surge. Markets will focus on any guidance or key metrics that will help determine when tightening might be likely.

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