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Equity markets ended the week in a broad risk-on mood, with almost every major index posting gains and both large and small caps participating. The dominant force behind the rally remains artificial intelligence hardware — semiconductors were up 6% on the week and have nearly doubled in some Asian markets year-to-date. The one discordant note came from bonds, where long-dated US Treasuries remain under pressure for the year, quietly signalling that not everyone is convinced the good times will last.

The AI hardware trade is not slowing down — it is accelerating. South Korea and Taiwan are the world’s best-performing equity markets this year, powered almost entirely by chipmakers such as Samsung, SK Hynix, and TSMC. This matters because it confirms that the investment cycle is firmly in the physical layer of AI — the chips, the memory, the data centre hardware — rather than in software or platforms.

The Iran war remains the single biggest macro risk — and it is unresolved. The Strait of Hormuz closure has effectively removed around one billion barrels of oil from global supply, and despite President Trump’s suggestion that talks are in their final stages, observers see no sign of either side backing down. Dec 2026 futures prices remain elevated, as markets see a slow recovery in oil supply even as a deal is seen as the most likely outcome.

Interest rates are not coming down — and bond markets are adjusting. The latest US Federal Reserve minutes show a majority of officials are prepared to raise rates further if inflation stays above target, reversing what many had hoped would be a year of cuts. Sovereign bond yields across the G7 are at two-decade highs, and governments are under pressure to fund growing deficits at a much higher cost. This “higher-for-longer” environment is the backdrop against which equity valuations must eventually be judged.

China is the market that the data and the price are both warning about. Domestic spending and investment missed forecasts in April, reflecting an economy where factories and exporters are thriving but ordinary consumers are not. The MSCI China index is the only major equity benchmark in the red for the year (-7.82% YTD), even as Chinese hardware exporters benefit from global AI demand. A few analysts see a mean-reversion opportunity in beaten-down Chinese sectors — but the price action this week does not yet support that view.

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MARKETS IN BRIEF

Markets sent a mixed and unsettling message this week. Energy surged, Brent oil up over 9%, natural gas up nearly 14%, while Asian equities reversed sharply after a strong month, and bonds fell across the board with yields rising. The overall mood is best described as inflation anxiety: the dollar rose, but gold fell, and safe havens offered no comfort, suggesting markets are more worried about the cost of the war.

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TOP THEMES THIS WEEK

1. Oil is back above $100 — and it is not going away soon The Strait of Hormuz disruption knocked roughly 6 million barrels per day out of global supply in Q1, and while a handful of tankers have been allowed through, freight analysts warn that new vessels are not entering the waterway. This matters because energy prices are already up roughly 78% this year, are now feeding directly into US producer price data, and are keeping inflation expectations at their highest since 2022–23, which constrains what central banks can do next. Can Kevin Walsh cut rates?

2. The AI trade is borrowing its way forward — and the cracks are showing The big tech companies are raising extraordinary sums to fund AI infrastructure. Alphabet alone raised nearly $60 billion in four months, and tech now accounts for close to 40% of all high-grade US corporate bond issuance this year. At the same time, AI-related job cuts are up 33% year-on-year, Chinese tech giants are struggling to turn AI spending into profit, and the Apple–OpenAI partnership is fracturing. The investment implication is that the AI trade is increasingly dependent on continued debt appetite and hardware earnings delivery, both of which are now under scrutiny.

3. AI hardware euphoria hit a wall in Asia South Korea, the year’s biggest equity market winner at nearly +84% year-to-date, fell almost 6% this week. Semiconductors and Taiwan have been the central engines of this rally, fuelled by AI hardware demand, but valuations have become extreme and local retail investors are borrowing heavily to chase further gains. When a market that has risen 84% in five months falls 6% in a single week, it is worth paying close attention — this is how crowded trades begin to unwind.

4. Private credit is showing its first real stress signals KKR’s flagship private credit fund for retail investors reported a $560 million loss in Q1, with default rates rising to 8.1%. Separately, Apollo launched a new financial structure that bundles loans and fund stakes — observers have drawn comparisons to the CDO structures that preceded the 2008 financial crisis, though Apollo disputes the comparison. The broader signal is that while private credit has been presented as a stable, high-returning alternative to public bonds, the quality of underlying loans is now deteriorating in ways that are becoming hard to ignore.

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WATCH THIS NEXT WEEK

South Korea (EWY) and the semiconductor trade. This is the sharpest reversal of the year’s strongest trend. EWY is up 84% year-to-date but fell nearly 6% this week alone — the biggest single-week drop in the entire watchlist. The Kospi’s concentration in electronic equipment (over 50% of the index) and the explosion of retail margin trading among local investors are classic late-cycle signals in a crowded trade. If EWY continues lower, expect the weakness to spread into semiconductors globally, then into QQQ and US tech. If it stabilises, the broader AI hardware rally likely has more room. Either way, this is the clearest signal of what comes next.

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INVESTMENT IMPLICATIONS

The combination of surging energy prices, rising bond yields, and a stronger dollar — all at the same time — is a stagflation signal, not a straightforward growth or recession one. This is the most difficult environment for a balanced portfolio because neither equities nor bonds are offering reliable protection simultaneously. Investors heavily exposed to Asian tech and semiconductors after a remarkable YTD run should be asking whether their gains reflect earnings reality or euphoria — the price action and the private credit stress both suggest the latter is increasingly present. The more durable positioning in this environment points towards shorter-duration bonds, selective exposure to energy, and genuine diversification away from single-country or single-sector concentration.

Investors often assume that rising interest rates are usually bad for equities. Higher borrowing costs should slow economic growth, reduce corporate profits, compress valuations and hurt stock prices.

Yet history tells a slightly different story.

Since 1990, the S&P 500 has frequently delivered positive returns during Federal Reserve tightening cycles. Stock markets are ultimately driven more by earnings growth and economic conditions than by interest rates alone.

The key question for investors is not whether the Federal Reserve is raising rates. The more important question is whether the economy and corporate earnings can continue expanding despite higher rates.

What History Shows

Since 1990, the Federal Reserve has gone through five major hiking cycles. During most of those periods, the S&P 500 still generated positive returns.

Fed Hiking Cycle

The historical evidence challenges the simplistic narrative that “higher rates equal lower stocks”.

In fact, the Federal Reserve usually raises rates because economic conditions are strong. Employment is healthy. Consumers are spending. Businesses are investing. Corporate earnings are growing. Inflation pressures emerge precisely because demand remains robust.

In other words, rate hikes often occur during periods of economic strength rather than weakness.

This explains why equities can continue rising during tightening cycles. Earnings growth can offset the negative effects of higher interest rates.

The 2004–2006 cycle is particularly instructive. The Federal Reserve raised rates 17 consecutive times, taking the Fed funds rate from 1% to 5.25%. Despite this, the S&P 500 still advanced about 12% during the hiking cycle. The economy continued expanding, corporate profits remained healthy and financial conditions initially stayed supportive.

Similarly, during the 2015–2018 tightening cycle, the Federal Reserve gradually raised rates while the US economy benefited from improving global growth, strong labour markets and corporate tax cuts. Equities delivered strong gains during most of the cycle.

Even the recent 2022–2023 tightening cycle (one of the fastest in modern history) did not permanently derail equities. While markets suffered a sharp valuation correction in 2022 as inflation surged and bond yields rose, the market later recovered as earnings proved more resilient than feared, particularly within large technology companies benefiting from artificial intelligence investment spending.

The Real Risk Is Usually Not The Rate Hikes Themselves

History also shows that the greater danger often emerges after the Federal Reserve stops hiking.

This may sound counterintuitive. Investors frequently celebrate when the Fed pauses rate increases. Yet some of the most severe bear markets began after the final hike had already occurred.

Fed Hold Period

The lesson is important. A Fed pause does not guarantee safety. What matters is whether economic imbalances are building beneath the surface.

In 2000, the Fed stopped hiking, but the technology bubble was already unsustainable. Corporate earnings expectations became unrealistic and valuations collapsed.

In 2007, the Fed had already paused, but excessive leverage within the housing and banking systems eventually triggered the Global Financial Crisis.

By contrast, the 1995 and 2019 pauses produced strong equity rallies because the economy avoided recession and earnings remained resilient.

What Investors Should Focus On Instead

For long-term investors, interest rates should be viewed within a broader framework rather than in isolation.

Three factors matter more than the absolute level of rates:

First, corporate earnings. As long as earnings continue growing, equities can often absorb higher rates.

Second, economic momentum. Rising rates become dangerous primarily when they push the economy into recession or trigger financial instability. It is the last rate hike that matters, not the first.

Third, valuations. Higher interest rates are more problematic when markets are already trading at extreme valuations disconnected from underlying fundamentals.

Today’s environment remains unusual. Interest rates are restrictive compared to the past decade, yet nominal economic growth remains positive, labour markets are relatively resilient and large technology firms continue benefiting from substantial AI-related investment spending.

This does not mean risks are absent. Elevated valuations, fiscal deficits and geopolitical uncertainties still matter. However, history suggests investors should avoid assuming that rising rates alone are sufficient to end a bull market.

Markets are far more sensitive to collapsing earnings and recession risks than to the mere existence of higher interest rates.

For investors, the key takeaway is simple: do not fear rising interest rates in isolation. Focus instead on whether earnings remain resilient, whether economic growth continues and whether excesses are building beneath the surface. Those factors have historically mattered far more for long-term equity returns.

South Korea’s equity market has undergone a historic re-rating in 2026, transforming from a discounted emerging market into the world’s seventh-largest equity market with a market capitalization of US$4.59 trillion. Within five months, it overtook Germany, France, the UK, and Canada. The rally is no longer driven purely by speculation or policy optimism. It is increasingly supported by structural reforms, AI-driven semiconductor earnings, and institutional capital inflows.

The first pillar of the re-rating is governance reform. Historically, the “Korea Discount” reflected weak shareholder protections, opaque chaebol structures, and poor capital allocation. The government’s “Value-Up” reforms and amendments to the Commercial Act have materially changed this framework.

Fiduciary duties now extend to all shareholders, firms face pressure to improve shareholder returns, treasury shares must increasingly be cancelled, and English disclosures have expanded significantly. These measures have improved investor confidence and driven strong outperformance in the Korea Value-Up Index relative to the broader market.

The second pillar is the AI semiconductor boom. South Korea now sits at the centre of the global AI supply chain through its dominance in high-bandwidth memory (HBM) and advanced DRAM production. Samsung Electronics and SK Hynix have become major beneficiaries, with semiconductor firms now accounting for around 45% of the KOSPI. Demand from major cloud companies such as Amazon, Microsoft, Google, and Meta has effectively locked in production capacity for 2026. Exports surged sharply, while Samsung’s operating profit is projected to reach KRW 83 trillion, supported by strong pricing power and supply shortages in memory chips.

The third pillar is the institutionalisation of Korea’s bond market through inclusion in the World Government Bond Index (WGBI). This is expected to attract large foreign inflows, diversify Korea’s investor base, and support the Korean won. However, liquidity issues in long-dated “off-the-run” bonds remain a technical risk.

Despite the bullish outlook, vulnerabilities remain as highlighted by observers. The market is highly concentrated in large-cap technology stocks, retail leverage has risen sharply, and South Korea remains exposed to trade tensions, especially potential US tariff increases. In addition, weaker domestic sectors face refinancing pressures as interest rates rise.

Still, we remain impressed by how other “non-AI” sectors are doing. Financials, consumer discretionary and construction stocks are up double digits this year. There is evidence of broad participation, despite the bubbly-like performance of the Korean tech stocks.

Overall, South Korea is shifting from a market defined by a valuation discount to one increasingly deserving of a structural premium, driven by governance reform, AI earnings power, and deeper institutional integration into global capital markets.

Markets were firmly risk-on this week, led by semiconductors, Korea, emerging markets and US growth stocks. The rally was broader than the AI mega-cap trade alone, but the falling US dollar and rebound in gold suggest investors are still hedging against policy, inflation and geopolitical risk.

TOP THEMES THIS WEEK

1. AI remains the dominant market engine, but investors are becoming more selective

Markets rewarded companies with clearer AI revenue links (Google), while punishing firms where AI spending still looks heavy and uncertain (META). This matters because the AI trade is no longer being bought blindly; cash flow, execution and visible payoff now matter more.

2. Semiconductors are still carrying market leadership

Semiconductors surged again this week, with the sector up more than 11% over the week and more than 70% year-to-date. This matters because market momentum remains heavily tied to the AI infrastructure cycle, even though breadth outside semis has improved.

3. Energy risk eased late in the week

Oil reversed sharply lower despite strong year-to-date gains, helped by reports of possible movement towards a US-Iran peace proposal. This matters because lower oil prices reduce immediate inflation pressure and support the risk-on move, but the Strait of Hormuz remains the key tail risk. Expect volatility to be high as both sides remain committed to talks but the gap to breach remains wide.

4. Private credit concerns are rising

Reports of institutional exits, fraud-linked losses and markdowns in software-related loans have damaged confidence in private credit. This matters because stress in private markets can spill into banks, insurers, credit funds and risk appetite more broadly.

According to this article, the US stock market’s rally to new highs has been propelled by so few stocks that it’s reminding some on Wall Street of the run up to the dot-com bubble.

I disagree.

1. Breadth Indicator – % of Stocks Above 200DMA
   ~59% of S&P 500 stocks are above their 200-day moving average. Moderate participation, not extreme weakness.

2. Cap-Weighted vs Equal-Weighted Performance
   S&P 500: New highs.
   Equal-weight S&P 500 (RSP): Recovered all the Iran losses.
   Participation exists despite some concentration.

3. Small Cap Participation
   Russell 2000 trading in tandem with S&P 500. Strong small-cap performance suggests broadening rally.

High yield bonds
JNK is trading at new highs, credit market is joining in the rally.

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MARKETS IN BRIEF

Equity markets posted a broad, mostly positive week. Gains were seen across the US, Asia, and emerging markets. Europe was the laggard. The notable exception was credit, where both high-yield and investment-grade bonds slipped even as stocks rose, a warning that not every part of the market shares the same optimism. Gold fell sharply and long-dated US government bonds continued their slow decline, suggesting investors are antsy about inflationary pressures.

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TOP THEMES THIS WEEK

1. Big Tech is spending like there is no ceiling on AI Microsoft, Alphabet, Meta, and Amazon are collectively on track to spend over $670 billion on AI infrastructure in 2026 alone, driving strong earnings but raising serious questions about when and whether the returns will justify the cost. For markets, this level of spending is both a source of near-term economic resilience and a longer-term vulnerability. If growth disappoints, Big Tech valuations are likely to take a hit.

2. The Iran war is reshaping the energy market in ways that go beyond the price of oil Brent crude hit $126 a barrel this week before pulling back to $108, and an estimated one billion barrels of supply has effectively been locked out of global markets by Strait of Hormuz disruption. More structurally significant: the UAE announced it is leaving OPEC, a move that could eventually trigger a price war with Saudi Arabia. Expect lower prices when the Strait is open for business.

3. The US economy looks resilient on the surface but the underneath is uneven US jobless claims fell to their lowest level since 1969, and Q1 GDP growth came in at 2% annualised, partly driven by a 10.4% surge in business investment linked to AI. But the picture is described as “extremely polarised”. Large companies and wealthy households are doing well, while smaller businesses and average earners are under real pressure, a dynamic that matters for how long the current consumer-driven resilience can last.

4. Emerging markets are quietly having a very strong run The MSCI Emerging Markets index is rising roughly three times faster than US equities this year and trades at a 44% discount to the S&P 500, the widest gap in a year. South Korea, which is heavily weighted towards semiconductors, is up over 66% year to date and gained nearly 5% in the week alone. This is not a small or speculative move; it has the character of a genuine reallocation.

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WATCH THIS NEXT WEEK

Long-dated US government bonds (TLT).

This instrument has now fallen across every time period on a weekly, monthly, year to date, one year, and three years. This week it fell again even as equities rallied broadly. Normally, when risk appetite is healthy, bonds simply go sideways; actively selling government bonds while buying equities is a more pointed signal. It suggests that at least part of the market is worried about the US fiscal position and inflation staying sticky, both of which connect directly to the Iran war energy shock and the AI-driven spending surge.

The decision by the UAE marks a potential shift in how the oil market functions — from a system where supply is managed to support prices, to one where producers compete for market share.

That distinction matters. It changes how we think about oil prices, inflation, and asset markets over the next few years.

The UAE’s decision to leave the Organization of the Petroleum Exporting Countries reflects a growing mismatch between its own economic strategy and OPEC’s system of production quotas. Over the past decade, the UAE has invested heavily to expand its oil production capacity to around 4.5 million barrels per day, yet OPEC constraints have kept output closer to 3.4 million. As a low-cost producer, the UAE increasingly sees these limits as a direct loss of revenue. For it, the priority is no longer simply supporting prices, but maximising total income—producing more oil even if prices are somewhat lower.

This divergence is rooted in fiscal realities. The UAE’s government budget can balance at oil prices of roughly US$50 per barrel, while Saudi Arabia requires closer to US$90. That difference shapes behaviour. Saudi Arabia needs higher prices and is therefore incentivised to restrict supply. The UAE, by contrast, has greater flexibility. Its more diversified economy, combined with income from large sovereign wealth funds, means it can tolerate lower prices and focus on increasing volume instead.

The timing also reflects a shift in the broader energy landscape. Oil demand remains strong today, but the long-term outlook is becoming less certain as electric vehicles, renewables and energy efficiency gain traction. For the UAE, the logic is straightforward: monetise reserves while demand is still robust, rather than risk leaving value in the ground later. At the same time, cohesion within OPEC has already been weakening, with uneven compliance and rising internal tensions. The UAE’s exit is therefore less a sudden break and more a recognition that the system is no longer fully aligned with its interests.

Taken together, the move signals a deeper change in how major producers think about the oil market. If more countries adopt a similar approach—prioritising market share over price stability—the result would be a shift away from coordinated supply management towards a more competitive environment. For investors, that raises the likelihood of greater price volatility and a gradual downside bias in oil over the medium term.

Once the Strait of Hormuz is opened, expect a decline in oil prices over the medium term as oil producing countries begin to increase oil production to maximise revenues. This is a bullish scenario for global equities.

For years, private credit was the asset class that could do no wrong. While stock markets gyrated and bond yields disappointed, these funds, which lend directly to businesses rather than going through banks, quietly delivered steady, double-digit returns. Investors piled in. The market swelled to somewhere between $2 and $3 trillion globally. Everyone wanted a piece.

Now the bill may be coming due.

In the space of just a few weeks, some of the biggest names in private credit have been scrambling to manage a wave of investors trying to pull their money out. Defaults are climbing. A UK mortgage lender has imploded amid fraud allegations. And the rise of artificial intelligence is casting a shadow over billions of dollars of loans made to software companies. Welcome to private credit’s first real stress test.

The Rush for the Exit

The clearest sign of trouble is the queue forming at the door.

Earlier this month, BlackRock, the world’s largest asset manager, told investors in its $26 billion HPS Corporate Lending Fund that it could not honour all their withdrawal requests. Investors had asked to take out roughly $1.2 billion (about 9.3% of the fund’s value) in a single quarter. BlackRock paid back only about $620 million, applying its standard 5% quarterly limit. It was the first time the fund had hit that ceiling since it launched.

Morgan Stanley followed days later, limiting withdrawals from its North Haven Private Income Fund after investors tried to redeem nearly 11% of the fund’s shares. The fund returned just $169 million, less than half of what was requested. And Cliffwater, which runs a $33 billion vehicle, faced demands for 14% of its assets in a single quarter, choosing to cap payouts at 7%.

The message from investors is clear: they want their money back, and they want it now.

Blackstone’s experience is worth noting for a different reason. Its flagship $82 billion BCRED fund received the largest withdrawal requests of the group, about $3.7 to $3.8 billion, or 7.9% of the fund, but unlike its peers, it chose to meet every single request. To do so, it raised its redemption cap from 5% to 7% and injected $400 million of its own and employees’ money into the fund. Net outflows, after new money coming in, stood at $1.7 billion. Blackstone’s willingness to honour all requests in full was a deliberate signal of confidence, but even that move rattled markets.

Blue Owl, meanwhile, quietly ended regular quarterly cash redemptions altogether at one of its funds, switching instead to discretionary payouts funded by asset sales.

These are not random coincidences. They are the market’s verdict on an asset class that has, in many cases, promised investors more liquidity than its underlying loans can realistically deliver.

Defaults Are Rising and the Numbers Are Worse Than They Look

Behind the redemption pressure lies a more fundamental problem: borrowers are struggling to repay their loans.

According to Fitch Ratings, the US private credit default rate hit 5.8% for the 12 months to January 2026, the highest level since Fitch began tracking the figure in mid-2024. For smaller companies (those with annual earnings below $25 million), the rate was a sobering 15.8%. And within Fitch’s closely monitored portfolio of directly rated private borrowers, defaults reached 9.2% across the whole of 2025, up from 8.1% in 2024 and a new record.

Three names capture the flavour of the problem. First Brands, a US auto-parts supplier, collapsed in bankruptcy amid allegations of fraud and double-pledging, using the same assets as security for multiple loans simultaneously. Tricolor, a subprime car lender, went into liquidation. And in the UK, a specialist mortgage firm called Market Financial Solutions (MFS) fell apart almost overnight. Creditors initially estimated a £930 million hole in the collateral backing their loans; later court filings put the shortfall at over £1.3 billion, with similar double-pledging allegations at its core.

JPMorgan CEO Jamie Dimon put it bluntly when he described the situation as a “cockroaches” problem: if you can see one, there are likely more hiding nearby.

Making matters harder to read is the widespread use of payment-in-kind, or PIK, arrangements, a mechanism that lets struggling borrowers defer their interest payments rather than pay cash. Lenders can book these deferred payments as income, making portfolios look healthier than they are. PIMCO has pointed to what it calls “really bad underwriting,” overly optimistic forecasts, and sloppy documentation as root causes of the deterioration.

The AI Question Nobody Wants to Answer

There is a particular anxiety running through private credit right now that goes beyond the usual credit cycle worries, and it has to do with artificial intelligence.

A significant chunk of private credit portfolios, somewhere between 20% and 40% by many estimates, consists of loans to software companies. These are the kinds of businesses that, until recently, seemed like safe bets: steady revenues, recurring subscriptions, low physical assets to depreciate. Private credit lenders loved them.

But generative AI is changing the economics of software fast. Tools that once required teams of engineers or large software licences can now be replicated more cheaply. Competitive advantages that lenders priced into their loan terms are eroding. JPMorgan has already started marking down the value of software-related loans it holds as collateral. UBS analysts have warned that in a worst-case AI disruption scenario, default rates in this part of the market could spike as high as 15%.

This is the scenario keeping private credit managers up at night: not a straightforward recession, but a slow-motion repricing of an entire lending category that was supposed to be safe.

Could This Spread?

Private credit does not exist in isolation. Banks including JPMorgan have lent hundreds of billions of dollars to private credit funds themselves, creating a web of connections between the shadow banking system and the regulated one. If defaults in private credit accelerate, that stress could flow back into bank balance sheets, tighten lending conditions more broadly, and rattle equity and bond markets along the way.

Retail investors face particular risks. In recent years, private credit funds have opened their doors to everyday wealthy investors through structures like exchange-traded funds, defined contribution pension plans, and in Europe, a new category of vehicle called ELTIF 2.0. These investors typically expect easier access to their money than institutional investors do. Frozen redemptions, as we are already seeing, could hit them hardest.

Moody’s has flagged the systemic ties between private funds and the banking sector as a growing concern. Regulators on both sides of the Atlantic are paying close attention.

It’s Not All Bad News

It is worth keeping a sense of perspective. The private credit market is large, diverse, and not uniformly in trouble. Funds focused on service businesses, with conservative underwriting and transparent valuations, continue to perform well. Some forecasters expect the overall default rate to ease back toward 4.5–6% if the US Federal Reserve delivers further interest rate cuts, which would relieve pressure on borrowers carrying floating-rate debt.

Blackstone’s decision to honour every redemption request, at considerable cost to itself, was a reminder that the largest managers have the resources to manage stress without panicking. Lower rates, when they come, could also unlock a wave of refinancing activity and new deal flow.

The divide between well-run and poorly-run funds, however, is becoming impossible to ignore.

What This Means for Investors

For those with exposure to private credit, whether directly or through a fund of funds, now is a good time to ask some pointed questions:

• How much of the portfolio is lent to software companies, and what assumptions have been made about AI disruption?
• What are the actual redemption terms, and how realistic is it to access cash quickly if needed?
• How transparent is the manager about valuations? Are loans being marked to market, or held at cost?
• What is the track record of the underlying borrowers, and how aggressively were deals underwritten during the boom years of 2021–2023?

The private credit story is not over. But the easy years, when almost everything worked and redemptions were a theoretical concern, are behind us. What comes next will reward investors who chose their managers carefully and understood what they were actually buying.

It has now been almost two weeks since the United States and Israel launched a major coordinated assault on Iran in the early hours of 28 February 2026. Since our initial scenario analysis, the situation on the ground has shifted considerably, enough to warrant an updated assessment and a clearer picture of what investors should be watching.

Iran Has a New Supreme Leader

Following the killing of Supreme Leader Ayatollah Ali Khamenei in the opening strikes, Iran moved quickly to establish an interim leadership council. Mojtaba Khamenei, son of the late Supreme Leader, has since been elevated to lead the country. This points to regime continuity rather than collapse, the outcome that would most rapidly de-escalate the conflict.

The War Has Spread Geographically

Iranian forces have continued daily missile and drone strikes against US military bases and allied infrastructure across the Gulf, including Kuwait, Bahrain, Saudi Arabia, and the UAE. Iran has also targeted commercial shipping and oil facilities near the Strait of Hormuz, and has formally warned that vessels belonging to the US, Israel, or their allies could be treated as legitimate military targets.

Meanwhile, the US and Israel have continued large-scale air operations across Iran. Iran’s ability to retaliate appears to have diminished compared with the first days of the conflict, with observers noting a significant reduction in missile and drone launches.

The Strait of Hormuz Remains the Key Flashpoint

The most consequential economic development has been the near-paralysis of tanker traffic through the Strait of Hormuz, the narrow waterway through which roughly 20% of the world’s oil supply normally flows. Iranian threats and attacks on shipping have caused many vessels to remain outside the strait. Shipping costs and insurance premiums have surged as a result.

Crude oil prices briefly surged to US$120 per barrel before retreating to the US$80-85 range as markets began to reassess how prolonged the disruption might prove. As of 11 March 2026, WTI crude was trading at approximately US$88 per barrel.

The International Energy Agency has announced its largest-ever release of emergency oil reserves, 400 million barrels, equivalent to roughly 20 days of normal Strait of Hormuz traffic. This is expected to act as a ceiling on how high oil prices can rise, rather than a mechanism for bringing them back down.

Western governments are also considering plans to escort commercial vessels through the Strait. The US military has already destroyed Iranian vessels in the region. Nevertheless, tanker traffic through the Strait remains negligible, and pressure on oil prices persists.

How Have Financial Markets Responded?

Equity markets have reacted with heightened volatility rather than outright panic. Global equities are down approximately 4% since the conflict began, a significant move, but not the kind of sharp sell-off that would suggest investors believe this is the start of a prolonged global crisis.

This is broadly consistent with how markets have behaved during past geopolitical conflicts. History shows that equity markets tend to fall sharply in the early stages of a conflict, driven by uncertainty and rising energy costs, before stabilising once the scope and duration of hostilities becomes clearer.

The single most important variable for markets remains oil. If prices stay above US$100 per barrel for a sustained period, the economic consequences become significantly more serious: higher transport and manufacturing costs would act as a drag on global growth, slow corporate earnings, and likely delay interest rate cuts by major central banks. Conversely, if the Strait of Hormuz reopens and oil retreats, equity markets are expected to recover as investors refocus on economic fundamentals.

The Two Paths From Here

As we outlined in our initial analysis, the conflict is likely to resolve along one of several broad paths. Given what has changed since then, the two most relevant scenarios for investors to monitor are now as follows.

Path 1: De-escalation (Still the Most Likely Outcome)

Iran’s military capacity continues to weaken under sustained US-Israeli air operations. Both sides find grounds to declare limited objectives achieved. Attacks on shipping gradually subside, and tanker traffic through the Strait resumes. Under this scenario, oil prices would likely retreat toward US$70–80 per barrel, inflation pressures would ease, and financial markets would stabilise.

US domestic politics may reinforce this outcome. American petrol prices have already risen roughly 12% in the past week. With mid-term elections approaching, the Trump administration faces a powerful incentive to bring the conflict to a swift conclusion, a prolonged war risks handing the opposition both economic and political ammunition.

The good news is that the US has precedent here. During the so-called Tanker Wars of the late 1980s, the US Navy, joined by European allies, successfully re-opened the Strait of Hormuz through sustained armed naval patrols. A similar effort is now being considered.

Path 2: Prolonged Disruption (The Risk Scenario)

In a more severe outcome, Iran escalates its attacks on Gulf infrastructure or manages to sustain the blockade of the Strait of Hormuz for an extended period. This would significantly reduce oil exports from the Gulf and could push prices back above US$120 per barrel, triggering a broader global economic shock. Higher energy costs would feed through into inflation across transport, manufacturing, and household electricity, potentially forcing central banks to keep interest rates higher for longer.

The key triggers to watch for this scenario are: any reports of Iran attempting to lay mines in the Strait; further activation of Iranian-backed proxy forces such as Hezbollah or the Houthis; and whether Gulf oil infrastructure, including pipelines and export terminals, comes under sustained attack.

What Should Investors Be Watching?

With the situation still evolving rapidly, we would caution against making significant portfolio changes based purely on day-to-day developments. That said, there are three specific signals worth monitoring closely.

• Strait of Hormuz activity. Any credible reports of Iran attempting to lay mines in the waterway would be a significant escalation signal, pointing toward the more severe scenario. This is arguably the single most important variable for oil prices and markets right now.
• Iran’s proxy forces. If Hezbollah begins firing rockets into Israel in significant numbers, or the Houthis resume anti-shipping operations in the Red Sea, the probability of a prolonged conflict rises sharply.
• Diplomatic signals. Any statements from Iran’s new leadership council indicating openness to ceasefire talks or conversely, pledging total resistance will be the clearest near-term guide to where this is heading. Back-channel contact through Oman appears to be ongoing.