The tensions between the United States and Iran continue to be reflected in global markets, with significant impacts on energy, inflation and monetary policies. In a context of fragile negotiations and persistent geopolitical risk, investors’ attention is focused on the sustainability of growth and the stability of correlations between asset classes. This was underlined by Andrea Delitala, Head of Multi Asset Euro at Pictet Asset Management.
The critical points of the negotiation between Iran and the United States
The negotiating confrontation between Washington and Tehran is based on a series of opposing requests which largely reflect elements already emerged in the previous talks in Geneva, interrupted by the unilateral start of US military operations. The current context marks a paradigm shift in international relations, in which the principle “Si vis pacem para bellum” (If you want peace, prepare for war) coexists with a growing difficulty in defining credible negotiation incentives.
The historical points of friction between the US and Iran remain two: the Iranian nuclear program, formally oriented towards civilian purposes but perceived as a potential military risk, and the development of ballistic missiles, considered by Tehran as defensive tools but seen as a direct threat, especially due to Israel’s role in the region. To these are added two new elements that emerged during the conflict: the theme of sovereignty over the Strait of Hormuz and the extension of the conflict to Lebanon, now an integral part of the same war framework.
On the first point, the hypothesis of a form of economic compensation – for example a symbolic duty of around 1 dollar per barrel (equal to around 1% of the value of the cargo of a 2 million barrel Large Crude Carrier) – appears economically sustainable but politically sensitive, as it touches on the principle of sovereignty. On the second front, the overlap between the Iranian and Lebanese theaters further complicates any hypothesis of coordinated de-escalation.
Correlation shock
The recent evolution of the markets highlights a significant anomaly in the dynamics between asset classes. In a scenario of high geopolitical risk, a stabilizing role of bonds was expected; on the contrary, a more marked deterioration was observed in the bond sector compared to the equity sector. The movement translates into an increase in yields of around half a percentage point in the yield of Eurozone bonds, with losses concentrated on the short part of the curve and subsequently extended to the 10-year segments. This trend not only recalls the pattern observed in 2022, but amplifies it, configuring a more intense correlation shock. In parallel, the stock market has shown greater resilience than expected, supported by the stability of corporate profits, which partly justify the current (high) price levels despite the adverse context.
Overall, a noticeable misalignment emerges between asset classes: while oil remains at levels consistent with expected scenarios, bonds are excessively penalized. A divergence that raises questions about the market’s correct reading of the macrofinancial cycle.
Energy and supply chain
From an energy point of view, the impact of the crisis appears significant but not yet systemic. Energy prices recorded an increase of approximately 50%, in line with 2022 but at different absolute levels, in particular for gas, an extremely critical component for Europe. However, the absence of direct attacks on key infrastructure – such as the East-West oil pipeline connecting Jubail to Yanbu in Saudi Arabia – signals a desire to contain the escalation.
The monitoring of maritime flows confirms relative operational stability, with episodes of tension limited to threats and demonstration actions. This element contributed to the recovery of the markets and supports a moderately constructive reading of the basic scenario. However, the structural vulnerability of Europe remains evident, still heavily dependent on foreign countries for energy supplies. The replacement of Russia with the Middle East has not in fact eliminated the risks of supply interruptions, making it necessary to accelerate investments in storage, domestic production and energy diversification.
The limits of monetary and fiscal policy
The current energy shock has different characteristics compared to the 2022 crisis, since it is more limited at a sector level and generally transitory. However, also in light of the usual delays in transmitting central bank decisions to the economy (12-18 months), the effectiveness of monetary policy appears reduced. The consequence is that the adoption of restrictive interventions risks producing pro-cyclical effects in a phase in which the crisis may already have been reabsorbed, as also suggested by the backwardation of the energy curves.
On the fiscal level, however, the conditions for large-scale expansionary measures similar to the post-pandemic ones (with the Next Generation EU) or the Biden administration’s 2 trillion dollar package are not emerging. Furthermore, some targeted measures – such as the reduction of excise duties on fuel in Italy, Spain and Germany – help mitigate the risk of an inflationary flare-up. Estimates indicate an impact on European growth of approximately -0.7% in the event of a permanent increase in oil prices by 50%, reduced to approximately -0.2% in a crisis scenario limited to one quarter. In the United States, thanks to energy self-sufficiency, the impact on growth is negligible.
Inflation and real rates
As regards inflation, the estimated impact is approximately +0.8% for the Eurozone and +0.9% for the United States, with a peak around 3% in the Eurozone and 4% in the USA, before a gradual decline. The final forecasts therefore indicate an average inflation of 2.4-2.6% in Europe and 3% in the USA, highlighting a manageable stagflationary dynamic, especially in the presence of relatively stable core inflation.
The reactions of central banks are varied: the Federal Reserve maintains a more balanced approach between growth and inflation, while the ECB, bound by the mandate of price stability, is perceived by the market as more inclined to restrictive interventions, with expectations that have included up to three rate increases. Since we believe a monetary restriction to be suboptimal in dealing with an energy supply shock, both due to a lack of selectivity and the asynchronous timing (from the so-called “lags”) with which monetary policy would make its restrictive effects felt, we think that even the ECB will carry out at most a “demonstrative” increase (i.e. aimed at keeping inflation expectations under control).
A critical element concerns the trend of real rates, which are stably above the estimated neutrality levels (around 0% for the Eurozone and 1% for the USA). This misalignment, which is difficult to explain with macroeconomic fundamentals, suggests the presence of a risk premium linked to structural factors, including the energy transition and the potential increase in military spending in the Old Continent. At these levels, in any case, medium-long term yields on European government bonds are starting to offer interesting returns.
Asset allocation: neutral on stocks, interest in European bonds
In terms of asset allocation, the context favored a prudent and flexible approach. The bond sector, after the recent corrections, appears relatively more attractive, while in the equity sector there is a progressive reduction in direct exposure in favor of optional strategies. The resilience of equities is supported by the solidity of earnings, which reflect economic growth that is still robust despite the adverse environment. However, the recent price recovery has reduced valuation margins, limiting near-term upside potential.
Overall, a market configuration emerges characterized by high uncertainty and possible regime changes, particularly for Europe. The increase in real rates and the need for structural investments in energy and defense suggest a more complex context than in the past, in which the geopolitical component remains decisive for investment choices.
