The escalation of the Middle East conflict triggered a sharp rise in oil prices, pushing inflation expectations higher and prompting a broad reassessment of growth and interest‑rate outlooks across regions.
Global equities fell sharply, particularly in Europe, Asia and emerging markets, while energy was the standout performing sector. Bond markets initially sold off as rate‑cut expectations faded.
While headline inflation remained broadly stable in the US and UK, weakening labour markets and downward growth revisions underscored rising downside risks to economic momentum.
March 2026 was marked by a sharp deterioration in global market sentiment as the conflict in the Middle East escalated and disrupted global energy supplies. A rapid rise in oil prices drove inflation expectations higher, forced a repricing of interest‑rate outlooks, and triggered broad equity market declines across regions. Bond markets sold off sharply early in the month as rate‑cut expectations were unwound, though concerns over slowing growth later provided some support. Energy was the standout sector, while cyclical assets and rate‑sensitive areas suffered most.
European equities fell sharply as the Middle East conflict pushed energy prices more than 60% higher and inflation expectations surged. All sectors declined except energy, while cyclicals such as real estate, consumer discretionary and industrials were among the worst performers. Eurozone inflation jumped to 2.5%—well above the ECB’s 2% target—prompting markets to price in multiple rate hikes this year. Business confidence weakened and services activity deteriorated, highlighting Europe’s vulnerability to energy shocks. Political developments in Italy added to uncertainty after voters rejected judicial reforms proposed by Prime Minister Meloni.
UK equities suffered their worst monthly decline since the pandemic, driven by surging oil prices and heightened inflation concerns. The Bank of England held rates at 3.75% but warned that inflation was likely to rise, pushing rate‑cut expectations off the table and increasing the likelihood of rate hikes. Inflation remained at 3.0% in February ahead of expected energy‑driven increases. Economic growth stalled in January, consumer confidence fell to its lowest level since April 2025, and retail sales declined as households grew increasingly concerned about energy costs and their impact on disposable income.
US equities declined but outperformed Europe and Asia, with energy stocks delivering strong gains while mega‑cap technology lagged. The Federal Reserve held rates and acknowledged that the conflict could push inflation higher in the short term. Inflation remained stable, but labour market data weakened sharply, with job losses recorded and unemployment rising to 4.4%. Economic growth was revised down significantly due to the prolonged government shutdown, reinforcing concerns about slowing momentum. Consumer confidence edged higher, though overall sentiment remained fragile amid ongoing geopolitical and economic uncertainty.
Asia Pacific equities experienced extreme volatility and their steepest monthly decline since 2008 as the closure of the Strait of Hormuz triggered a reassessment of inflation and growth risks. Energy‑importing economies such as Korea, India and Indonesia were among the hardest hit. China showed relative resilience, supported by energy security measures and reaffirmed growth targets, while export data remained robust. Korea suffered severe market disruption, including trading halts, as energy and technology stocks sold off sharply. Japan, Australia and Taiwan also declined amid concerns over inflation, policy tightening and the broader economic impact of sustained geopolitical tensions.
Emerging market equities reversed their strong start to the year as higher oil prices and geopolitical risks drove a sharp sell‑off. Asian markets were particularly affected due to heavy reliance on Middle Eastern energy imports, while ASEAN markets declined amid inflation concerns. Latin America outperformed on a relative basis, supported by commodity exposure, though markets still fell overall. Brazil cautiously began easing policy despite renewed inflation risks, while Chile and Eastern Europe tracked broader EM weakness. Middle Eastern markets faced significant pressure due to shipping disruptions and heightened uncertainty, although some resilience was provided by strong fiscal buffers.
Government bonds sold off sharply as energy‑driven inflation fears led investors to unwind rate‑cut expectations, with European bonds underperforming US Treasuries due to greater energy dependence. Gilts and bunds recorded particularly weak returns, while corporate bonds also struggled amid widening credit spreads. By late March, fears of a global growth slowdown helped stabilise bond markets and reversed some of the earlier sell‑off. Central banks adopted a more cautious tone: the Fed kept rates unchanged, the Bank of England signalled that hikes remained possible, and the ECB’s hawkish rhetoric increased expectations of renewed tightening.
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