Inflation nightmare reignited, with stocks and bonds both suffering losses, Wall Street has already chosen the next direction!

Jin 10 Data

A $594B asset-management giant warns that “it’s dangerous to look at things through the fog.” Société Générale raises its allocation to commodities. In this capital contest without gunfire, how are major institutions deploying their resources?

A battered financial market, under the banner of war headlines, is entering the second quarter. Against this backdrop, the stock market may face a larger-scale retreat, while the heavy sell-off in the bond market could tempt buyers back onto the battlefield.

Investors expect that even if the conflict is resolved and boosts short-term market sentiment, the damage to Middle East energy infrastructure and the notion that oil prices will remain “high for a longer period of time” will still weigh on economic growth and push up inflation.

This kind of macro environment could trigger further sharp declines in the stock market; but if the conflict evolves into a prolonged war and causes concern about economic growth to outweigh fear of inflation, it could give rise to a recovery in the bond market.

“When all we can hear is noise, it becomes very difficult to cut through the clouds and see the truth,” said Seema Shah, Global Chief Strategist at SLI Asset Management, which manages about $594B in assets. “We have been pushing to increase our risk exposure to international equities, and that still works today, but that doesn’t mean you should completely cut off your investments in the U.S. market.”

The fighting in the Middle East has put an end to the turbulent first quarter. During this period, U.S. President Trump’s intervention in Venezuela, his threat-related remarks surrounding Greenland, and the disruptive shock from artificial intelligence also left markets riding a “roller coaster.”

Oil is undoubtedly the standout asset. It surged by about 90% in the quarter and cleared the $100 mark in one go. That immediately sent bond investors into a cold sweat, prompting them to raise their expectations for rate hikes.

Reuters’ survey of analysts expects that as long as the current supply disruptions continue, oil prices will fluctuate between $100 and $190, with an average forecast of $134.62.

Data from the online prediction market platform Polymarket shows the probability that this war ends in mid-May is about 36%, while the probability it ends by the end of June is 60%.

Just like during the inflation surge in 2022, short-term borrowing costs in the UK and Italy both jumped by 75 basis points this quarter. The bond markets of the U.S., Germany, and Japan also saw notable volatility.

“Looking back at every oil crisis in history, there are only two things that matter most: first, the length of time the shock lasts; and second, how the central bank reacts, because that determines the market’s overall risk appetite,” said Manish Kabra, a multi-asset strategist at Société Générale.

Since the outbreak of the Iran war, traders have completely given up on the idea of rate cuts before the end of the year. In the eurozone, they now expect three rate hikes; in the UK, at least two. Previously, they had been eagerly hoping for easier monetary policy. As a result, the process of emerging markets driving monetary easing has been forced to come to a short halt.

Kabra said the next focus for the market may be the U.S. Memorial Day holiday weekend in May. This marks the start of the traditional peak travel season, when consumers could place enormous pressure on policymakers, demanding that they curb energy costs.

Since the war began, he has raised his allocation to commodities from the previous 10% to 15%, reflecting that the link between geopolitics and commodities is growing ever tighter.

Bonds are wobbling, and the stock market may be hard to escape

In the bond market, as investors prepare for higher inflation and interest rates, bond prices have crashed and yields have surged. However, some investors expect the market to see a pullback.

Francesco Sandrini, head of multi-asset strategy at AXA IM, said the firm has increased its exposure to short-term eurozone government bonds and maintained its investment in five-year U.S. Treasuries. They believe that once the crisis shows signs of turning, fixed-income products will shine brightly.

“Put differently, we expect major central banks to try to ignore short-term price pressure,” Sandrini said.

Paul Eitelman, global chief investment strategist at Russell Investments, said bonds now look more attractive than they did a few months ago. He also added that the strength of the dollar is unlikely to be sustained over the medium term.

The dollar has once again reaffirmed its role as a safe-haven asset, rising by more than 2% in March.

Analysts said that before the war broke out, investors had been pulling out of U.S. assets and diversifying their investments, which put some pressure on the dollar; if the conflict ends, this theme could return.

Meanwhile, gold fell 4% in March. Although this type of safe-haven asset typically rallies when markets grow anxious about inflation, the price of gold instead weakened, because investors urgently needed to realize profits from positions to cover losses in other assets.

Buoyed by strong corporate earnings and the tech-stock boom, the stock market has held up relatively well, but recent selling pressure has increased significantly.

The S&P 500 and Europe’s STOXX 600 are down 9% to 10% from their recent record highs, while Japan’s Nikkei index has also slipped nearly 13% from its record high set in February.

Guy Miller, chief market strategist at Zurich Insurance Group, said that as the economic outlook has grown increasingly dim, he has cut his stock allocation from an overweight position prior to the war to an underweight.

In March, the drop in the U.S. consumer confidence index exceeded expectations. German investors’ sentiment collapsed completely. And as a barometer of future business activity, the S&P Global’s eurozone and U.S. March Purchasing Managers’ Index (PMI) both fell to multi-month lows.

Analysts said that although strong economic fundamentals and the energy-exporters’ position provide the U.S. with a “buffer,” if the conflict keeps energy prices high, the U.S. will ultimately be unable to escape as well.

The OECD issued a warning last Thursday, saying the global economy has now been pushed off the track of strong growth.

“(This war) is completely different from the geopolitical and political ‘black swan’ events we’ve seen over the past year, whose impact on corporate earnings, profit margins, and market valuations is almost negligible,” Guy Miller of Zurich Insurance said candidly.

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责任编辑：郭建