Extended Equity and Bond Market Damage from the Middle Eastern War – Currency Thoughts
Extended Equity and Bond Market Damage from the Middle Eastern War
March 27, 2026
Ten-year sovereign debt yields are winding up the final full week of March near their highest levels of the 21st century in Japan and 15-18 year peaks in Germany, France and the United Kingdom. Just today has seen the yields advance by 11 basis points in the U.K. and Japan, 9 bps in Italy, 6 bps in Spain, 5 bps in the United States and 4 bps in Germany. Compared to a month ago, the yield increases range from 48 basis points in Germany to 84 bps in Italy.
Equity market losses this Friday in the U.K. and Euroland’s four biggest economies range from 0.9% to 1.7%. India’s Sensex index suffered a 2.3% plunge today, and many other Asian stock markets ended in the red, too. The U.S. stock market’s recent pattern of bouncing up after sessions that saw large sell-offs hasn’t replicated today; around 90 minutes prior to today’s open the DOW, SPX, Nasdaq and Russell 2000 were each down 0.4-0.6% in futures trading.
The catalyst behind the market anxiety has been the persistence of very high energy prices in spite of Trump administration efforts to characterize the war as a smashing defeat for Iran that now heralds an end to the conflict any day now. West Texas Intermediate oil still costs $96.9 per barrel, $42 more than its 52-week low, and average gasoline prices in the United States have risen over 30% in the month since the war began. No side is denying that Iran has suffered devastating losses to its infrastructure and the deaths of many of the regimes top officials, but great care must be taken when using quantitative measures of such things to assessing a likely winner. America’s own revolution was won against the most powerful military in the world at the time. During the Vietnam War, the ratio of Vietnamese and Viet Cong deaths to U.S. deaths ran 19:1 and ballooned to 58:1 is one includes Vietnamese civilians. The common denominator in those two America-defining events is that when a great power fights a war far, far away from its homeland, the adversary only needs to avoid surrender to overcome enormous odds.
The clearest U.S. financial beneficiary of the war has been the dollar, which overnight climbed around 0.2% further on a weighted basis. Gold and silver prices are also flashing green today, with gains so far of 1.0% and 0.3%. Bitcoin sank 3.2%, in contrast.
For most monetary authorities that were in interest rate-cutting cycles, the Middle Eastern war has been a stop-the-presses event, but the Bank of Mexico, which announced a 25-basis point further cut late yesterday, has been an exception (see my review). In other cases, especially the Bank of England but also the European Central Bank, bets are being placed on a rate increase, and the predicted number of hikes is edging up as the conflict lingers in spite of victory declarations made weeks ago. Even regarding the Federal Reserve, there is a growing minority of analysts believing that a rate hike in 2026 may prove unavoidable.
One cheery bit of news for Asia came from Chinese data releases. Industrial corporate earnings recorded a much larger-than-expected 15.2% year-on-year increase in January-February that contrasts with a 0.3% on-year drop in the first two months of 2025 and full-year changes of +0.6% in 2025, -3.3% in 2024, -2.3% in 2023 and -4.0% in 2022. China also left its measured current account surplus in 2025 largely unrevised at a record high $735 billion, some 59% wider than in 2024. Together, these releases suggest that the Chinese economy withstood the U.S. tariff warfare better than was to be expected.
Several economies reported retail sales figures for February. British sales fell 0.4% on month, cutting their on-year growth to 2.3% from 4.8% in January. Norwegian sales slid 1.1% on month and posted the smallest year-on-year rise (1.6%) in nine months. Slovenian retail sales dropped 2.0% on month and 3.5% on year. Sales in Lithuania fell 2.5% on month but rise 2.6% on year, somewhat less than the average 3.5% increase in 2025. Portuguese sales climbed 0.7% on month and by the most in three months (4.9%) in the year-on-year comparison. The 12-month rate of increase in Irish retail sales imploded to 0.8% last month from 3.4% in January. Latvia’s 4.3% on-year rise of sales represented a 2-month low.
Austria, whose manufacturing purchasing manager survey results get reported a little earlier than other surveys for that sector, experienced a 46-month high of 52.4 in March versus 49.4 in February and a 7-month low of 47.2 in January.
Consumer price inflation in Spain leaped a whole percentage point to a 21-month high of 3.3% in March due to sharply higher energy costs. Core inflation stayed at January’s 2.7% level.
Among the several reported producer price data releases today, Filipino PPI inflation ticked up 0.1 percentage point to a 39-month high of 1.4%. Singapore‘s February PPI reading of -2.9% was considerably less deflationary than January’s -6.1% but in the ballpark of December’s -2.6%. Malaysian producer prices fell 0.5% on month and by 3.4% on year, the biggest 12-month decline in 7 months.
Copyright 2026, Larry Greenberg. All rights reserved.
Tags: British retail sales, Chinese corporate earnings and current account, sticky oil prices
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