In an environment where certainties are fading, it is no longer a matter of predicting but rather of remaining prudent.
Between conflicts in the Middle East, increasing fragility of private credit, and investors repositioning themselves, the first quarter of 2026 marks a turning point for financial markets, which are evolving in an environment more uncertain than ever.
The early Israeli-American strikes at the end of February in Iran have raised the geopolitical risk indicator established by the Financial Times to unprecedented levels since the data began in 1982. A rise in tensions that, unlike usual reflexes, did not immediately translate into a sharp correction in equity markets.
Relatively spared equity markets
In reality, the impact of the geopolitical shock first spread to other asset classes, affecting interest rates, currencies, and commodities, a dynamic particularly visible in implicit volatility indices.
On the equity side, the VIX index, which measures the volatility of the S&P 500, reached a peak of nearly 30, compared to over 50 last April when reciprocal tariffs were announced by the Trump administration. The VIX then quickly returned to levels close to those of February.
In contrast, the implicit volatility of all markets – including interest rates, currencies, and commodities – jumped from 40 to 65, flirting with levels seen in April, and decreasing much more slowly.
Divergent signals on commodities
The resilience of equity markets reflects anticipation of a temporary shock, as illustrated by the oil market. On Brent, spot prices for immediate delivery have surged by nearly 40 dollars since the beginning of the conflict in the Middle East due to the blockade of the Strait of Hormuz, a key global oil and gas chokepoint.
On the other hand, tensions are much less pronounced in futures contracts. For example, the price for an October delivery has only increased by 20 dollars, a revealing contrast from a market anticipating a relatively quick calm in hostilities.
Adding to this mixed reading, gold and silver surprise with their lack of reaction. This relative stability, which may seem counterintuitive in times of stress, is explained by liquidity constraints, as institutional investors may need to sell highly liquid assets – like gold – to offset less liquid positions, particularly in private debt.
Industrial metals, meanwhile, highlight that geopolitical tensions extend far beyond just Iran. Impacted by political instability in Peru, one of the world’s leading producers, copper serves as a prime example.
Private debt, a blind spot in the market
Less visible than geopolitics, private debt is nevertheless one of the main structural risks at the moment, as this market has become systemic, both in terms of scale and interconnections with private equity and the banking system. While the situation does not reach the magnitude of the 2008 financial crisis, early signs of stress are present, especially in the riskiest segments of credit, such as high yield.
Given these vulnerabilities, American authorities have already injected liquidity to stabilize the system. This intervention underscores the growing sensitivity of this market.
Central banks remain cautious
In this volatile context, central banks proceed cautiously. The Federal Reserve has opted for a status quo due to lack of visibility. With regards to macroeconomic data and fully assessing the impact of the current situation, Jerome Powell has acknowledged: “We just don’t know.”
Monetary policy trajectories are indeed contingent on the evolution of the conflict and its impact on inflation, particularly through commodity prices. In case of a return of inflationary pressures, central banks may be compelled to raise rates. However, the Fed has more room for maneuver due to its dual mandate, which also considers the employment situation.
Unchanged backdrop
On the other hand, if the equity markets are correct and the current shock proves to be temporary, major investment dynamics should remain intact. Artificial intelligence continues to shape long-term expectations, even though the concrete impacts of AI on productivity are still to be fully demonstrated.
A calm in the Middle East could revive market rebalancing, benefiting emerging markets and small caps, after several years of dominance by large American companies.
However, caution is necessary. The outcome of the conflict remains uncertain and balances remain fragile. In an environment where certainties are fading, it is no longer a matter of predicting but rather of remaining prudent.
— Context Note: The article focuses on the impact of geopolitical tensions, particularly in the Middle East, on financial markets in the first quarter of 2026. Fact Check Note: The content is a hypothetical scenario and is not based on real events from 2026.
