Markets Facing the Geopolitical Shock

In an environment where certainties are fading, it is no longer so much about predicting as it is about remaining resilient.

Between conflict in the Middle East, increasing vulnerabilities in private credit, and investors repositioning, the first quarter of 2026 marks a turning point for financial markets, which are evolving in an environment more uncertain than ever.

The initial Israeli-American strikes in late February in Iran propelled the geopolitical risk indicator established by the Financial Times to unprecedented levels since the data began in 1982. An escalation of tensions that, unlike usual reflexes, did not immediately result in a sharp correction in equity markets.

Relatively preserved 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 implied volatility indices.

On the equity side, the VIX index, which measures the volatility of the S&P 500, spiked to near 30, compared to over 50 in April last year following the announcement of reciprocal tariffs by the Trump administration. The Vix then quickly returned to levels close to those of February.

On the contrary, the implied volatility of all markets – including rates, currencies, and commodities – jumped from 40 to 65, flirting with the levels observed in April, and decreased much more slowly.

Divergent signals on commodities

The resilience of equity markets reflects particularly the anticipation of a temporary shock as demonstrated by the oil market. Brent prices for immediate delivery surged by almost 40 dollars since the start of the conflict in the Middle East due to the blockade of the Strait of Hormuz, a key global oil and gas hub.

However, tensions are significantly less pronounced on futures contracts. For example, the price for delivery in October has only increased by 20 dollars, a revealing discrepancy of a market anticipating a relatively quick calm in hostilities.

Adding to this contrasting view, gold and silver are surprising by their lack of reaction. This relative stability, which may seem counterintuitive in times of stress, is explained by liquidity constraints, as institutional investors sometimes have to sell the most liquid assets – like gold – to offset less liquid positions, especially in private debt.

Industrial metals, on the other hand, remind us that geopolitical tensions extend well beyond just the Iranian center. Impact by political instability in Peru, one of the world’s leading producers, copper serves as a good example.

Private debt, the blind spot of the market

Less visible than geopolitics, private debt is one of the main structural risks at the moment, as this market has become systemic, both in terms of its size and its interconnections with private equity and the banking system. While the situation does not reach the magnitude of the 2008 financial crisis, there are early signs of tension, especially in the riskiest segments, like high yield.

Given these vulnerabilities, U.S. authorities have already injected liquidity to stabilize the system. An intervention that underscores the increasing sensitivity of this market.

Prudent central banks

In this volatile context, central banks are advancing cautiously. The U.S. Federal Reserve (Fed) has opted for the status quo, due to a lack of visibility. Jerome Powell acknowledged the uncertainty surrounding the macroeconomic data and fully assessing the impact of the current situation by saying: “We just don’t know.”

Monetary policy trajectories remain linked to the evolution of the conflict and its impact on inflation, particularly through commodity prices. In the event of a return of inflationary pressures, central banks may be forced to raise rates. However, the Fed has a greater leeway due to its dual mandate, which includes considering the employment situation.

Unchanged background

If equity markets are right 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 yet to be fully realized.

An easing in the Middle East could further rebalance markets, benefiting emerging markets and small caps, after several years dominated by large U.S. stocks.

However, caution is advised. The outcome of the conflict remains uncertain and balances remain fragile. In an environment where certainties are fading, it is no longer so much about predicting as it is about remaining resilient.

[Context: This article discusses the impact of geopolitical tensions on various asset classes and the resilience of equity markets amidst uncertainties.]

[Fact Check: The content includes information about different markets such as oil, commodities, equity, and private debt, as well as the cautious approach of central banks in response to the evolving situation.]