Beware the Red Flags

The stock market continues to be weirdly serene at the worst possible moments. Oil, by contrast, is flashing a warning that stocks still seem reluctant to read. Since the Middle East conflict escalated, equities have slipped, but not by much. In the United States, the S&P 500 is down only about 2% over the past 10 days. Europe has done worse, with the Stoxx 600 off roughly 5%, but even that is modest by the standards of a real geopolitical shock - especially when both markets were hovering near record highs. Investors, in other words, still appear to be pricing in a short war and a fairly quick return to normal.

The International Energy Agency tried this week to calm markets by proposing the release of 400 million barrels from member countries' strategic reserves - the largest emergency drawdown ever attempted. In normal times, that kind of announcement would push crude lower. Instead, when news of the plan first broke, Brent actually rose by about $3 a barrel.

The reason is simple enough: releasing them tells traders that governments think the disruption may last a while. And oil markets run on daily flows, not just stockpiles sitting in storage caverns. If 11 million to 16 million barrels a day from the Persian Gulf are effectively missing, as Citigroup estimates, emergency reserves can soften the blow but not erase it.

That highway, of course, is the Strait of Hormuz, the world's most important oil transit chokepoint. Its de facto closure has already strained supplies. The latest sign of danger came when two tankers were struck in Iraqi territorial waters, helping push Brent back toward $100 a barrel. The broader message from the market is increasingly hard to miss: Even if some physical supply still moves, the war-risk premium alone is making oil more expensive.

That is why this week's seemingly tame inflation data in the United States did not reassure investors for long. February core CPI fell to its lowest level in five years, which under calmer circumstances might have been welcome news, but right now, if the energy shock lasts, inflation could easily reaccelerate in the months ahead. Long-term inflation expectations, for now, seem relatively stable, but probably because investors assume the Federal Reserve will do whatever is necessary to keep inflation under control over time.

Part of that optimism rests on the belief that the conflict will end quickly. That idea has been encouraged by Donald Trump's comments this week suggesting that the war could be over "very soon," and, in a remark to Axios, that there was essentially nothing left to destroy in Iran. But wars are not tariff disputes. A president can announce a trade measure and reverse it later. A regional conflict with global consequences does not work like a light switch.

Iran's Revolutionary Guards said they, not Trump, would decide when the conflict ends. Of course, they were never going to say anything else. Still, the point should not be dismissed. Even a battered Iranian regime may retain a significant ability to disrupt shipping and energy infrastructure for months. Investors may be overestimating Washington's control over events that now have their own momentum.

Meanwhile, the economic damage is not evenly distributed. Europe, more exposed to higher energy costs, has already taken a bigger hit than the United States. Germany's leading economic institutes have cut their 2026 growth forecasts, warning that the conflict's impact on energy prices will weigh on activity. Across Asia, markets are also wobbling under the strain: Tokyo fell 1.5%, and the MSCI Asia Pacific index dropped 1.6%. The pain is spreading outward from the oil market into the broader global economy.

However, we haven't seen yet the usual rush into classic defensive sectors. In past geopolitical shocks, money often rotated hard into consumer staples and health care. This time, that pattern has been much less obvious. Some of the biggest losers have instead been industries directly exposed to higher fuel costs, such as airlines and cruise operators. Energy stocks have held up better, naturally, while companies tied to consumer or rate-sensitive activity look more vulnerable.

One could argue that the market is being rational: The global economy has proved surprisingly resilient in recent years, and with Trump, investors have been trained to expect crises to fade faster than the headlines suggest.

However, many risks are looming. Loans are extended by nonbank lenders to private companies, then bundled into products that can be valued with, let us say, a degree of optimism. Recently, signs of strain have multiplied. Morgan Stanley limited redemptions in one of its private-credit funds. JPMorgan marked down some loans to private-credit funds. Reports have raised questions about how some lenders are valuing weak assets and whether portfolio problems are being disguised rather than solved. If that sounds faintly familiar, it should. Financial systems have a habit of discovering that opacity is profitable right up until the moment it is not. A prolonged period of higher oil prices and fewer rate cuts would only add pressure to already stretched borrowers. So the story developing now may not be just war and inflation. It may also be war, inflation, and a credit market that has spent years assuming money would stay easy enough to forgive a lot of bad habits.

Today's economic highlights:

On today's agenda: the RICS House Price Balance and the speech by BoE Governor Bailey in the United Kingdom; In the United States, initial jobless claims, housing starts, preliminary building permits, balance of trade, exports, imports, and the Fed Bowman speech; In Canada, the balance of trade. See the full calendar here.

• Dollar index:99.495
• Gold: $5,173
• Crude Oil (BRENT): $98.39 (WTI) $93.21
• United States 10 years: 4.22%
• BITCOIN: $70,490

In corporate news:

• EU antitrust chief Teresa Ribera said member states may still be able to grant relief to energy-intensive industries facing surging power costs, while the European Commission also weighs broader crisis support and continues reviewing Meta's revised WhatsApp chatbot policy.
• Senator Elizabeth Warren asked Amazon CEO Andy Jassy to explain Amazon Business's algorithmic pricing and contracting practices after allegations that schools and local governments were charged inconsistent and sometimes inflated prices.
• Google named its new London headquarters "Platform 37," referencing both nearby King's Cross station and DeepMind's famous AlphaGo "Move 37," as staff prepare to move in later this year.
• Israeli cybersecurity startupOnyx Securitylaunched with $40 million in funding to help enterprises secure AI agents, underscoring continued investor appetite for Israel's cyber sector.
• Tesla's new steering-wheel-free, pedal-free Cybercab reportedly rolled off the Austin production line last month, with mass production expected to begin in April according to the Wall Street Journal.
• Li Auto reported a steep drop in quarterly profit and revenue as weaker sales, lower margins, and intense competition weighed on its performance during its transition toward battery EVs.
• Citibank temporarily shut most UAE branches and reduced some services as banks in the region took precautionary measures amid the worsening Middle East conflict.
• Eli Lilly warned that compounded tirzepatide mixed with vitamin B12 may contain a previously unidentified impurity with unknown health risks and said it asked the FDA to seek a recall of such products.
• JPMorgan and UBS reportedly cut ties with hedge fund Infini Capital Management as it became embroiled in a Hong Kong probe, according to Bloomberg.
• Tesla Energy Ventures received a licence to supply electricity in Great Britain, opening the door for Tesla to compete directly with household energy providers.
• Estée Lauder sued Jo Malone, Jo Loves, and Zara UK, alleging the use of Malone's name on certain fragrance products breaches its contractual and trademark rights.
• UK regulators told Meta, TikTok, Snap, YouTube, and other platforms to strengthen age checks and child safety measures or face enforcement action.
• Goldman Sachs delayed its expected timing for Federal Reserve rate cuts to September and December, citing inflation risks from higher energy prices linked to the Middle East conflict.
• Logistics group GLP is targeting a roughly $20 billion valuation in a potential Hong Kong IPO that could come as early as this year, according to Reuters sources.
• Tilman Fertitta in exclusive talks to buy Caesars Entertainment.
• Morgan Stanley also limits withdrawals from its private credit funds.
• Anthropic in talks with Blackstone and other private equity firms to create an AI consulting joint venture, according to The Information.
• Netflix to pay up to $600 million for AI production company InterPositive, according to Bloomberg.
• Atlassian is laying off about 10% of its workforce.
• Investors demanded significant concessions during Salesforce's $25 billion bond offering on Wednesday, according to the FT.
• Microsoft is preparing its next Xbox console.
• Palo Alto Networks is increasing its share buyback program by $1 billion.
• Donald Trump plans to invoke an emergency law in favor of Sable Offshore as the company seeks to restart production at a group of offshore platforms in California.

Analyst Recommendations:

• Aptiv Plc: UBS upgrades to buy from neutral and raises the target price from USD 89 to USD 97.
• Conagra Brands, Inc.: Wells Fargo downgrades to underweight from equalweight and reduces the target price from USD 20 to USD 15.
• General Mills, Inc.: Wells Fargo downgrades to underweight from equalweight and reduces the target price from USD 45 to USD 35.
• Lyondellbasell Industries N.v.: Citi upgrades to buy from neutral with a price target raised from USD 49 to USD 76.
• Murphy Oil Corporation: Piper Sandler & Co upgrades to overweight from neutral with a price target raised from USD 33 to USD 41.
• Occidental Petroleum Corporation: Piper Sandler & Co upgrades to overweight from neutral with a price target raised from USD 54 to USD 66.
• Sterling Infrastructure, Inc.: William O'Neil & Co Incorporated initiates coverage with a buy recommendation.
• The Campbell's Company: Wells Fargo downgrades to underweight from equalweight and reduces the target price from USD 28 to USD 20.
• Aerovironment, Inc.: Jefferies maintains its buy recommendation and reduces the target price from USD 390 to USD 305.
• Caesars Entertainment, Inc.: Morgan Stanley maintains its equalwt recommendation and raises the target price from USD 25 to USD 32.
• Chevron Corporation: Piper Sandler & Co maintains its overweight recommendation and raises the target price from USD 179 to USD 242.
• Clean Harbors, Inc.: UBS maintains its neutral recommendation and raises the target price from USD 240 to USD 300.
• Exxon Mobil Corporation: Piper Sandler & Co maintains its overweight recommendation and raises the target price from USD 145 to USD 186.
• Hecla Mining Company: RBC Capital maintains its outperform rating and raises the target price from USD 19 to USD 28.
• Uipath, Inc.: Canaccord Genuity maintains its buy recommendation and reduces the target price from USD 19 to USD 15.