Key Highlights

• President Trump says U.S. could “take the oil in Iran.”
• Russia is to ban gasoline exports from April 1.
• Japanese 30y government bond yields surge amid inflation fears.

Chart of the Day

INR and EUR to benefit if markets rebalance against stagflation and energy stress

^{Source: BNY}

As we approach the second month of the Iran conflict, the market also faces the first round of monthly and quarterly rebalancing decisions. Normally, these are mathematical or passive instructions to follow, subject to some degree of discretion. However, these are extraordinary circumstances in which escalation risk is clear, and asset allocators may need to proceed with extreme caution, within operational boundaries.

Even setting aside underlying asset performance, the main themes in the market are quite clear based on monthly smoothed flows since the end of February: INR and EUR have by some margin been the most-sold currencies, suffering from balance of payments and stagflation fears. CNY has been seen as a potential haven due to heavily managed exchange rates and a low starting point for inflation. Meanwhile, BRL is likely to benefit the most from a positive terms-of-trade shock in energy, food and other resources, while enjoying the highest level of nominal rates among the currencies we track. Normal rebalancing would entail a reversal of these positions, i.e. adding to INR and EUR and fading CNY and BRL. However, the underlying drivers which supported these positions have not gone away, and if anything may strengthen.

Consequently, unless absolutely mandated, we believe any form of rebalancing will involve a degree of caution, or else the signals are so strong that the scale of asset performance has already more than compensated for the level of risk in the market. Given the current state of news flow, we doubt there will be much conviction pursuing these strategies. If anything, after some mild rebalancing toward end-March, the positions which performed well during the month will likely see extensions.

What's Changed?

The ongoing war in Iran leaves investors waiting for clarity. There are hopes of peace deals and sufficient mixed signals to slow any panic selling of risk, but ongoing supply shocks are hitting growth expectations. The biggest change in the market has been in bond yields going lower, while the U.S. dollar has set 10-month highs. Japan has been the notable exception. The global stock markets are mixed, with APAC lower, EU equities up slightly and U.S. futures flat. Markets are talking about potential demand shocks from oil supply constraints, and whether this materializes or not will be key for the week and month ahead.

• Japan: Rate hike risks and JPY intervention dominated Monday trading in Japan, leading to bond curve bear steepening, despite the global push to buy bonds elsewhere given rising recession expectations. Vice Finance Minister Atsushi Mimura has warned of FX intervention, as even JPY breaching the 160 mark failed to jolt markets. BoJ Governor Kazuo Ueda is also watching JPY and warning of an April hike linked to inflation. Rate hikes combined with fears of demand shocks have a rocky economic history.
• Private credit: Just how much exposure there is to AI-linked business in private credit remains a driver, aside from the current worries about Iran. Fears of that credit worries could broaden out persist. An LBO led by JP Morgan faces pushback over $7.2bn to fund a takeover of Sealed Air Corp. Some take this as another sign of stress in markets, while others are worried about private equity and side deals. The U.S. Treasury is consulting with insurance regulators on private credit lenders. Treasury officials are keen to hear regulators’ feedback on the rising use of ​fund-level leverage, the consistency of private credit ratings, the use of offshore reinsurance and the liquidity of investments in ​private credit markets. As rates move lower, there should be relief, but spreads and demand remain key factors for recalibrating risk/reward.
• Oil: The Saudi pipeline to the Rea Sea is pumping 7 million barrels/day (mbd) of oil – about 2mb of which is used for domestic refineries and the rest for export. This has helped stabilize oil markets for the moment, as it covers about 60% of the Saudi crude that formerly flowed through the Strait of Hormuz. The issue for the week relates to the Houthis and their escalation of the war, with two missile attacks on Israel: spillover from blocking shipping in the Red Sea would panic oil markets again. Oil prices persistently above $110/barrel Brent are driving fears of larger-scale product shortages globally.

Bottom line: The U.S. session faces the same questions as Friday, with even less clarity given the mixed signals from President Trump, who warned of a potential Kharg Island invasion and talked up diplomacy success. The rise in oil, with Brent over $115/barrel, leaves little room for a rebound in risk, with only bonds the salve for stocks. Investors will need to wait for more economic data to push the narrative that the best-case scenario (a quick resolution to the conflict and a return to normal in oil) will avert deeper demand destruction globally. Given that we are into the holiday and month-end week, liquidity across markets will be another factor for concern, as waiting requires more than patience now. Volatility shocks are driving margin calls, while ongoing headlines over the war and oil are driving uncertainty. 

What You Need to Know

Japanese authorities have signaled a stronger willingness to act in currency markets, as Vice Finance Minister Atsushi Mimura warned that “bold action” may be taken if speculative activity persists, marking an escalation in intervention rhetoric. The remarks briefly supported the yen after it moved beyond the 160 level, with additional backing from BoJ Governor Kazuo Ueda’s cautious parliamentary comments and discussion of potential rate hikes. Despite the firmer tone, analysts remain unconvinced that immediate intervention will follow, viewing the move as an effort to stabilize expectations while buying time, particularly given persistent dollar strength driven by safe haven demand and shifting U.S. rate expectations, which could undermine the impact of direct market action. Nikkei -2.79% to 51886, USDJPY -0.4% to 159.67, 10y JGB -1.4bp to 2.374%.

In an interview with the FT, President Trump stated a preference for seizing Iran’s oil by potentially capturing Kharg Island, Iran’s main export hub, amid escalating U.S.-Israeli tensions in the Middle East. The U.S. has deployed 10,000 troops to the region, including Marines and the 82nd Airborne Division, prepared for possible land operations. Trump compared this to U.S. intentions in Venezuela and claimed that Iran’s defenses on Kharg Island are weak. Despite the threats, indirect U.S.-Iranian talks via Pakistani intermediaries are continuing, with an April 6 deadline for a deal. The conflict has expanded regionally, impacting global energy markets and oil prices. Brent +2.674% to 115.58, WTI +1.817% to 101.45, Omani crude -9.932% to 104.84, Dubai crude -1.157% to 128.49.

Kim Sung-joo, CEO of South Korea’s National Pension Service (NPS), has highlighted concerns over the won’s 5% depreciation against the dollar this year to 1,514.25, viewing the low 1,400s as a more appropriate equilibrium. The NPS is considering measures to stabilize the currency, including issuing foreign currency bonds pending legislative changes. The fund faces considerable return challenges due to the Iran war and is monitoring vulnerabilities in the global private credit market, though it has limited Middle East exposure. Despite the market turmoil, the NPS is making targeted adjustments without major asset allocation changes, emphasizing the need for the Iran conflict to end. KOSPI -2.97% to 5277, USDKRW +0.411% to 1516.95, 10y KTB +7.5bp to 3.925%.

Australia has announced a three-month halving of its fuel excise duty from April 1 to June 30, 2026, reducing it to 26.3 cents/liter from 52.6 cents/liter to ease petrol and diesel costs amid a fuel crisis. The government has also cut the heavy vehicle road user charge to zero for the same period, costing AU$2.55bn. A four-stage national fuel security plan was agreed to manage supply and demand, encouraging public transport use and voluntary fuel reduction. Further measures on supply chain challenges are expected. The government will monitor petrol prices to ensure excise cuts translate into consumer savings. ASX +0.6% to 5357, AUDUSD -0.233% to 0.6858, 10y ACGB -2.8bp to 5.07%.

What We're Watching

U.S. March Dallas Fed manufacturing activity is expected to rise to 1.5 vs. 0.2.

Canada March Bloomberg Nanos Confidence forecast at 49.8 from 50.6.

Central bank speakers: The Fed’s Jerome Powell takes part in a moderated discussion.

U.S. Treasury sells $89bn in 13-week bills and $77bn in 26-week bills.

What iFlow is Showing Us

Mood: iFlow Mood narrowed further to -0.068, driven by reduced demand for core sovereign bonds, while equities remained under selling pressure.

FX: Flows were mixed across G10 and LatAm. JPY, USD and AUD saw inflows, while EUR, GBP and NZD faced outflows. LatAm currencies were broadly bought. In contrast, APAC FX recorded continued outflows, led by SGD, INR and CNY. EMEA showed wide dispersion, with strong HUF inflows versus ILS and ZAR outflows.

FI: G10 sovereign bonds continued to attract demand, led by U.S. Treasurys, although cross-border flows remained skewed toward outflows. Selling persisted across APAC, LatAm and EMEA bond markets.

Equities: Broad-based selling continued across the iFlow universe, led by EM APAC and DM EMEA. The largest outflows were seen in South Korea, India, Malaysia, Czechia and Türkiye, alongside selling in Canada, Switzerland and Sweden. Poland, Thailand, Colombia and Australia were notable exceptions with inflows.

Quotes of the Day

“Need is not a demand. Effective economic demand requires not merely need but corresponding purchasing power.” – Henry Hazlitt

“Ability will never catch up with the demand for it.” – Confucius

Economic Details

EU economic sentiment declined by 1.5 points to 96.7 in March, while euro area sentiment fell 1.6 points to 96.6, both moving further below the long-term average of 100. Employment expectations also weakened, with the EU indicator down 1.3 points to 97.3 and the euro area down 1.4 points to 96.4. The deterioration was driven mainly by sharp falls in consumer confidence, down 3.4 points to a multi-year low, and retail trade confidence, down 2.0 points, while services eased slightly and industry remained broadly stable. Construction confidence improved modestly. Among major economies, sentiment fell in France and Spain in particular. Overall uncertainty increased and price expectations rose across sectors, signaling weaker growth momentum. Euro Stoxx 50 +0.37% to 5526, EURUSD -0.131% to 1.1494, BBG AGG Euro Government High Grade EUR 0bp to 3.42%.

Italy’s industrial producer prices in February fell by 0.4% m/m and 2.7% y/y, with the y/y decline widening from -1.6% in January, mainly because of lower domestic energy prices. On the domestic market, prices dropped 0.8% m/m and 3.7% y/y, while excluding energy they rose 0.1% m/m and 1.1% y/y. Foreign market prices increased by 0.3% m/m and 0.2% y/y. Over December to February, industrial producer prices rose 0.6% q/q. Construction producer prices were up 0.3% m/m and 1.3% y/y for buildings, while roads and railways rose 0.5% m/m and fell 0.1% y/y. The quarterly buildings measure also increased by 0.4%. FTSE MIB +0.48% to 43587, EURUSD -0.131% to 1.1494, 10y BTP -3.1bp to 4.018%.

Spanish retail sales increased by 2.2% y/y in seasonally adjusted terms in February, down 1.6 percentage points from January, while the unadjusted series rose 2.0% y/y. On a m/m basis, sales slipped 0.1%, with e-commerce down 2.4%, food sales flat and non-food sales falling 0.1%. Excluding fuel, retail sales fell 0.2% m/m, while service station sales rose 0.6%. By region, sales increased in 15 autonomous communities and fell in two, with rises of 4.2% for Aragón, 3.7% for Melilla and 3.4% for País Vasco, while Navarra fell by 0.6% and Illes Balears by 1.6%. Retail employment rose 0.7% y/y, easing slightly from January after a stronger start to the year. IBEX 35 +0.72% to 16875, EURUSD -0.131% to 1.1494, 10y Bono -2.5bp to 3.604%.

Spain’s export price index declined by 2.4% y/y in February, down 1.3 percentage points from January, while import prices fell by 4.3% y/y, unchanged from the previous month. The decrease in export prices was driven primarily by energy, which dropped 35.3%, while intermediate goods were flat and the index excluding energy held at 0.0%. On a m/m basis, export prices fell 0.8%, with sharp decreases in electricity prices offsetting gains in refined petroleum and transport equipment. Import prices rose 0.4% m/m, supported by increases in crude oil and refined products, although energy components remained a key drag annually. Overall industrial prices (IPRI+IPRIX) fell 5.6% y/y, highlighting broad-based disinflationary pressures.

U.K. mortgage lending in February increased to £4.8bn from £4.2bn in January, above the six-month average, while approvals for house purchases rose to 62,600 and remortgaging approvals increased to 41,200. Consumer credit borrowing edged up to £1.9bn, with credit card borrowing shrinking to £0.8bn and other consumer lending rising to £1.2bn. Borrowing by private non-financial corporations (PNFCs) slowed to £2.6bn from £5.1bn, although bank lending increased to £4.3bn. The M4ex money supply rose to £10.8bn from -£7.3bn, driven by household and corporate deposits, while M4Lex lending fell to -£3.2bn as corporate repayments outweighed household borrowing. FTSE 100 +0.72% to 10039, GBPUSD -0.174% to 1.3236, 10y gilt -3.1bp to 4.943%.

Lloyds’ latest business barometer noted that U.K. business confidence rose by 11 points in March to 55%, driven mainly by smaller firms, while the trading outlook improved with 66% of firms positive and a net balance of 60%. Economic optimism also strengthened, with 65% of firms positive and the net balance rising 14 points to 50%. Smaller firms saw a five-point increase in their trading outlook, while larger firms reported a decline and SMEs were broadly stable. Positive firms cited stronger demand, investment and supply chains, while negative sentiment reflected cost pressures and uncertainty. Confidence increased across most regions, with the West Midlands the strongest, although larger firms remained more cautious overall.

Sweden’s retail trade volume fell 0.6% m/m in February, with durables down 0.9% and consumables flat. Over the December-February period, the retail trade volume slipped 0.2% versus the previous three months, as durables fell 0.1% and consumables declined by 0.4%. On a y/y basis, retail trade volume rose 2.4% in February, driven by a 4.7% increase in durables, while consumables edged down 0.2%. In non-calendar-adjusted constant prices, the retail trade volume also climbed 2.4% y/y. Retail turnover in current prices rose 2.6% y/y, with durables up 3.9% and consumables increasing by 1.6%, indicating that nominal sales growth continued to outpace the gain in overall retail volumes. OMX +0.5% to 2878, EURSEK +0.144% to 10.9208, 10y Swedish GB -3.8bp to 2.951%.

Switzerland’s KOF Economic Barometer slid 7.7 points to 96.1 in March, falling below its long-term average after a prior increase and signaling a deterioration in the economic outlook. The weakening was broad-based across both production and demand components, with particularly sharp falls in manufacturing and foreign demand indicators. Within production, sub-indicators for exports, general business conditions and order backlogs came under pressure, while most manufacturing segments, including the machinery, electrical, metal and paper industries, showed worsening expectations. The drop marks the first move below average this year, highlighting increasing downside risks to near-term economic momentum. SMI +0.37% to 12617, EURCHF -0.008% to 0.91947, 10y Swiss GB -0.7bp to 0.413%.

Hungary’s external trade balance in February showed a surplus of €665mn, down €342mn y/y, as export volumes fell 2.3% y/y while import volumes rose 6.7% y/y. The value of exports increased by 2.6% and imports by 5.9% in EUR terms, with exports at €12.7bn and imports at €12.0bn. On a m/m basis, seasonally adjusted export volumes rose by 2.6% and imports by 1.2%. Terms of trade improved by 5.9%, supported by a 1.3% decrease in export prices and a 6.9% fall in import prices. Over January-February, export volumes declined by 6.0% while imports increased by 4.6%, with the cumulative surplus narrowing to €957mn. Budapest SI +0.51% to 122343, EURHUF +0.011% to 389.46, 10y HGB +2bp to 7.33%.

Türkiye’s economic confidence index fell by 2.8% m/m in March to 97.9 from 100.7 in February, moving below the neutral 100-point level and signaling a deterioration in overall sentiment across sectors. The decline was broad-based, with real sector confidence dropping 3.9% m/m to 100.0 and construction confidence also falling 3.9% m/m to 80.6. Retail trade confidence decreased by 2.0% m/m to 113.6, while consumer confidence declined by 0.8% m/m to 85.0 and services confidence edged down 0.5% m/m to 113.2. Despite services and retail remaining above 100, the overall index indicates weakening economic expectations across most parts of the economy, as the country is significantly affected by the conflict. BI 100 -0.02% to 12695, USDTRY +0.035% to 44.4688, 10y TGB +32bp to 34.49%.

New Zealand’s filled jobs rose by 0.3% m/m, or 7,146 jobs in February, taking the total to 2.35 million, while y/y growth was just 0.1%. Primary industries led the m/m increase with a 1.6% gain, while services rose 0.3% and goods-producing industries edged up 0.1%. By industry, the largest y/y increases were in public administration and safety, up 3.2%, and health care and social assistance, up 1.7%, while construction fell 2.1% and manufacturing declined by 1.6%. Gross earnings rose 2.7% y/y to NZ$15bn, pointing to firmer income growth than employment growth. Reliance on public sector jobs will likely increase scrutiny over productivity in the country. NZX 50 -1.44% to 12749, NZDUSD -0.157% to 0.5738, 10y NZGB +1.3bp to 4.785%.

The Bank of Korea (BoK) is to extend the operating hours of its financial settlement network, BOK-Wire+, from 9 a.m.-5:30 p.m. to 9 a.m.-8 p.m. starting Monday. This 2.5-hour extension aims to enhance overlap with major countries’ payment systems, improving cross-border payment efficiency. The move is expected to facilitate smoother same-day bond settlement for foreign investors via KRW funds through CLS foreign exchange settlement. This upgrade supports the inclusion of South Korean government bonds in the FTSE World Government Bond Index (WGBI) from April 1, promoting the globalization of the country’s foreign exchange and bond markets. KOSPI -2.97% to 5277, USDKRW +0.411% to 1516.95, 10y KTB +7.5bp to 3.925%.