A nightmare, prolonged stress or a quick pullback: what to expect on Wall Street

Major U.S. indices collapsed at the opening on March 9 by more than 1%. The war in the Middle East has pushed the oil market beyond previous stress models. Brent is trading around $100 per barrel, and at the opening of the Asian session the price rose to almost $120. The main driver is not only strikes on energy infrastructure, but also the actual stoppage of traffic through the Strait of Hormuz. For investors, this is no longer a local geopolitical episode, but a whole macroeconomic shock, which strengthened the demand for the dollar, reduced expectations of a soon easing of the Fed policy, and led to a large-scale sell-off in Europe and Asia.

Brent broke through the $119 mark for the first time since 2022, WTI also tested the zone around $120, Not only oil contracts were under pressure: European gas prices rose sharply. Bahrain Peteoleum Company declared force majeure after the attack on the oil refinery complex, Iraq reduced production by about 60%, Kuwait and UAE announced production cuts, according to Bloomberg source, the largest oil exporter - Saudi Arabia- does not rule it out. In all these countries the storage facilities are full, because of the closure of the Strait of Hormuz there is simply nowhere to load new batches of fuel. The market is faced with a rare combination: crude supplies are shrinking, freight is becoming more expensive and the premium for military risk is growing.

The first scenario for the market: a quick pullback after a partial recovery of transit. In this case, Brent may return to its previous levels around $65-70 per barrel, and the panic in stocks and currencies will gradually subside. This is the outcome Fitch points to: the agency considers a prolonged closure of the Strait of Hormuz unlikely, and the price spike temporary, even if the conflict drags on. Fitch is still guided by its December forecast of an average Brent price of $63 per barrel for 2026 and does not see significant upside even after the current spike. For investors, this would mean that the current spike in inflation expectations will remain painful but will not develop into a systemic stagflationary shock.

Second scenario: prolonged stress without a complete collapse in supply. This means oil will remain around $100, pressure on stocks and a tighter reassessment of rates. Earlier, MSCI analysts in the baseline stress scenario allowed quotes to move toward $100, warning of new inflationary momentum, a freeze in rate cut expectations and pressure on global growth. The market is already cutting expectations of rate cuts in the US and the eurozone: investors have less and less faith that the Fed and ECB will be able to quickly ease policy amid a new inflationary momentum.

That the market is already laying down a tougher scenario is evidenced by the reaction of Ed Yardeni, who raised the probability of a sharp sell-off in the US market to 35% from 20%, while expectations for the next Fed rate cut have shifted from July to September. "The U.S. economy and stock market are now sandwiched between Iran and harsh reality. The same is true for the Fed," wrote Ed Yardeni. The dollar's rise in the current configuration reflects not so much a classic demand for defensive assets, but a market repricing to accommodate an inflation shock and the U.S.'s energy advantage as the largest oil producer.

The third scenario: no longer inflationary stress, but a full-fledged energy shock. With a prolonged disruption of supplies through Hormuz and new strikes on infrastructure, the market will begin to lay down not a temporary surge in prices, but the risk of a global recession. It is no coincidence that Daniel Yergin, vice-chairman of S&P Global, in his column for the Financial Times calls such an outcome a nightmare scenario for the global energy sector, while analysts from ANZ already consider the current turbulence to go beyond the previous worst-case/worst-case scenario.

Bloomberg Economics attributes this scenario to accelerating inflation and slowing global growth, and Iran's warnings of oil above $200 in this configuration no longer look purely political pressure.

This article was AI-translated and verified by a human editor