The war has forced investors to rethink trading strategies. What has lost relevance

Escalating war in the Middle East has led investors to reconsider some of the most popular strategies and investment themes for 2026, Reuters writes. Stocks are falling, the dollar is rising, and traders are now less hopeful of a Fed rate cut - not at all what investment banks predicted earlier this year.

"Investors have been betting on economic growth this year. A stagflationary shock was not part of those plans," ING head of global markets Chris Turner told Reuters. - Investors are acting cautiously and they probably have yet to unwind some of their positions."

The agency highlighted five trends that no one expected and which became a reality due to the war in the Middle East and the actual blockage of the Strait of Hormuz - the most important transportation corridor for the global oil market.

A month ago, investors held the largest bet since 2021 on a weakening dollar, writes Reuters with reference to data from the US authorities. The expected reduction in interest rates by the US Federal Reserve gave little incentive to actively buy the US currency, the agency notes.

But since the conflict began, the dollar has hit its highest since last November, a sign that investors have rushed into defensive assets.

"The main winner of the conflict in the Middle East is the U.S. dollar," Ipek Ozkardeskaya, senior analyst at Swissquote, told Reuters. - The U.S. economy is likely to prove more resilient to energy shocks."

World stock markets, which started 2026 amid a broad "buy equities" consensus, fell sharply after the war began. The MSCI World ex US index fell after US and Israeli strikes on Iran, while the S&P 500 was more resilient as investors favored the US market: the US economy is less dependent on energy imports. The US is now a net energy exporter and imports only 17% of the energy it needs - a 40-year low, said Jean François Robin, head of global research at Natixis CIB.

"The conflict hasn't destroyed the investment idea of long equity positions for 2026, but it has made it much more dependent on interest rates and oil prices," eToro global strategist Lale Akoner told Reuters. If rising energy prices keep inflation high, she said, "the weak link will be multiples, not corporate earnings."

Ozkardeskaya of Swissquote notes that the shock could redirect capital flows to energy-rich countries and put pressure on economies dependent on energy imports. This could potentially stop the rotation of capital from the US to Europe and Asia.

Emerging market equities and currencies had a strong start to the year, with the MSCI Emerging Markets Equity Index rising more than 15% and the MSCI Emerging Markets Currency Index adding 1.9% through last Friday. However, these indices lost 7% and 1.5% respectively last week. Markets that had previously posted their best performance of the year, including South Korea's Kospi index, fell particularly hard.

"The biggest laggards this week were precisely those currencies that were growth leaders in January-February," Reuters quoted a note by Goldman Sachs analysts published on March 4. They noted that the reduction in risk positions was most pronounced in markets most exposed to the Middle East and oil shocks, such as Egypt, the United Arab Emirates and Thailand, as well as among last year's leaders, including South Korea, Brazil and South Africa.

On March 3, analysts at JPMorgan downgraded EMEA (Europe, Middle East and Africa) currencies to Marketweight and added the Polish zloty to the list of currencies with an Underweight recommendation, noting that Central and Eastern European countries are particularly sensitive to energy prices.

The sharp rise in energy prices has heightened concerns about inflation and caused traders to lower expectations for an interest rate cut by the US Federal Reserve. Before the conflict, markets estimated the probability of a rate cut at the June meeting at about 50%. Now this probability has decreased to about 25%, writes Reuters.

The recent energy shock has also caused markets to cut expectations of a rate cut by the Bank of England, and on the European Central Bank, traders are now pricing in a rate hike this year rather than a cut.

"Some of the largest changes in market expectations for G10 central bank rates in 2026 have occurred precisely in economies where further policy easing was previously expected," Goldman Sachs said.

Bank stocks, which had posted moderate gains in early 2026, have fallen in price as investors reassess the economic impact of possible supply disruptions across the Strait of Hormuz, Reuters noted. The risk of rising energy prices has heightened fears that inflationary pressures could return, raising the possibility of a slowdown in lending and weakening demand for credit even if interest rates remain high. While higher rates typically support banks' margins, renewed inflationary concerns could limit borrowing and investment, the agency explains.

"The key risk to watch is credit spreads and liquidity in private credit markets. Geopolitical headlines matter mostly when they lead to tighter financial conditions," eToro's Akoner said.

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