Escalation Abroad and Emerging Stress in Credit

Dave Harrison Smith, CFA
Chief Investment Officer
March 2, 2026

 

 

The Middle East explodes into war

Over the weekend, the region collapsed into a situation investors had feared. The U.S. and Israel conducted a barrage of strikes against Iran, while Iran retaliated against not only Israel but also against Qatar, the UAE, Saudi Arabia, Kuwait, Bahrain, and even a U.K. base in Cyprus. In short order, the region descended into a multi-front conflict with potential global consequences.

I won’t repeat the military or humanitarian details; those are readily available elsewhere. Instead, I’ll focus on what it may mean from a financial perspective.

Oil and energy prices will be the primary conduit through which we see economic and market impact. Iran produces roughly 3 million barrels of oil per day, about 3% of global production. The country also sits on the critical Strait of Hormuz, the chokepoint waterway through which an estimated 15% to 20% of global oil supply flows by tanker. Traffic through the Strait has already slowed to a trickle as shipping companies and insurers evaluate risks. While some disruption could be mitigated in the short term via pipelines and alternative ports, they simply cannot fully replace Hormuz volume. A lengthy shutdown would have significant repercussions for global energy prices.

Thus far, the initial market reaction looks textbook, if subdued. Traditional safe havens including gold, the U.S. dollar, and the Japanese yen are higher, while risk assets such equities are modestly lower. Defense and energy stocks are surging. Oil has traded in the mid-$70s to low-$80s per barrel range, up roughly 5% to 13% from recent levels. Airline stocks are notable underperformers, as a wide corridor of Middle Eastern airspace has been shuttered and one of the world’s busiest airports, Dubai International, was hit by a missile strike. Investors may wonder why the market reaction has not been more severe. That may reflect some prior anticipation of a conflict, as seen in the recent decline in safe haven 10-year U.S. Treasury yields from 4.26% at the start of February to 3.96% last week.

This is clearly a major geopolitical event. The human cost will be enormous, and the path of nations will be determined. Economically, the trajectory for risk assets will depend on both the duration and severity of global disruption. Elevated energy prices feed into inflation in the near-term and higher gas prices crimp consumer spending, particularly among lower-income households where financial stress is already visible. A swift resolution could lead to a return to normalcy. This morning, though, an off-ramp seems unlikely.

 

Block, formerly Square, announced it will slash workforce by nearly 50%, citing AI productivity gains

This adds fuel to an already contentious debate on the impact of AI on the job market. Block CEO Jack Dorsey was direct: “A significantly smaller team using the tools we’re building can do more and do it better…I don’t think we’re early to this realization. I think most companies are late. Within the next year, I believe the majority of the companies will reach the same conclusion and make similar structural changes.”

There are important caveats. Block expanded aggressively after the pandemic, growing from roughly 2,000 employees to 10,000. While many peers course corrected and reduced payroll in 2023/2024, Block has maintained its elevated employee count. The company has also been criticized by Wall Street for under-earning relative to peers, with adjusted operating margins in the low 20% range against a peer group running 35% to 40% or more.

So, we question: is this actually AI-driven workforce replacement or a company-specific rationalization dressed up with an AI narrative?

The true answer is likely nuanced. One fact worth mentioning: software job postings on Indeed are actually up 11% year over year. The picture is clearly more complicated than at first blush but the implications to our world are significant.

 

Private credit back in the news… another cockroach in the system

We have previously written about recent implosions in the private credit space, including First Brands and Tricolor. Those collapses caused significant write-downs at several large investment firms and regional banks. At the time, JP Morgan CEO Jamie Dimon commented that there were likely more ‘cockroaches’ in the system.

Last week, the industry found another one. U.K.-based mortgage provider MFS abruptly collapsed amid fraud allegations that the lender had ‘double pledged’ collateral. Investors in MFS include Elliot Management, with a roughly $200 million investment, as well as Barclays, Jefferies, and Apollo Global.

This impact may extend beyond the headline. Over the last five years, investor capital has flooded private credit chasing high yields and strong returns. Our concern is that investment firms loosened underwriting criteria in a rush to deploy capital. Combined with growing pressure in private equity, where many portfolios have considerable exposure to AI-disrupted software firms, there is potential for significant write-downs. Insurance companies and pension funds have deep exposure to both private equity and private credit.

Black swan, systematic events rarely announce themselves politely. This is an area we are monitoring closely.

 

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