Markets reprice on rapid policy shifts

Dave Harrison Smith, CFA
Chief Investment Officer
March 23, 2026

 

 

Policy signals are driving market swings

Markets have swung sharply over the past 72 hours, driven less by fundamentals and more by policy signals.

Late Friday, oil prices surged on news of escalation in the Middle East, alongside President Trump’s threat of potential strikes on Iranian energy infrastructure. By early Monday, that tone reversed, with a pause on military action following reported discussions with Iranian counterparts. Iran has since pushed back, denying meaningful progress.

This kind of whiplash is not new. It echoes April 9, 2025, when markets sharply rebounded after a sudden tariff reprieve. The S&P 500 rose 9.5% in a single session. Policy-driven reversals can be abrupt and non-linear. A single tweet can move mountains.

Oil markets are still pricing a de-escalatory base case, with futures below $80 per barrel by year-end and closer to $70 by late 2027. That baseline remains vulnerable to escalation, infrastructure damage, or a more prolonged conflict.

Crude oil WTI futures pricing remains below escalation scenarios

Rising oil prices are already showing up in bond markets

Higher energy prices raise the risk of persistent inflation. That, in turn, is pushing yields higher. Yields have moved higher across major economies as markets reprice a combination of higher inflation, elevated growth risk, and sustained fiscal deficits. As of last week, the U.S. 10-year reached 4.39%, with similar moves across Germany, Japan, and the UK.

Global 10-year yields have moved higher

Short-term yields tell the same story. Just one month ago, futures markets implied a 92% probability of at least one Fed cut, with 2–3 cuts as the most likely outcome. Today, that has shifted materially. Markets now imply a 70.9% probability of zero cuts, with roughly equal odds of either one cut or one hike.

At the start of the year, the expectation was for steady easing. That path now looks less certain. Sticky inflation, geopolitical risk, and the potential pass-through from higher energy prices are all pushing in the same direction.

 

The outlook has become less linear

The year began with a clear expectation of easing monetary policy. That view has been challenged.

Tighter policy and higher anticipated borrowing costs are starting to show up across equity valuations, bond markets, and investor sentiment. At the same time, uncertainty around inflation and geopolitics is narrowing the range of likely outcomes.

Instead of a clean easing cycle, markets are now adjusting to a more conditional path forward. Policy decisions and external shocks are playing a larger role than many expected at the start of the year.

 

 

# # #