Please see the below article from Tatton Investment Management, discussing capital markets’ fragile optimism in the face of rising oil prices, war escalation, higher bond yields, and pressure on small‑cap stocks and private credit, received this morning – 16/03/2026.
Capital markets’ fragile optimism
Stocks pulled back into the end of last week but, given war escalation and oil prices breaking above $100pb, equities still look surprisingly sanguine. That continues to be the case as we open this week’s trading, with spot Brent crude oil above $105pb.
The move into big tech stocks could be a ‘safe haven’ move, but the bigger scare was higher bond yields – particularly the UK. Higher ‘risk free’ yields but comparatively little movement in stock prices means the bond-adjusted equity risk premium fell. Remarkably, investors see stocks as less risky, compared to bonds.
That only makes sense as a TACO trade. Trump has an incentive to end the war quickly (he’s already declared it “pretty much” over) but that doesn’t mean he can. Iran still has retaliatory capabilities, so it takes two to TACO. If the war drags on, equities look vulnerable.
Small-cap stocks are at risk from higher-for-longer interest rates. Small-cap was doing well in 2026, but even before the war, small-cap earnings growth was starting to flounder. Large cap earnings looked better, but existing problems around private credit and AI make investors nervous.
Bond yields are key. If they come down, investors will be more at ease. The standard explanation for higher bond yields is that the oil shock pushes up inflation and interest rates – but we see it more as a rise in bond risk. A long oil shock forces governments to spend more, worsening already-stretched fiscal metrics. At the start of the year, it looked like the decades-long trend of rising government debt, relative to private sector debt (a bad sign for private sector growth) might reverse. The oil shock has dashed those hopes, for now.
For bond yields to fall, oil prices need to drop back. We will have to wait and see, but in the meantime, long-term investors can arguably pick up stocks at a relative discount (given rising earnings expectations from Christmas but static prices). As Warren Buffett says, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Oil price scenarios
Oil prices swung wildly last week, as Iranian strikes closed off the Strait of Hormuz and western leaders promised to release emergency oil reserves. Capital Economics wrote a useful piece outlining three different scenarios for Brent Crude prices: a two-week war and $65pb Brent by the end of 2026; a three-month war with a closed Strait but minor long-term oil production damage, with Brent peaking at $130pb but back to $90pb by the year end; and a three-month war with long-term production damage, leaving Brent around $150pb for six months. The ‘trouble now, supply later’ narrative is in line with market expectations, but we would add one unlikely worst-case scenario: the US using Iran as a long-term chokehold on Chinese energy supply, effectively dissolving the globally traded oil market.
Nothing that’s happened suggests that worst-case scenario. Iranian oil keeps flowing to China undisturbed by the US and, if anything, Washington has signalled it wants to protect tankers bound for Asia. The US also hasn’t targeted any Iranian oil production and has discouraged Israel from doing so. Iran’s strikes haven’t materially damaged Middle Eastern production either (though they hit transportation), possibly more due to regional defences than lack of desire. In any case, neither side looks likely to damage long-term production, backing up ‘trouble now, supply later’ narrative.
That’s not to downplay the disruption. We are likely to see price swings even if the Strait opens – as refineries shut down once storage tankers fill. Major oil producers like the US won’t want a sudden postwar price drop either, which is another reason why Russian sanction relief will be temporary. In the meantime, the downstream inflation impacts – on freight shipping, semiconductor manufacturing and much more – have quashed chances of global interest rate cuts. Even if the oil shock is short-lived, the supply chain shock could last longer.
Private credit crunch, not credit crisis
More and more private credit (PC) funds are halting redemptions, and last week JPMorgan said it would reduce its lending to PC firms after marking down their loan values. Retail-focussed PC funds have been the most under pressure due to their liquidity mismatch: spooked investors demand money that fund like Blue Owl can’t pay all at once, predictably spooking more investors. The inciting factor this time was AI-threatened software companies, which PC lent to more than public credit markets (which is why initially there was little knock-on to junk bonds). Illiquidity isn’t a problem in itself, but it’s a risk that is so often underplayed by investment providers and, hence, underappreciated by investors.
Many worry about a 2008-style contagion – that Blue Owl might be the next Bear Stearns. The rise in corporate credit spreads last week certainly raised the temperature, but we still don’t think it’s 2008. That’s because PC can’t create money in the way banks can; they can only redirect money that’s already in the system. So even if PC loans default, it doesn’t destroy money. Banks lend to PC of course, but banks are already exercising financial prudence by tightening this lending, as JPM showed.
That doesn’t mean everything’s fine. PC might not be the source of trouble, but they are certainly an early sign of, for example, AI disruption to software firms. The FT’s Robert Armstrong noted last week that it’s not just illiquidity, PC has a problem of low quality loans. Then there’s the fact that PC has itself become a vital source of capital for many companies. Those companies could have weathered this credit hiccup if interest rates kept falling – but the oil shock has now thrown that in serious doubt. It will be crucial to watch credit spreads in public markets from here.
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Marcus Blenkinsop
16th March 2026