Oil’s big jump; markets’ small reaction: a risk of mispricing? 

While there has been considerable intraday volatility in March, the price move through March 9th resulted in a 43.2% percent jump in the price of oil since the crisis began, that would put this event fifth in the monthly percentage changes (see Exhibit 2). The events that saw larger price moves in percentage terms include the 1974 oil embargo shock, the 1986 oil collapse, the 1990 Gulf war, and the Covid global demand collapse. What is notable is that this relatively large macro shock has still had a fairly limited impact on global markets. 

Source: FTSE Russell/LSEG, Data as of 9 March 2026. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

Along many dimensions, the market reaction has been fairly muted. Exhibit 3 shows that the US dollar has generally appreciated against other currencies, once again reclaiming its role as the safe-haven currency. One reason is that the US has been a net energy exporter since the shale oil revolution more than 10 years ago. This USD strength was true across regions and even vs non-Gulf oil-exporting countries. However, these currency moves have not been excessive.

Looking at measures of risk, however, we start to see differentiation across markets based on exposure to the oil shock. Exhibit 4 shows that Investment Grade Option Adjusted Spreads (OAS) moved very little since the beginning of the month, but the High Yield OAS increased dramatically more in Europe than in the US, likely due to Europe’s higher exposure to the oil shipping bottleneck. 

Similarly, the equity daily volatility shown in Exhibit 5 shows a jump in volatility for all regions, but it is higher in Asia Pacific (APAC) which has higher exposure to the disruption of shipping through the Strait of Hormuz. The volatility for the US Russell 1000 quickly dropped back below pre-crisis levels. All these moves are much smaller than the volatility spikes around the tariff announcements last year.

This pattern of weak market reaction is illustrated in Exhibit 6 which shows the FTSE USA equity index with the smallest drawdown at -1.38%, and Japan, APAC, and Europe with larger drops. As an energy exporter, the US is insulated from the oil price shock which has a much larger impact on Europe, Japan, and APAC, but even those regions have sold off less than 8% as of March 11. 

Exhibit 7 shows that industries were generally down across the board with the exceptions of Energy and Technology. Overall, the Energy industry is helped by the higher oil prices, and Technology’s Software sector has bounced back from its recent weakness in March. Looking across the industries, there has not been much of a cyclical pattern, with the defensive Consumer Staples industry down almost twice as much as cyclical Consumer Discretionary. It seems that investors are treating this as a temporary blip and not a major global economic shock that would drive down industries closely tied to the global economy such as Discretionary and Industrials.

One explanation for the relatively muted response to the crisis is that, so far, markets seem to expect a relatively short crisis and a quick return to normal. This can be seen in Exhibit 8 which shows that the oil futures curve is in backwardation, indicating a very large short-term jump in the expected near-term price of oil but a relatively quick drop back to more normal prices. (For more analysis see our recent Asset Allocation report).  

As a result of this relatively benign view of oil price moves, the impact on inflation is also expected to be short-lived. Exhibit 9 shows the US break-even inflation rates for various maturity buckets, ranging from the 1-3 year expectation (dark blue line) to the longer term 7–10-year view in the dark gray. While there was a jump in inflation expectations across all maturities, the largest effect was on the shorter term 1–3-year bucket, and even that is only modestly higher than where it stood at the end of January.

The expected impact of inflationary expectations on monetary policy should be visible in bond yields where there has been a move up in yields, as shown in Exhibit 10. All but Japan’s 1-3 year segment have seen a rise, but the rise in the US has been smaller than in the more exposed UK and Germany (DE). 

As of the writing of this insight, the large shock to oil prices has resulted in a relatively muted market reaction. That the transmission mechanism is primarily through oil prices is supported by stronger market reactions in regions with greater exposure to oil shipped through the Strait of Hormuz. For example, Europe, Japan, and Asia Pacific have seen a larger jump in government yields, a larger increase in high yield spreads, higher equity volatility, and a larger sell-off in equities. Nevertheless, the equity market sell-off does not seem very large relative to the historic move in oil prices, and the reason may be the market’s pricing in a short duration for the crisis. Looking at the oil price futures curve, inflation break-evens, and moves in government bond yields, the expectation seems to be for a relatively short crisis and a quick return to normal. 

This raises the risk that a longer crisis could keep shipping through the Strait constrained for much longer, which would not only keep the price of oil elevated but would eventually cause supply chain problems due to shortages of oil byproducts. This would impact sectors such as the agricultural sector (fertilizer) and the trucking sector (diesel) that in turn have broad impacts on consumer prices. With increased production costs moving through the economy, a prolonged crisis presents the risk of a much broader inflationary impulse with associated risks to global growth. This could result in much broader dispersion between cyclical and defensive industries globally, and the impact on different economies and their financial markets would be determined by their access to oil products. If the crisis continues, we expect to see more asset repricing that would reflect these effects, and the timing of the repricing could lead to continued volatility.