Markets show inconsistent reactions across asset classes to Iran conflict, challenging long-term inflation expectations, the bank notes.
Deutsche Bank research identifies significant inconsistencies in how markets are pricing the Iran conflict across equities, rates, and credit. While US Treasury yields have tracked oil prices closely, equities initially correlated but later diverged, reflecting expectations of a temporary shock rather than a prolonged conflict.
Central bank pricing appears misaligned, with markets anticipating the Federal Reserve to hold rates steady for 12 months while pricing in up to three ECB rate hikes by March. This discrepancy persists despite stronger US growth and higher core inflation. Credit spreads in both high-yield and investment-grade markets have tightened since the conflict began, defying energy shocks and weaker growth expectations.
The bank warns that markets retain unwarranted faith in long-term inflation remaining near target, despite persistent energy shocks and historical upward price pressures.