Global markets delivered volatile, but ultimately positive, performance through February. The backdrop has become more unsettled heading into March. Returns were defined by pronounced regional divergence, ongoing sector rotation and a marked escalation in geopolitical risk. Equity investors were best rewarded outside the United States, while bond markets benefited from renewed safe-haven demand as uncertainty intensified.
The most significant catalyst for rising volatility has been a dramatic escalation in tensions involving Iran. Coordinated US–Israeli strikes reportedly resulted in the death of Supreme Leader Ayatollah Ali Khamenei, triggering profound political uncertainty within Iran and raising the risk of broader regional instability. The event has intensified diplomatic activity globally, with calls for restraint and a credible political transition, but also prompted threats of retaliation and heightened security concerns across the Middle East.
Source Reuters
From an economic perspective, the implications are substantial. Iran produces over 3 million barrels of oil per day – around 3% of global supply – and sits alongside the Strait of Hormuz, a critical energy chokepoint through which roughly 20% of global oil and liquefied natural gas flows each day. While the strait remains formally open, tanker traffic has been severely disrupted amid security threats and reported attacks on vessels. Even without a formal closure, this effective constraint on transit – compounded by military strikes on key energy infrastructure sites across the region – has driven a sharp spike in oil and LNG prices, embedding a renewed geopolitical risk premium into energy markets.
Higher energy prices have broader macroeconomic implications, particularly for inflation expectations and therefore for interest rates. Sustained disruption could push oil prices over $100 a barrel, potentially driving up inflation in major economies.
As the conflict in the Middle East deteriorates further, we may have forgotten about the US trade policy developments earlier in February. The US Supreme Court’s decision to strike down the Trump administration’s use of emergency powers to impose tariffs, introduced fresh ambiguity over the future direction of trade policy. While markets initially responded positively, elevated policy uncertainty remains a potential headwind for corporate investment and business confidence.
The chart below shows the improvement in most equity markets in February with US markets struggling again, particularly the tech-laden NASDAQ Index.
Source: Bloomberg
Japanese equities were standout performers (above in blue) rising 10.3%, (in euro), and the Nikkei 225 reaching a new record high. Investor confidence in Prime Minister Sanae Takaichi’s growth-oriented agenda, alongside strong demand for Japanese corporates, continued to support the rally.
Elsewhere in Asia (above in yellow), markets benefited from sustained demand for AI infrastructure suppliers and a weaker US dollar. South Korean technology firms, including Samsung and SK Hynix, attracted significant investor flows as part of the global AI supply chain theme. Emerging markets (in red) also extended their recent momentum, supported by capital inflows and continued dollar softness.
Across Europe, equities closed the month up 2.4%, benefiting from a surge in share buyback announcements, particularly across technology, financials and industrials, which provided support despite broader uncertainty around trade.
In contrast, US equities lagged. In euro terms, the S&P 500 (above in green) fell 1.5%, while the Nasdaq (in pink) declined 4.1% as investors rotated away from stocks perceived as vulnerable to AI disruption. Even large hyperscalers such as Microsoft, Alphabet and Nvidia came under pressure as markets became concerned about tech companies borrowing to fund enormous capital expenditure projects.
We have referenced rotation regularly over the last few months – it applies not just in rotation from the US but also away from the previously unstoppable tech sector toward defensive and cyclical areas. Utilities were the strongest performers, benefiting from predictable cash flows amid uncertainty. Energy gained on rising geopolitical risk, while Materials and Real Estate also advanced. Consumer Staples and Industrials outperformed on health corporate earnings.
Precious metals delivered decent returns with gold remaining above $5,000 per ounce and attracting sustained safe-haven inflows. Heightened geopolitical risk, strong retail demand and renewed Chinese buying following Lunar New Year supported the move.
Source: Bloomberg
Bond markets delivered strong returns through February as geopolitical tensions intensified and investor risk appetite moderated. In contrast to recent months, government bonds outperformed corporate bonds, benefiting from pronounced flight-to-quality flows.
UK gilts were among the strongest performers on the back of expectations that the Bank of England are more likely to cut interest rates sooner than previously anticipated. Japanese government bonds also recovered a portion of their earlier losses after the Prime Minister clarified her tax and spending proposals. German Bunds and US treasuries posted solid gains as investors sought traditional safe-haven assets amid escalating Middle East tensions.
Corporate bonds remained positive supported by still-resilient corporate fundamentals and solid balance sheets.
In currency markets, the euro gaining 1.6% against sterling and 0.2% against the US dollar, while commodity-linked currencies edged higher.
Looking ahead, the duration and scope of Middle East tensions will be critical in determining market direction. Prolonged disruption to energy flows through the Strait of Hormuz could sustain elevated oil prices and inflationary pressures, reinforcing volatility across asset classes. With geopolitical risk layered on top of ongoing structural questions around AI investment intensity and global trade policy, markets are likely to remain sensitive to further developments.
In this environment, diversification across regions, sectors and asset classes remains paramount, with balanced portfolio positioning offering important resilience as markets navigate an increasingly complex global landscape.
Source: Bloomberg
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This publication was prepared by Bernard Walsh, Head of Investments & Pensions for Fairstone Asset Management DAC trading as Fairstone & askpaul.
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Information as of the date of publication 05/03/2026
