Investment Perspectives: Middle East Conflict Updated

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Market update: oil above $100

In our Investment Perspectives: Middle East Conflict, our investment teams at TD Asset Management (TDAM) referred to energy prices as the primary source of potential risk to global markets. West Texas Intermediate (WTI) oil prices have risen approximately 50% since the conflict broke out, with WTI oil trading around $100 at time of writing on March 9. The Strait of Hormuz remains effectively closed and shipping disruptions persist. Storage capacity constraints are emerging in several Gulf states, increasing the risk that energy production may be forced offline if bottlenecks persist.

Global equities and government bonds have sold off modestly in tandem, reflecting concerns that higher energy prices could reinforce inflation pressures and lead to tighter financial conditions. Compounding inflation concerns is a weaker than expected labour market report on March 6 and increasing reports of liquidity challenges in private credit markets.

While volatility has increased, movements in the S&P 500 Index and 10-Year U.S. Treasury Bonds remain orderly rather than disorderly, consistent with a repricing of risk rather than signs of systemic stress. Outcomes remain highly variable and subject to rapid change.

We continue to reinforce the need to look through volatility, maintain diversification, and avoid drastic portfolio moves.

Energy markets remain the key variable for the global economy

With the Strait of Hormuz effectively closed, the risk profile has shifted from a short lived disruption toward the possibility of extended supply constraints. The global economy today is less oil intensive than in prior decades, and we believe it can manage oil prices modestly above $100.

That said, risks escalate materially if prices move toward all time highs or remain elevated for a sustained period, particularly for energy importing regions. Higher energy costs also feed directly into headline inflation and indirectly into inflation expectations, complicating the policy outlook at a time when central banks were beginning to contemplate easing.

U.S. Labour market

While the recent U.S. employment report contributed to market volatility, we believe the picture is moderate compared to the headline weakness.

Weather likely weighed on several weather sensitive sectors, temporarily depressing payroll growth. In addition, statistical adjustments played a meaningful role, suggesting the reported figure may overstate underlying weakness.

Taken together, the data are more consistent with modestly negative or broadly flat employment growth rather than a sharp deterioration in labour demand. This distinction matters, as it points to a gradual cooling in the labour market rather than an abrupt downturn.

Private credit: stress focused on liquidity, not impairment

Alongside energy and labour markets, private credit has emerged as another area of focus. The daily drumbeat around private credit stress continues, but it is important to be clear about where pressures are currently concentrated.

In our view, stress remains firmly focused on liquidity rather than widespread credit impairment. Higher rates and reduced market liquidity are creating refinancing and funding challenges at the margin, but this is not yet translating into broad-based deterioration in underlying asset quality. We continue to monitor developments closely, particularly as tighter financial conditions persist.

Key Takeaways

As asset managers, our focus remains on balancing near term risk management with long term discipline. We remain overweight commodities within TDAM's multi-asset portfolios.

In this environment, we believe our diversified, high quality portfolios are best positioned to absorb volatility and, importantly, to take advantage of dislocations should risks continue to rise. History shows that periods of geopolitical stress often create opportunities.

For additional information on diversification please access the following resources:

• The Benefits of Diversification
• Additional detail on our strategic views is available in the most recent
  TD Wealth Asset Allocation Committee update
• Deeper insights from TDAM's Portfolio Managers on our TDAM Videos site

For any additional support, please reach out to your TDAM Representative.