Most important take away

The pain trade and momentum trade favor equities rallying higher and oil falling further, but the tail risk is extremely fat. Positioning is light because no one wants to be caught offside if the conflict suddenly ends or dramatically escalates, and private credit stress is a quiet but growing concern that could tighten financial conditions and spill into public credit and equity markets.

Chapter Summaries

Headlines Are Driving Everything

Joe and Tracy open by noting it is a true headline-driven market. As they record on March 25th, conflicting signals from Iranian and US sources are whipping markets around. Despite Iran’s Fars news agency rejecting ceasefire talks, futures remain up, and Brent crude is still around or just under $100 — not the mega-surge many predicted.

Ozan Tarman on Positioning and the Pain Trade

Ozan Tarman, Deutsche Bank’s vice chair of global macro, explains that the momentum and pain trade favor equities higher and oil lower. Many traders, particularly in rates, are wounded from prior positions and reluctant to take fresh bets. The consensus expectation is that the conflict resolves within three to six months, which is also reflected in the forward oil curve.

The Fat Tail Risk

Despite the base case of resolution, tail risks are severe. Ozan warns that if Marines approaching the Strait of Hormuz encounter resistance, even one oil or gas ship being hit could cause things to spiral. The ECB and Bank of England are already pricing in the possibility of hikes rather than cuts, signaling central banks are not dismissing the risk.

Private Credit Stress

Before the Iran conflict dominated headlines, private credit was the main topic of concern. Multiple funds (Ares, Apollo) are curbing redemptions. While industry insiders insist it is orderly and not systemic, Ozan warns the situation could be worse than people admit — somewhere between 2001 and 2008. If investors cannot withdraw from private credit, they will sell liquid assets (public credit and equities), creating contagion risk.

Inflation Was Already Reaccelerating

Evidence suggests inflation was reaccelerating even before the war began. The 10-year yield was at 3.93% before the conflict started, and a clean NFP print might have pushed yields lower. Now war-driven factors (oil prices, $200B defense spending) layer on top of an already sticky inflation picture, raising stagflation concerns.

Energy Rationing and Global Growth Impacts

Physical energy rationing is emerging as a real risk for Asia and Europe. Airlines are adding fuel surcharges, some Asian countries may have to choose between fueling industry and households, and European governments may encourage work-from-home to conserve energy. This combination of supply constraints plus rising inflation expectations points toward stagflation.

The Financial vs. Physical Oil Disconnect

Tracy highlights a growing divergence between financial oil futures prices and actual physical barrel prices (notably Oman crude trading significantly higher). Traders in financial markets may be betting on short-term resolution, but the physical market tells a different story. These prices must eventually converge.

Summary

Actionable Insights and Investment Considerations

Oil and Energy:

• Brent crude remains just under $100 despite the Strait of Hormuz threat — the financial price is lower than physical barrel prices (Oman crude significantly higher). This disconnect cannot persist indefinitely; if it resolves upward, oil-linked assets could surge.
• The forward oil curve prices resolution in 3-6 months. If that timeline slips, expect a repricing.
• Airlines globally are adding fuel surcharges (Indian airlines, Australian services). Energy-exposed transport stocks face margin pressure.

Equities:

• The pain trade is for equities to rally further. Positioning is light and many traders are sidelined, meaning a ceasefire headline could trigger an almighty squeeze higher.
• However, if private credit stress spreads, forced selling of liquid public equities could create downside pressure. Watch for headlines about more funds gating redemptions.
• European and UK equities have underperformed relative to the US despite the conflict being primarily a US/Israel situation — Ozan notes his European positions would have done better absent Iran.

Rates and Fixed Income:

• Rate cut expectations for later in 2026 are being priced out but not entirely. The front end of the curve has wounded traders.
• ECB and Bank of England are signaling vigilance on inflation, not backing away from potential hikes. Do not assume rate cuts are coming.
• Inflation was reaccelerating before the war (pre-February data). War-related spending ($200B US defense) and energy costs add to this. Stagflation risk is real.

Private Credit — Key Watch Area:

• Ares, Apollo, and others curbing withdrawals. Industry says it is orderly, but if redemption pressure continues, contagion into public credit markets is the mechanism to watch.
• If private credit funds cannot meet redemptions, investors sell liquid assets — public credit spreads widen, then equities follow.
• Ozan compares the dismissive “not systemic” reaction to the early stages of the 2023 bank crisis. He is more worried than consensus.
• Watch what happens if large US banks start lending less to private credit funds, or if insurance company exposures become problematic.

Stocks and Sectors Mentioned:

• Philippines Airlines flagged as an example of airlines being hit by energy rationing.
• Millennium (hedge fund) reportedly considering moving some traders from Dubai to Jersey, signaling Gulf-based financial firms may face operational disruption.
• Deutsche Bank (Ozan’s employer) — context only, not a direct recommendation.

Key Positioning Takeaway: Keep positions light. The market could squeeze violently in either direction on a single headline. The asymmetry favors being cautious with large directional bets while maintaining optionality for both a sudden resolution (bullish equities, bearish oil) and escalation (bearish everything, long oil and defense).