Deutsche Bank strategist Henry Allen told clients in a note Wednesday that recent market behaviour resembles the stagflation playbook investors have seen before as the conflict in the Middle East persists. Yet, he emphasised that the intensity of the current sell-off falls well short of the shocks observed in 2022 and the 1970s.
Allen described global bonds and equities as having undergone a "synchronised decline," a pattern that often accompanies oil-driven downturns. Still, he stressed that "we haven’t yet seen the scale of the moves that occurred in either 2022 or the 1970s," and he attributed that in part to a less severe economic fallout so far.
According to Deutsche Bank, three distinctions help explain the difference in market reaction:
- Markets "still aren’t pricing in a sustained oil shock," with six-month Brent futures "only at $84/bbl," a notable gap compared with periods spent near $100 in 2022.
- There "hasn’t yet been any monetary policy tightening by major central banks," which contrasts with the rapid rate hikes that characterised 2022.
- Early activity data remain resilient: flash composite PMIs for March are "still in expansionary territory in the Euro Area, the UK, and the US," unlike the downturns that followed the 1970s oil crisis and the Gulf War.
That combination of lower near-term oil pricing, the absence of central-bank tightening, and continued expansionary PMI readings helps explain why US and European markets have not developed into bear markets similar to prior episodes, the note suggests.
Allen cautioned, however, that history provides guidance on potential paths if the shock endures. In past oil-related episodes, "equities generally had a tough time across sectors," with energy the lone consistent outperformer. Sovereign bonds also fell sharply, though Allen noted that nations able to control inflation - citing Germany and Switzerland in the 1970s - performed better in real terms.
The note frames the current environment as one in which markets are following a familiar script but have not yet entered the deeper, cross-asset turmoil seen in earlier decades. The observations centre on three measurable differences that have, for now, limited the breadth and depth of the sell-off.