TRADING DAY-Selling snowballs, turmoil spreads

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

The equity rout sparked by the deepening Middle East crisis spread on Tuesday as Wall Street finally buckled, with soaring energy prices and widening cracks in most other asset markets forcing investors and policymakers to rethink their outlook. 

More on that below. In my column today I look at how the current turmoil has exposed the frailties of the traditional '60-40' investment portfolio. With stocks and bonds both selling off, where is the protection from diversifying? 

I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* What goes up, must come down

Few corners of world markets are escaping the selloff now gathering force. Pockets that might have been insulated by solid underlying fundamentals or seen as reasonable diversification options are being hammered just as hard as anything else.

South Korean equities, gold and silver were among the biggest losers on Tuesday. It's no coincidence that they were among the biggest gainers recently - gold and silver at the end of last year, and the KOSPI up 50% in the first two months of this year. In the scramble for liquidity, assets that rose most on waves of frenzied speculation have most room to fall. 

* Kevin help us now

Two quarter-point rate cuts from the Fed this year are no longer fully priced into the 2026 rate futures strip. Right now, investors are viewing the negative energy supply shock and surging prices as an inflation threat rather than a growth risk, and are pricing the Fed accordingly.

With inflation already above the Fed's target, it could not be a more challenging environment for Kevin Warsh, President Trump's Fed chair nominee, who is expected to succeed Jerome Powell in May. Might the Fed's first move under Warsh's leadership be a rate hike? 

* Private credit still a problem

While events in the Middle East have a chokehold on global asset prices, the problems brewing under the hood of private credit market haven't gone away. If anything, the surge in redemptions from Blackstone's flagship private credit fund show they are intensifying.

Shares in Blackstone tumbled 5% on Tuesday, and shares in rivals KKR and Apollo also fell. They've all lost around 30% this year, and are down 45-50% from their all-time highs. The geopolitical turmoil has accelerated the scramble for cash and liquidity, snowballing the selling. 

For investors, the conflagration in the Middle East and flaring geopolitical tensions worldwide raise an uncomfortable question: how can you hedge these risks if the traditional equity-bond portfolio no longer works?

Historically, the first port of call for investors scrambling to hedge against geopolitical, economic, or financial market risk has – along with gold – been Treasuries, long viewed as the safest and most liquid financial asset on the planet. 

Bonds were traditionally expected to appreciate during risk-off periods, muting the volatility in equities. This led to the widespread adoption of the traditional portfolio allocation: 60% to stocks, and 40% to bonds.

But since the COVID-19 pandemic, America's mounting fiscal deficit and public debt, along with elevated inflation, have gradually but steadily eroded Treasuries' status as the natural hedge against equity risk.

As a result, the 60/40 portfolio's in-built safety mechanisms have eroded. 

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