03.31.2026
WAR GAMES
In this note, we lay out four macro and market scenarios, alternative to our baseline, for the US and the EA economies under different assumptions regarding length and severity of the energy market stress stemming from the conflict in the Middle East.
The backbone of our framework is quantitative. We use a top-down, quarterly, semistructural general equilibrium framework, while stretching the quantitative analysis by introducing a qualitative, judgement-based, estimate of the pass-through that the energy shock may have on core prices. In this respect, we introduce the concept of cyclically adjusted core inflation pass-through to control for the state of the macro cycle when assessing how core inflation might be influenced by rising oil and gas prices.
Against this backdrop, for every scenario we forecast the most likely monetary policy reaction that we think would be consistent with the current state of central banks’ reaction functions.
We think government bonds offer value at current yield levels, especially in Scenarios I and II, where we assume that energy prices have already reached their peaks. Scenarios III and IV, where we assume that energy prices have not reached their peaks, are less favourable for government bonds in the short term, as nominal yields could still increase sizably from current levels, but only until markets start pricing in risks to growth and reprice expectations for central banks.
Our baseline remains constructive on equities. That said, the range of outcomes remains unusually wide, and the four scenarios highlight that the market path is unlikely to be linear. Depending on the evolution of the geopolitical shock, energy prices and financial conditions, equities could still deliver anything from a solid upside case to a much weaker outcome driven by multiple compression and earnings downgrades. In this context, the scenarios should be seen less as precise forecasts and more as a framework to assess how sensitive returns are to different macro regimes.
Our positioning on the DXY and EUR-USD would not substantially change in Scenario I and Scenario II (we would remain neutral tactically and short DXY and long EUR-USD strategically), as the easing of geopolitical tensions would leave the dollar exposed to its pre-war drivers. In Scenario III and Scenario IV, we would turn more constructive on DXY and more negative on EUR-USD given persisting geopolitical tensions and higher energy prices that would hit the EA economy more strongly than the US economy.
Fabio Fois
Head of Investment Research & Advisory
Chiara Cremonesi
Senior Rates Strategist
Investment Research
Cosimo Recchia
Senior Equity Strategist
Investment Research
Matteo Gallone
Junior Macroeconomist
Investment Research
Francesco Ponzano
Junior Equity Strategist
Investment Research
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