A ceasefire agreement might be reached swiftly, but markets may only fully price in a "return to pre-war conditions" once energy trade flows smoothly again. According to sources, Nomura's Japan team stated in a recent report dated March 27th that a market narrative surrounding US-Iran "ceasefire negotiations" is forming. However, investors should focus more intently on another variable: whether, and when, energy trade can achieve "normalization." The time lag between a ceasefire and normalization is expected to make the 2026 investment landscape more challenging than the pre-war environment. "'Ceasefire' and 'normalization of energy trade' are not synonymous." A ceasefire would indeed alleviate extreme economic pessimism in markets and effectively prevent a credit crunch in financial systems. However, until the pathway for restoring energy trade becomes clear, oil prices, corporate confidence, and the outlook for monetary policy will struggle to return to their pre-war states. The report's conclusion is explicit: "Investors in 2026 may have to operate under more stagflationary conditions than previously assumed." This implies that even as the global economy is in a recovery phase, levels of inflation and interest rates are likely to be somewhat higher than earlier forecasts, while economic growth rates and equity valuations could face relative pressure.

Market Pricing for "More Stagflation": Central Bank Rate Hike Expectations Intensify Markets have already begun incorporating a "more stagflationary" world into their pricing. Due to persistent inflation, expectations for interest rate hikes among major global economies are rising. Currently, markets are pricing in three rate hikes from the Bank of England this year, two from the European Central Bank, and a half-point hike from the US Federal Reserve. However, the authors question this aggressive stance. They suggest that if oil prices merely stabilize at high levels, the necessity of such forceful tightening to curb inflation remains "debatable." In this "stagflation-leaning" environment, central banks are highly susceptible to policy errors. Hiking too aggressively could stifle the recovery, while insufficient tightening might allow inflation to become more entrenched and term premiums to rise further.

Shorting the US Dollar Pre-Normalization: A Questionable Strategy Through discussions with numerous overseas investors, Nomura observed that the market has formed two core consensus views regarding a "ceasefire trade": buying a steepening of the US Treasury yield curve and shorting the US dollar. The first consensus centers on a steepening US yield curve. The logic is straightforward: a ceasefire would rekindle expectations for near-term Fed rate cuts, pushing short-term rates lower. Simultaneously, residual effects from high oil prices, coupled with increased government fiscal spending for conflict response and economic stimulus, would significantly lift inflation expectations and term premiums, thereby driving long-term rates higher. Lower short-end and higher long-end rates naturally lead to a steeper curve. The second consensus is dollar weakness. During the conflict, the dollar was sought as a safe-haven asset. Once a ceasefire is established and oil prices stabilize, this safe-haven premium for US assets would diminish, potentially reversing previous capital flows. Additionally, the impending leadership change at the Federal Reserve adds unpredictability to US policy, potentially accelerating the trend of capital moving away from the dollar. However, from Nomura's perspective, the primary immediate effect of a ceasefire is to reduce the probability of "worst-case scenarios," such as a sudden sharp tightening of credit conditions, allowing for a recovery in risk appetite. But the true determinants of the levels for interest rates and inflation are whether the energy trade chain can transition from being "restricted, rerouted, and price-distorted" back to being "predictable, deliverable, and financeable." This underpins a key judgment in the report: until energy trade normalizes, the relative attractiveness of US assets and the US dollar is likely to persist. The reason is simple: higher uncertainty tends to favor markets with greater liquidity and depth. Furthermore, if energy supply chains remain impaired, global inflation and term premiums will find it harder to decline.

Major Reshuffle in US Equity Sectors: Capital Returns to Banks, Consumer, and Capital Goods A shift in the macro environment will inevitably trigger a significant sector rotation. Sectors that were abandoned during the conflict are poised to become leaders in the post-ceasefire recovery phase. Since the conflict began, technology and energy stocks have outperformed, while consumer staples, capital goods, real estate, and non-US bank stocks have significantly lagged the market. The core reason for this divergence lies in the varying degrees of negative impact from high energy costs, financing constraints, and elevated policy rates across different industries. But trends reverse. "Assuming a credit contraction is avoided, bank stocks are likely to outperform in the post-ceasefire phase," emphasized author Matsuzawa. As energy trade moves towards normalization, expectations for global economic recovery will quickly build. At that point, stocks highly sensitive to the economic cycle, such as capital goods and consumer-related companies, are expected to regain strong upward momentum. The extent of any rebound in the real estate market will depend on whether bond yields can stabilize.

The Japanese Market's Dilemma: Central Bank Cornered, Equity and Currency Forecasts Downgraded For the Japanese market, a ceasefire alone is insufficient; the normalization of energy trade is the critical factor determining its fate. Japan is highly dependent on energy imports. Until energy trade is restored, the imported inflation from high oil prices clashes sharply with weak domestic demand. This places the Bank of Japan (BOJ) in a difficult position. Matsuzawa pointed out, "The BOJ will find it very difficult to raise its policy rate to a neutral level, and concerns about it 'falling behind the yield curve' will persist." With the central bank forced to maintain relative restraint, inflation expectations are likely to push long-term yields higher. Consequently, the Japanese government bond yield curve is expected to steepen (at least in the 10-year sector) for a period after a ceasefire, while the yen is forecast to continue weakening, particularly on cross-currency rates. Based on this pessimistic outlook for a prolonged stagflationary tail, Matsuzawa comprehensively downgraded core forecasts for Japanese equities and the yen. The report lowers target levels for the Nikkei 225 and TOPIX indices for each quarter from 2026 to 2027 and simultaneously reduces the USD/JPY exchange rate forecast, anticipating significant near-term pressure on the yen.