Weekly Markets Review

This week in summary

• US equities rose as earnings continued to impress, with technology leading on AI-driven demand and improving sentiment helped by signs of easing US‑Iran tensions
• The US labour backdrop stayed resilient, with payroll growth beating expectations and continuing claims falling, although labour force participation weakened
• Hard data was firmer than expected, with construction spending and factory orders both surprising on the upside, helped in part by continued electronics and infrastructure demand
• Outside the US, market returns were broadly constructive, with Japan particularly strong, while Europe was more mixed despite modest gains in some major indices
• Consumer sentiment weakened sharply, with survey data pointing to a record-low reading even as realised activity remained firmer than feared
• In Europe, firmer eurozone producer prices and hawkish European Central Bank commentary reinforced the risk that rate relief may be delayed if inflation does not ease sufficiently.

Market review

Earnings strength offsets softer sentiment

Markets moved higher over the week, underpinned by a strong earnings season. In the US, equities were up by over 2%, led again by technology on the back of AI-related demand. The wider message is that investors continue to favour companies with visible growth and resilient fundamentals.

Elsewhere, returns were more mixed but still broadly constructive: German equities rose 0.2%, Italian equities were up over 2%, China and Japan both gained c.3% and Emerging Market equities surged over 6%. The UK market was an outlier, with a modest decline on the week. Risk appetite was also helped by some easing in immediate concerns around Middle East tensions, although developments in Iran and the associated impact on energy prices remain an important macro risk to watch.

The macro backdrop remains supportive, if somewhat less clean than the headline market move suggests. US payroll growth in April beat expectations and continuing claims fell, indicating that the labour market is still holding up. Construction spending and factory orders also came in ahead of expectations, reinforcing the idea that activity has not softened as sharply as many had feared. However, weaker labour force participation, softer productivity and a record low reading in consumer sentiment suggest resilience is becoming narrower beneath the surface.

From a market perspective, leadership has remained relatively concentrated. The technology sector has continued to set the pace, supported by AI-related spending and demand expectations, while more cyclical and rate-sensitive areas have been less consistent. That pattern fits a market still willing to pay for structural growth and earnings visibility, but less willing to give the benefit of the doubt where the macro outlook is more exposed. For now, stronger hard data are carrying more weight than weaker survey evidence, although the divergence between the two is worth monitoring.

Thematics – not all exposure is equal

A consistent theme in recent earnings seasons has been the strength of infrastructure-related investment supporting the build-out of AI capabilities. Infrastructure has historically been viewed as a relatively defensive sector, offering some protection when wider markets fall, yet elements of the space, notably utilities, were among the strongest performers within wider markets in 2025.

Similarly popular in 2025 were positions in precious metals, with gold, silver and others surging to new highs. Mining equities were also very strong, with some returns running to several hundreds of percentage points during the year. Elements of this strength were fundamentally driven, with precious metals serving as important industrial inputs, but geopolitical uncertainty, central bank purchases and falling interest rates also played an important role.

The behaviour of these two thematics has been notably different thus far in 2026, demonstrating the importance of active selection and monitoring within portfolios. Both gold and silver saw significant drawdowns following the emergence of the Iran-US conflict, with miners responding accordingly. This reaction stands in contrast with what might typically have been expected, as a significant escalation in geopolitical tension would often prompt a flight to safety, including into precious metals. In this instance, however, rising inflation concerns appear to have offset that relationship, with traditional safe haven assets offering less protection than investors might normally have anticipated.

The gold price and related equities are now broadly flat year-to-date despite the very strong start to the year. This sits in contrast to infrastructure-related equities, which have delivered double-digit returns year-to-date and provided, for the most part, reasonable downside protection during wider equity market sell-offs.

Infrastructure-related investments suffered heavily as interest rates rose in 2022, so one might have expected similar concerns given the inflationary expectations emerging from the conflict. However, underlying fundamentals within the space have thus far proven resilient, with the strong inflation linkage of cashflows providing investors with greater comfort around future performance. Policy-backed investment in electrification and grid expansion, together with rising expectations for AI-related power demand, has brought a sector once viewed as relatively defensive into sharper focus for a wider group of investors.

As hopes for a resolution to the conflict resurface, we are again reminded of the importance of diligence and rigour in investment decision-making and of looking beyond first-order effects. One might have expected two traditionally defensive or safe haven themes to have delivered similar performance in portfolios this year, but gold and infrastructure have diverged relative to wider global equities. While this is not unique to these particular themes, it does highlight the need to combine long-term conviction with tactical flexibility in an evolving market environment.

The week ahead

US macro data: Existing home sales (Monday); CPI (Tuesday) PPI (Wednesday) and Retail Sales (Thursday) will give a further read on underlying strength of the US economy. Consensus is for broadly flat home sales and month on month CPI/PPI reads, with an uptick in year-on-year CPI and weakness in core retail sales.

Oil: Crude oil inventories and OPEC monthly market report on Wednesday will give colour on the current state of the oil market.

Geopolitics: US President Trump is due to meet Xi Jinping on Wednesday – Friday this week, in the first visit to China by a US President in nearly a decade. Tariffs and the Iran war will be the likely focus of discussion, with potential for market-moving updates in both directions.

This week in summary

• Global equities rose 0.76% on the week and 10.15% in April, with the US leading thanks to exceptionally strong and broad‑based earnings
• The ‘Magnificent Seven’ delivered across-the-board earnings beats, though market reactions were mixed; the group finished the week up 0.45% amid excitement over Artificial Intelligence (AI)‑driven demand offset by scrutiny of rising expenses and investment
• AI‑related capital expenditure remains extremely strong, with multiple investment categories hitting record highs and high‑tech’s share of US non‑residential capex reaching a record 55%
• Ten major central banks met with few surprises; all held rates, though the US Federal Reserve (Fed) saw unusual dissent
• Markets expect US cuts while the European Central Bank (ECB) and Bank of England (BoE) face pressure to tighten despite weaker economies
• US labour‑market data remains robust, with weekly jobless claims hitting their lowest level since 1969 last week, raising the possibility of a stronger‑than‑expected April employment report due this Friday.

Market review

US equities lead on earnings strength

Global equities ended the week up a muted 0.76%, but April closed with a striking 10.15% gain - the strongest monthly return since November 2020. The US continues to lead the rally, supported by broad‑based and exceptionally strong earnings. With most companies now having reported, the market is on track for a sixth consecutive quarter of double‑digit earnings growth. Analyst expectations for earnings growth over the next year rose to 21.2% last week, helping to justify the rebound following the March sell‑off around the Iran conflict.

The focus last week was on the ‘Magnificent Seven’, with five of the seven mega‑cap tech names reporting. All five beat expectations on both revenue and earnings, though market reactions were mixed as investors weighed AI‑related demand against rising expenses/investment. The group showed wide dispersion and ended the week up 0.45%.

A key takeaway is that AI‑driven capital expenditure remains extremely strong, with no signs of slowing, and external capital‑spending indicators are red hot. Nondefense capital goods orders (excluding aircraft) hit fresh record highs in March, continuing the strong uptrend since 2024. Intellectual property (including software) and business‑equipment investment (including semiconductors and servers) also reached record highs in the first quarter and have been rising for five years. Software, information‑processing equipment, and  research and development have likewise reached fresh record highs this year. Growth in information‑processing equipment has steepened significantly amid the AI‑driven investment boom, pushing a high‑tech’s share of total non‑residential capital spending to a record 55%.

Few surprises from central banks

There were a total of 10 central bank meetings last week including the Fed, ECB, the BoE and the Bank of Japan (BoJ). All face renewed inflation challenges. The key question is, of course, how much inflation is coming down the pipeline and how central banks will respond.

The Fed has a dual mandate explicitly targeting full employment as well as inflation, this makes it easier for the Federal Open Markets Committee (FOMC) to prioritise the labour market over inflation and to delay interest rate hikes. It helps that the US is about half as vulnerable to oil shocks as Europe or Asia. Markets still anticipate interest rate cuts in the US this year, while the ECB and BoE are expected to raise rates. However, both the UK and eurozone have weaker economies, and the transmission from supply‑side inflation (energy) to demand‑side inflation (wages and goods) is less clear. Workers have less bargaining power than in 2022, and firms may struggle to pass on costs to already‑pressured consumers. This may make policymakers more cautious about tightening further, even as markets price in additional hikes.

The Fed, ECB, BoE and BoJ all held rates steady last week and there were few surprises with the BoE, ECB and BoJ all hinting at their willingness to potentially raise rates when necessary. The Fed, however, saw an unusually high number of dissenters: one voting for a rate cut rather than a hold, and three opposing the inclusion of language implying a continued easing bias. This was notably the final FOMC meeting chaired by Powell and marked the highest number of dissents during his tenure.

While Powell’s term as chair ends in May he has vowed to remain on the Board of Governors for an unspecified period (an uncommon choice, as outgoing chairs typically step down entirely). He cited political interference as his reason for remaining. Powell’s term on the Board runs until January 2028.

The week ahead

US employment report:

The US labour market has remained robust this year, with job growth at larger companies offsetting cooling labour demand among smaller businesses. The unemployment rate is expected to hold at 4.3% in April. Weekly labour‑market data for April has also been remarkably strong. Initial unemployment claims fell last week to their lowest level since 1969, indicating that layoff activity remains exceptionally subdued. Continuing claims are also declining. This strength in the high‑frequency data raises the possibility of a stronger‑than‑expected April employment report from the Bureau of Labor Statistics.

This week in summary

• Equity markets paused after a sharp April rebound, with US strength supported by corporate earnings, while Europe and other regions lagged amid ongoing Middle East uncertainty
• Oil has surged to $105 per barrel (bbl) but the market has adapted well to the historic supply shock through rerouted flows and emergency supply
• The energy shock is feeding into inflation, with UK Consumer Price Index (CPI) rising to 3.3%, though pressures remain largely energy-led for now
• Central banks are expected to look through the spike, with inflation expectations still anchored, keeping the bar high for further tightening even as rate cuts are pushed out
• A busy week ahead, with major central banks expected to hold rates, alongside US growth rebounding and early signs of a conflict-related slowdown in euro area data.

Market review

Schrödinger’s Strait: oil shock, contained

The market recovery in April has been more sprint than marathon. While the US clung to its highs last week thanks to some strong corporate results, Europe and other regions slipped back, once again reacting to developments in the Middle East. The ceasefire may have been extended, but it remains fragile. The Strait of Hormuz is simultaneously open and closed (‘Schrödinger’s Strait’), and negotiations are stale, at best.

With both sides unyielding and with President Trump keen to end the conflict, it may well be that further military escalation is needed to expedite the war. There are hawkish members of the administration who are inclined to ‘finish the job’ in forcing regime change and this remains a potentially overlooked near-term risk for markets. For the moment, a continuation of extended ceasefires and stalemated negotiations seems the most likely outcome and equities are attempting to look through it all and focus on the rosier fundamental picture.

Oil remains the market’s most direct pressure point. Brent rose 16.5% last week to $105/bbl, yet some analysts have noted that the move still looks contained relative to the scale of disruption. The Arab oil embargo in 1973 removed roughly 5% of global supply and drove a 400% price surge. Today’s shock is significantly larger, yet prices have moved from around $60 to $100, surging rather than spiralling.

As highlighted by economist Ed Yardeni, this reflects a market that is far more adaptive than in past crises.

First, supply has not disappeared, it was disrupted and now, where possible, is being rerouted. Saudi Arabia and the UAE have pushed alternative pipeline infrastructure to capacity, diverting flows away from the Strait and offsetting the loss of seaborne supply by c.7m barrels per day (c.35% of the supply previously through the Strait).

Second, emergency supply has filled part of the gap. Strategic reserve releases and policy flexibility to accommodate sanctioned barrels, have injected additional liquidity into the market.

Third, headline prices are masking regional stress and illiquidity. While Brent has consolidated near $100, physical markets, particularly in Asia, are far tighter, with buyers paying substantial premiums to secure immediate supply. The global benchmark and futures (where two parties agree today to buy or sell something at a set price on a future date) therefore understate the severity of local dislocations in the spot market.

Fourth, like the old saying ‘the cure for high oil prices is high oil prices’ demand is already adjusting lower. Higher prices are beginning to ration consumption, from reduced air travel to government-imposed efficiency measures across emerging markets. The International Energy Agency (IEA) now expects global oil demand to contract this year.

Finally, and perhaps most importantly, the global economy is simply less energy intensive than in previous decades. That lowers the price required to rebalance supply and demand, preventing the kind of extreme price spikes seen in the 1970s. The global economy is more protected against high energy prices and $150 could well be the new $100, the level previously assumed to cause a recession.

All these factors considered, a reasonable base case may be for oil to trade between $85 and $100/bbl for the short to medium term.

The energy shock is already feeding into headline inflation. In the UK, CPI rose to 3.3% in March, up from 3.0%, with the increase almost entirely attributable to higher energy prices. A similar pattern, to a lesser extent, is evident in the US.

For now, central banks are likely to look through the initial energy-driven spike. Core inflation remains relatively contained and, longer-term inflation expectations are still anchored. Futures prices in the UK still show inflation undershooting the Bank of England’s 2% target over the medium term. Rate cuts have been delayed, but the bar for renewed tightening remains high. As long as expectations stay anchored and second-round effects are contained, this is more likely to slow the pace of easing than reverse it entirely. As long as a resolution to the conflict remains elusive, bond yields in the UK and Europe are likely to remain elevated and the probability for more structurally embedded inflation is increased.

The week ahead

Central bank meetings:

There are a total of ten central bank meetings this week including the Bank of England, the US Federal Reserve, the European Central Bank (ECB) and the Bank of Japan. All are expected to hold rates steady while maintaining flexibility to hike rates if signs of second-order effects begin to appear. 

US GDP growth: 

Economic growth in the US is expected to have accelerated in the first quarter to 2% from 0.5% in the final quarter of last year. The temporary slowdown in Q4 was driven predominantly by the government shutdown. This year consumer spending has softened slightly on the back of elevated inflation fears while business investment has been robust. 

Euro-area GDP growth:

Growth in the first quarter is expected to come in at 0.2%, a slower pace that evidences the first bit of damage from the conflict in the Middle East. The figures are released the same day as the ECB’s rate decision and the inflation report for April. Inflation is expected at 3.0%, up from 2.6%. 

This week in summary

• Equities rebound sharply to record highs, with global markets up 3.9% in USD terms, supported by strong earnings, resilient data and easing geopolitical tensions
• The ceasefire between the US and Iran supports sentiment but risks linger, with lower oil prices offset by ongoing disruption in the Strait of Hormuz and fragile regional dynamics
• Gilt demand surges despite higher yields, with a record UK syndication highlighting strong appetite amid improved valuations
• UK inflation in focus this week, with March CPI expected to rise to 3.3%, driven largely by higher fuel prices and geopolitical effects.

Market review

Upbeat earnings drive equities back to highs

A strong start to earnings season helped push equities back to record highs. Global equities gained 3.9% in USD terms with the technology sector once again the best performing sector, notching a 7.7% return. The rally, led by US stocks, was supported by a combination of resilient economic data, robust earnings, and most prominently, easing geopolitical tensions.

Perhaps most striking is the speed of the recovery. Equity markets have returned to highs after hitting lows just over a fortnight ago, one of the fastest rebounds of its kind. Last week was the first time the US market gained more than 3% for a third consecutive week. Market leadership remains highly rotational as the losers have become winners.

The US-Iran ceasefire, alongside signs of broader regional de-escalation after confirmation from Iranian Foreign Minister Abbas Araghchi that the Strait of Hormuz was “fully open”, supported sentiment and drove a sharp decline in oil prices. As has often been the case in this conflict, developments over the weekend have complicated the picture. Tanker crossings in the Strait have barely shown any recovery. Iranian gunboats attacked a tanker while the US seized and boarded an Iranian vessel.

The equity market recovery has felt almost instantaneous. The move does leave markets vulnerable to a deterioration in the conflict. There is also an underlying assumption that any lasting ceasefire will return things back to the previous equilibrium but much like putting a genie back in a bottle restoring trade through the Strait of Hormuz could prove more difficult. That said, as long as fundamentals and economic data remain robust, investors may continue to prioritise the fundamental picture over the murky waters of the Hormuz. 

UK government bonds draw record demand

Price pressures in the gilt market (UK government bonds) have eased in April while demand has proved strong at current higher yield levels. The UK Debt Management Office issued a record £15bn in a ten-year gilt syndication which attracted demand of nearly ten times the amount issued.

Gilts in the two  to seven year sector continue to yield up to around 4.4% - around 0.5% higher than at the end of February - offering an attractive yield in the context of subdued economic conditions. While inflation may remain elevated in the short term, most medium term projections still point to moderation over coming years. The OECD, for example, expects UK CPI to average around 4% in 2026 before falling to approximately 2.6% in 2027. Although forecasts are particularly difficult in the current climate the case for rate hikes appears limited against a backdrop of soft growth and rising unemployment.

Although it has adjusted lower, market pricing for the Bank of England (BoE) base rate nevertheless continues to imply further tightening this year, a stance that remains difficult to reconcile with policymakers’ recent messaging. Immediately following the March Monetary Policy Committee meeting, BoE Governor Andrew Bailey cautioned against reaching any strong conclusions on rate hikes while Committee members through March and April continued to emphasise a challenging economic backdrop.

This suggests a relatively high bar for additional rate increases, particularly if incoming data continue to point to a weak economy. Policymakers would likely opt to look through the near term inflationary impulse.

The week ahead

Wednesday: UK inflation

Inflation is expected to have risen to 3.3% in March showing the first impact of the US-Iran war. Fuel prices will be the main contributor having risen an expected c.9%. Bloomberg economics’ baseline scenario puts inflation ending the year 1.3% above their pre-war scenario, much depends however on geopolitical developments from here.

This week in summary

• Markets rallied sharply on the two-week ceasefire in Iran, with global equities up 4.1% in USD terms and credit tightening back towards pre-conflict levels
• Performance was broad-based, led by US technology, while energy lagged as oil prices fell back below US$100 per barrel (Bbl)
• Inflation is rising, driven by energy, while growth expectations are being revised lower
• The current state of the ceasefire is opaque, with ongoing disruption in the Strait of Hormuz
• Focus this week shifts to earnings season, with bank results and forward guidance on margins key to determining whether recent market optimism can be sustained.

Market review

Markets surge on fragile ceasefire

Markets swung sharply higher again last week. Global equities gained 4.1% in USD terms, with most of the move concentrated midweek following the announcement of a two-week ceasefire between the US and Iran. A weaker US dollar diluted returns to 2.1% in sterling terms, but the direction of travel was clear as investors moved quickly back into risk.

The rally was broad-based, US equities-led, with technology outperforming. Credit markets followed suit, tightening forcefully back towards pre-conflict levels. Energy was the only sector to post negative returns as oil prices fell back below US$100/Bbl, registering their steepest daily decline since 2020.

Core government bonds rallied over the week, particularly in the UK and Europe, as expectations for rate hikes were pared back. Investors are constantly reassessing the finely balanced and fluctuating risks to inflation and growth. Investor concerns so far have been heavily tilted towards the ‘flation’ over the ‘stag’. The positive moves in bond markets last week were a welcome shift towards the ‘stag’.

Inflation is beginning to move higher, driven entirely by energy costs. In the US, CPI inflation rose to 3.3% year-on-year in March. At the same time, GDP growth has been revised down, highlighting the early signs of a stagflationary impulse. Globally, the picture is one of resilience for now, but with clear signs that the energy shock is beginning to feed through.

The situation in the Middle East is evolving faster than ever. Despite the ceasefire, hostilities never fully halted, with missiles reportedly fired from Iran immediately after the ceasefire announcement, possibly due to poor communication or lack of control within the Iranian army. The unclear terms of the ceasefire (for example whether it applies to Israeli strikes against Hezbollah in Lebanon) highlight the fragility of the agreement.

The trade situation in the Hormuz is still unclear too. Research firm Citrini even sent an analyst to the Strait to report back. After avoiding Iranian drones & patrol boats and after being detained by the Omani coast guard his conclusion was that the Strait is ‘neither open, nor closed’. President Trump has announced that the US will begin to blockade the Strait themselves after talks collapsed in Pakistan over the weekend.

The US has inflicted significant damage against Iranian military and while they are winning the kinetic war they are losing the economic war. The US has devastated Iranian military capability including 90% of its naval fleet. Despite this Iran retains just enough capacity to block the Hormuz and disrupt the flow of commerce. Both sides believe they have the upper hand in negotiations which may be a sign that further damage needs to be done before any ground can be made diplomatically.

The week ahead

Earnings season

It is a relatively quiet week on the economic calendar, leaving markets firmly focused on developments in the Middle East. However, earnings season now begins, with several major banks kicking things off.

Expectations are high, with banks set to deliver another strong set of results. The focus will be less on the headline numbers and more on guidance, particularly around margins. Can companies sustain margins in the face of rising input costs?

For now, the bar is high and the direction and scale of earnings surprises will be critical in determining whether the recent market optimism is justified.

This week in summary

• Markets rebounded despite volatility, with equities and bonds both gaining as optimism around a potential ceasefire in the Middle East improved sentiment
• Price action remains reactive, with markets at times driven more by headlines and Truth Social than underlying fundamentals
• Beneath the surface, fundamentals are holding up, with resilient economic data and expanding corporate margins
• Sector leadership reflected the conflict, with previously pressured areas rebounding most strongly
• Focus this week centres on Donald Trump’s deadline on Iran and US inflation data, with escalation and high energy costs testing the balance between resilient fundamentals and geopolitical risk.

Market review - what's happening now?

Markets rebound on strong fundamentals and hope for a ceasefire

In Dr. Seuss’ ‘If I Ran the Circus’, the 'Zoom-a-Zoop' troupe’s trapeze act is so chaotic that no one knows ‘who will catch which by the what and just where, or just when and just how in which part of the air’. It has been an apt parable for markets since the conflict in the Middle East began six weeks ago. The unpredictable rotations have been uncomfortable, but once we cut through the noise there is room for optimism. Markets have been reactive; passengers to Truth Social rather than fundamentals.

Beneath the surface, the picture remains stronger than daily price action suggests. Panic is rarely a profitable strategy. History rewards patience, and over time fundamentals such as earnings, growth and economic strength prevail over short-term geopolitical noise.

Last week equities and bonds both performed well, but measurements week-on-week have often felt unhelpful given the scale of daily moves. An interesting pattern has emerged where markets have been weak in the last days of each week as investors have been cautious of carrying risk into the weekend, which has often been where the key developments in the war have occurred. Easter broke this trend with global equities rising 3.6% in sterling terms. Regions and sectors most sensitive to the conflict were the biggest winners. The optimism stemmed from emanations out of Iran that some form of settlement was possible in the short-term.

Communication Services and Technology alongside the Materials and Real Estate sectors gained the most. Bonds also rallied with gilts (UK government bonds) leading the charge with the 10-year gilt yield falling 0.14% to 4.83%.

Markets open today on stronger footing with events over the weekend thankfully mostly muted following the terrific rescue of the downed F-15E servicemen. Optimism could fade quickly with Trump’s self-imposed deadline on Iran to re-open the Strait of Hormuz by 20.00 EST today. Trump threatens extensive strikes against Iran’s infrastructure, specifically bridges and energy production facilities.

For European policymakers, the focus remains on reopening the Strait of Hormuz through diplomacy rather than military escalation. That requires coordination with regional powers and other major energy importers, while attempting to reduce Iran’s incentives to keep the Strait closed without provoking further tension with the US. This is a difficult balance to strike. Nonetheless, the UK’s Foreign Secretary, Yvette Cooper hosted a call with counterparts from about 40 other nations aimed at doing exactly that. Europe is not insulated from this conflict. Its reliance on imported energy leaves it particularly exposed, and the adopted ‘this is not our war’ philosophy to-date sits in contrast with economic reality.

Economic data over the week was supportive, particularly the S&P Global Manufacturing survey, which reported expanding manufacturing activity globally despite the war. This was complemented by a particularly robust US labour market report with 178k new jobs created in March, the biggest increase since 2024. Although this was a strong report, previous numbers were revised lower and this data is set amidst a broader cooling trend for the labour market.

From a corporate perspective, profit margins continue to edge higher and will be a key focus as we move into the upcoming reporting season. The recent improvement has been supported in part by the strength in the energy sector, but it is also evident more broadly across the market. As long as companies are able to maintain or expand margins, markets tend to remain well supported from a fundamental perspective. That still appears to be the case today. While there is always a risk that earnings disappoint against a more uncertain backdrop, there is little evidence of any meaningful deterioration so far.

The first quarter ended with another note of confidence where global M&A activity recorded its most impressive first quarter in history with total transactions of US$1.3tn. On this front there is an exciting pipeline for deals and IPOs for the remainder of 2026. It is still early days to say with any certainty what the impact of a potential extended conflict will mean for deal activity and for the global economy, but there are many reasons to remain optimistic. 

The week ahead – what next for investment markets?

Tuesday: Trump’s deadline on Iran

“All hell will rain down on Iran” if the Strait of Hormuz is not opened today by 20.00 EST, according to President Trump. Both sides are reportedly negotiating a ceasefire but will be far from agreeing terms, it seems that today escalation is more likely than successful negotiation.

Oil prices remain elevated six weeks into the conflict, and the longer the disruption persists, the greater the risk that the inflation impulse feeds more meaningfully into the global economy. The window for a clean resolution is narrowing. Without a de-escalation, markets may be forced to reassess the current balance between resilient fundamentals and rising geopolitical risk.

Friday: US CPI inflation

Inflation is expected to rise to 3.4% for March thanks to rising gasoline prices, the most immediate impact from the Iran war. Economists expect a monthly reading of 1%, the highest since June 2022.

Markets for the week

This week in summary

• Volatility rose sharply, with the VIX Index at its highest since 2025, as Middle East developments dominated a quiet data week
• Equity and credit markets remained resilient despite the shock, suggesting a benign growth and inflation outlook is still being priced
• Continued weakness in UK government bonds saw yields move higher on fears of a more persistent inflation impulse
• Markets are now pricing two conflicting narratives: resilient growth versus entrenched inflation
• The bond market appears focused on upside inflation risks, while equities continue to anchor to a softer, more stable outcome
• Focus will likely remain on the Iran war as it enters its fifth week, but eurozone inflation and US labour market data will provide an early test to the new forecasts since the war began.

Market review - what's happening now?

Bonds and equities tell separate tales

It is not just energy that is in short supply, but certainty too. The VIX Index rose to 31 last week, its highest level since the tariff volatility of 2025. With not much on the economic calendar, investors focused on developments in the Middle East with news flow steering equities, bonds and oil prices. Despite this, headline equity and credit markets have remained notably resilient, while sovereign bonds have weakened sharply, particularly in the UK. Two distinct narratives are now being priced simultaneously: a relatively benign outcome in risk assets, and a far more troubling one in government bonds.

Global equities are down 3.4% year to date in sterling terms. Emerging markets and Japan remain the standout performers, still in positive territory. The UK is broadly flat, Europe is in line with global markets, and the US has lagged, down 6.6%, with technology again under pressure last week. Credit markets tell a similar story of resilience. Global high yield spreads have widened modestly to 3.4%, around 0.5% higher on the year, while investment grade spreads sit at 0.83%, only 0.1% wider.

Taken together, risk assets continue to price a contained outcome. The market is assuming that any inflationary impulse from the conflict with Iran will prove manageable and insufficient to materially damage demand or corporate profitability.

The bond market is telling a different story. Yields have moved higher, reflecting concern that a more prolonged conflict could embed inflation. There are echoes here of the 1970s.

Late-1960s fiscal expansion associated with the Vietnam War pushed inflation higher, while monetary policy remained too accommodative for too long. The collapse of the Bretton Woods system in 1971 removed the anchor on the US dollar, adding further fuel. The subsequent energy shocks, first the Yom Kippur War and oil embargo, then the Iranian Revolution, turned an inflation problem into an inflation regime. By 1980, inflation had reached 14.8% in the US and 21.6% in the UK.

It ultimately took the Volcker Shock, with rates pushed above 20% under Paul Volcker, to restore credibility, at the cost of a deep recession and a prolonged period of weak real equity returns.

The parallel is not exact, but it is instructive. If the bond market is right, and inflation proves persistent, then current equity pricing looks sanguine.

For now, there is little evidence that this dynamic is taking hold. It may be that bonds are aggressively pricing a tail risk, while equities remain anchored to a more probable and resilient path. In doing so, the bond market appears focused on upside inflation risks while underappreciating the downside risks to growth.

There remains a path back toward something resembling the previous equilibrium if the conflict de-escalates quickly, but that window is narrowing. Initial mitigation mechanisms, whether through rerouting supply, drawing on reserves or utilising sanctioned flows, are finite. Even in the event of a ceasefire, with the Iranian regime still in place the geopolitical risk premium is unlikely to fully dissipate. The risk of renewed disruption to the Strait of Hormuz, and by extension global energy supply, remains a live one.

The week ahead – what next for investment markets?

Tuesday: Eurozone inflation

The preliminary reading for inflation in March is expected to come in hot at 2.6% rising from 1.9% in February. This will be the first glimpse into inflation since the surge in oil prices triggered by the Iran war. 

Friday: US employment data

Unemployment in the US is expected to remain at 4.4% while job growth and labour participation likely picked up from a weak reading in February. 

This week in summary

• Geopolitical risk remained elevated as the conflict between the US, Israel and Iran intensified, disrupting energy markets and keeping investors focused on the risk of a prolonged shock to oil and gas supply through the Strait of Hormuz
• Global equity markets declined as rising energy prices, renewed inflation concerns and mixed central bank communication weighed on sentiment, with US equities leading declines, though energy stocks provided notable relative support
• Government bond markets sold off sharply, led by UK gilts, as investors reassessed inflation risks and interest rate expectations following a more hawkish shift in central bank rhetoric
• Scrutiny of private credit increased amid retail investor outflows and governance concerns, though spillover risks to the broader financial system remain limited.

Market review - what's happening now?

Middle East: Energy shock dominates, but markets remain measured

Developments in the Middle East continued to dominate global markets this week, with investor attention firmly centred on the Strait of Hormuz and the implications for global energy supply. Continued attacks on shipping, damage to key infrastructure and restrictions on transit have raised the risk of a significant energy shock, keeping volatility elevated across commodity markets.

While the headline exposure remains substantial – around a fifth of global oil supply normally transits the Strait – the realised disruption to supply has so far been less severe than initially feared. Limited transit continues for selected countries, bypass pipelines in Saudi Arabia and the UAE are operating near capacity and coordinated strategic reserve releases have helped offset part of the shortfall. At the same time, higher prices and slowing activity are beginning to temper demand.

Energy markets have nevertheless reacted forcefully. Oil prices remain elevated, while gas prices have risen sharply, particularly in Europe and Asia. Despite this, broader financial markets have remained relatively orderly. Equity drawdowns have been contained and moves in bond yields, while meaningful, suggest investors are still assuming a shorter or more contained conflict.

That said, risks remain clearly skewed. Markets are likely to stay highly sensitive to headlines, particularly around any further escalation or credible signs of de escalation. Sustained disruption to energy infrastructure or supply routes would likely prompt more pronounced moves across both equity and fixed income markets.

Central banks: Policy signals drive volatility and repricing

The latest round of central bank meetings demonstrated once again the difficulty policymakers face in navigating an energy driven supply shock. While the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) all held rates steady, market reactions were driven less by the decisions themselves and more by shifts in tone, projections and forward guidance.

In the UK, gilt markets were at the centre of the reaction. Following the BoE’s meeting, upward revisions to near term inflation projections and references to potential tightening triggered a sharp repricing in rates. Yields moved significantly higher, with the 10 year approaching 5% – its highest level since 2008 – and markets shifted to price in up to three rate hikes by year end, a dramatic reversal from expectations for cuts at the start of the year.

This response appears difficult to reconcile with underlying domestic conditions. Governor Andrew Bailey later sought to temper market expectations, emphasising that current inflation pressures largely reflect an external energy shock rather than strength in domestic demand. With UK growth stagnating, unemployment at 5.2% and demand softening, the outlook remains more consistent with a prolonged pause and eventual easing once energy pressures fade.

From an investment perspective, the repricing has improved the attractiveness of UK fixed income. The ‘belly’ of the curve – gilts in the three  to ten year range – offers a compelling balance of yield and volatility, capturing elevated starting yields without the extreme price sensitivity of longer maturities.

In the United States, the Fed also held rates steady, maintaining a cautious stance while acknowledging extreme levels of uncertainty. Chair Jerome Powell highlighted the risk that energy driven shocks could become embedded in inflation expectations, reinforcing the challenge of balancing inflation control against slowing growth. This was reflected in the data, with producer price inflation accelerating to 3.4% year on year, its fastest pace in a year.

US equities declined amid renewed inflation concerns and rising yields, with major indices ending the week lower. Energy stocks stood out as clear outperformers, benefiting from higher oil prices. Treasury yields moved higher overall, with the 10 year rising to around 4.4% as investors reassessed the policy outlook.

In Europe, the ECB also kept rates on hold but raised its inflation forecast, warning that higher oil and gas prices could have a material near term impact. Across developed markets, central banks remain on hold but increasingly constrained, as energy driven inflation pressures complicate the disinflation narrative.

Private credit: Cracks emerge, but risks remain contained

Private credit markets came under increased scrutiny as retail investors stepped up withdrawals from semi liquid funds, exposing structural weaknesses in parts of the asset class.

Pressure reflects a combination of factors, including high profile instances of fraud that have highlighted risks in opaque lending structures, concerns around underwriting standards – particularly in software related lending – and persistent uncertainty around asset valuation in the absence of frequent market pricing.

These issues have driven elevated redemption requests in retail focused vehicles. However, built in structural features such as redemption caps have limited the need for forced asset sales, allowing stress to be absorbed gradually rather than through disorderly market moves. Investors seeking liquidity are instead facing delays, while underlying assets continue to reprice over time.

Importantly, broader systemic risks appear contained. Private credit represents a relatively small share of total corporate borrowing, and most capital remains locked in long term institutional structures. While exposures across banks and non bank lenders warrant monitoring, they remain modest relative to the size of the overall financial system.

The adjustment is therefore likely to play out over time, through declining valuations and selective defaults rather than a sudden dislocation. At the same time, significant capital has been raised by distressed and opportunistic credit investors, providing a potential backstop by supporting secondary market demand and limiting wider contagion.

The week ahead – what next for investment markets?

Geopolitical developments in the Middle East:

Markets will remain highly sensitive to developments around the Strait of Hormuz, energy infrastructure and any signs of escalation or de escalation

Tuesday: US, UK, Europe, Japan and Australia flash Purchasing Managers’ Index (PMI) for March – may give an indication of whether the conflict is impacting sentiment.

Quieter week for macro news:

Tuesday: US Manufacturing and Services PMI – both expected to remain in expansionary territory

Tuesday: Japan Consumer Price Index (CPI) for February – headline inflation fell last month but core remains sticky – important read for the newly energised Takaichi government

Wednesday: UK CPI for February – expected to remain constant at 3%

Thursday: US Initial Jobless Claims – expected to tick up slightly versus last month’s read.

This week in summary

• The escalating conflict in Iran kept markets volatile, with Brent crude briefly reaching $120 per barrel (bbl) before ending the week up 10.8%, leaving the Iran war responsible for roughly one-third of the current oil price
• Rising energy prices pushed short-dated bond yields sharply higher, particularly in the UK, where the two-year gilt (UK government bond) yield has risen 61 basis points (bps) since the end of February as markets reassess inflation risks
• The Strait of Hormuz has become the central variable for markets, with around one-fifth of global oil and liquefied natural gas (LNG) flows passing through the waterway, meaning prolonged disruption would represent a significant global supply shock
• Outside of energy, defence and utilities markets struggled, with the US dollar acting as the primary safe-haven while technology stocks continued to correct amid a broader rotation in equities
• In the week ahead, attention turns to a trio of central bank meetings, with the US Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) all expected to hold rates while assessing the inflationary implications of higher energy prices
• Updated economic projections from the Fed and policy guidance from the BoE and ECB will be closely watched for signals on the extent to which the energy shock delays the expected path of rate cuts.

Market review – what’s happening now

The battle for the Strait of Hormuz

Volatile markets remained fixated on the war in Iran. Brent crude surged to $120/bbl on Monday before ending the week at $103.1, up 11.3% on the week and 67% year-to-date. The Iran war shock is one-third of today’s oil price.

President Trump suggested early in the week that the conflict was progressing ahead of schedule and could end soon, briefly lifting risk sentiment. Those hopes quickly faded with reality as no such certainty can be given in the fog of war. Iran seems to be hoping that a prolonged conflict that keeps oil prices elevated will erode the US’ resolve for war and increase international and domestic pressure to strike a deal.

The upward pressure on short-dated bond yields has been severe, with the UK the main pressure point. The two-year gilt yield has risen from 3.52% at the end of February to 4.13%, an increase of 61bps. This compares with a 34bps rise in the two-year US Treasury yield and a 44bps increase in the two-year German bund yield.

For markets, the central concern remains inflation, and the key variable is the Strait of Hormuz. Roughly one fifth of global oil and liquefied natural gas flows through the Strait, alongside around 5% of global trade. Its effective paralysis therefore represents a significant global supply-side shock and has become the linchpin of the war. The longer the Strait remains disrupted, the greater the risk that this energy shock spreads through supply chains and begins to generate broader inflationary pressure.

A battle for control of the Strait increasingly appears inevitable. Iran and its Houthi proxy in Yemen continue to threaten shipping routes, while the US and its allies attempt to neutralise their ability to strike commercial vessels. Although US and Israeli forces have reportedly made progress in degrading Iran’s missile capabilities, the country’s large stockpile of relatively inexpensive Shahed drones may prove more difficult to eliminate. Their ability to be launched from unmarked civilian vehicles makes them particularly challenging to detect and destroy.

Interestingly, President Trump has recently shifted from celebrating low energy prices to suggesting that higher oil prices are good for the US, a U-turn that may hint at expectations for a longer conflict and the President’s determination to see the Islamic Revolutionary Guard Corps (IRGC) destroyed.

With central banks now confronting this new and unpredictable world, the outlook for interest rates has too become increasingly uncertain. The BoE had previously been expected to cut rates at this Thursday’s meeting, but that now appears unlikely. Markets have even begun pricing the possibility of a rate increase later this year. That seems premature given the negative momentum in the UK economy, despite the country’s sensitivity to energy prices (see last week’s note).

The Fed appears more comfortable looking through the shock. The US economy is also more insulated from the shock given its domestic energy production and large strategic reserves. Governor Christopher Waller suggested that the energy spike is likely to prove a one-off event rather than the beginning of sustained inflation. This comes as US labour market data surprised to the downside, with February payrolls showing a loss of 92,000 jobs against expectations for a gain of 55,000. While the labour market is softening, solid corporate profit growth is still expected to keep it from deteriorating dramatically in the short-medium term.

The ECB sits somewhere between these two positions. Having already reached what it considers a neutral policy rate, the ECB has paused its easing cycle. However, President Christine Lagarde has struck a more hawkish tone in response, emphasising that the ECB would act to prevent a repeat of the previous inflation surge. Governing Council member Peter Kazimir suggested that rate hikes could occur sooner than markets currently expect.

In terms of market performance last week, outside of energy, utilities & defence there were, once again, few places to hide. The US dollar has remained the purest safe haven trade, strengthening from 1.385 against sterling at the end of January to 1.323. US dollar strength has helped offset losses in US equities when converting returns back into sterling. In US dollar terms, the rotation out of tech has seen the Magnificent 7 hit correction territory (a decline of >10%) as measured by the Bloomberg Mag 7 index, a correction is seen as a healthy pullback within a long-term positive trend while bear market territory is defined as a decline of greater than 20%.

The week ahead – what next for investment markets?

Wednesday 18 March: Fed rate decision

The Fed is widely expected to hold rates after cutting at the final three meetings of last year. A rate cut would likely be welcomed given the recent deterioration in labour market data, but the oil shock provides the Fed with an additional reason to pause. This meeting will also include an updated Summary of Economic Projections. Markets expect growth forecasts to be revised lower, inflation slightly higher and unemployment modestly higher.

Thursday 19 March: BoE rate decision

The BoE will likely hold Bank Rate at 3.75%. The sharp rise in energy prices since the last meeting complicates the outlook and will likely force Governor Bailey to soften his previously dovish tone. While the Bank still intends to cut rates later this year, the timing of those cuts now depends heavily on the trajectory of oil prices and the Iran conflict.

Thursday 19 March: ECB rate decision

The ECB is also expected to leave rates unchanged at what it considers the neutral level. However, President Lagarde has recently adopted a more hawkish tone in response to the energy shock, emphasising the ECB’s determination to prevent a repeat of the previous inflation surge. Markets will focus on any guidance or key metrics that will help determine when tightening might be likely.

This week in summary

• The conflict with Iran escalated sharply, with drone and missile strikes disrupting traffic through the Strait of Hormuz (a critical passageway for oil supplies), raising the risk of a prolonged regional conflict
• Energy markets reacted violently, with Brent crude rising to US$108 / barrel (bbl) and UK natural gas surging to £1.57/therm (a unit of British thermal energy, leaving both commodities dramatically higher year- to-date
• Financial markets outside of energy struggled, with global equities falling around 3% in GBP terms while the US dollar, currently the purest safe haven, strengthened
• Bond markets sold off sharply, particularly in the UK, as higher oil and gas prices revived concerns about a renewed inflation shock
• Despite the market reaction, the macro backdrop differs significantly from 2022, with inflation falling, monetary policy restrictive and the labour market weakening
• As the war enters its second week, investors will focus on the risk of prolonged disruption to the Strait of Hormuz, the trajectory of the conflict and the potential for Russian oil to fill supply gaps created by Middle Eastern instability.

Market review – what’s happening now

Two energy shocks, two opposite reactions

The conflict with Iran intensified last week as Iranian strikes targeting Gulf states expanded. US President Trump stated he is not interested in negotiations and that the US will not stop short of Iran’s unconditional surrender after an Iranian drone strike on a military base in Kuwait killed six US soldiers. Regime forces continue to fire on protesters while Tehran has vowed to escalate attacks further. Missile and drone strikes have also disrupted commerce through the Strait of Hormuz, paralysing both ocean and air traffic. The selection of Mojtaba Khamenei, the son of Ayatollah Ali Khameini, as the new Supreme leader suggests no change to the current trajectory of the war.

The crisis sent energy prices sharply higher. By this morning Brent crude had risen to $108/bbl, now 77% higher for the year, while UK natural gas surged to £1.57/therm, up 103% this month and 160% year-to-date.

There are risks that the conflict proves persistent. Iran is believed to possess a large stockpile of relatively inexpensive Shahed drones, which can be transported and launched from civilian vehicles that are difficult to identify. With individual drones costing only a fraction of the interceptor missiles required to destroy them. In such a scenario, energy markets could remain volatile for an extended period.

Across financial markets outside of energy there was nowhere to hide. Even other commodity markets struggled, with gold, silver and copper all ending the week lower. Global equities closed -3.0% in GBP terms, cushioned slightly by a strengthening US dollar. Indeed, the dollar increasingly appears to be the purest safe-haven trade at present.

The most notable deterioration has been in the bond market, particularly UK government bonds, which have sold off sharply in response to the inflationary implications of higher oil and gas prices. The UK appears particularly vulnerable. Gas inventories are unusually low and substantial replenishment is required at elevated prices, raising fears of a sustained energy-driven price shock.

The Telegraph reported over the weekend that the UK has only two days of natural gas supply compared with weeks of inventory across continental Europe and that the UK currently pays the highest wholesale energy prices of any country globally.

There is a notable comparison between this crisis and the one in 2022. When Russia invaded Ukraine and energy prices surged, UK inflation was already 6.2% and rising, driven by strong demand. The Bank of England (BoE) had only just begun tightening policy, raising rates to 0.5% that same month. The real policy rate was therefore deeply negative at -5.7%. The BoE was behind the curve, the labour market was extremely tight and wage growth was accelerating. The energy shock was hitting an already overheating economy.

Yet the bond market reacted positively to Russia’s invasion. The two-year gilt yield fell from 1.3% to 0.8% in a matter of days as markets focused entirely on the growth shock and ignored the inflation risk.

Compare that with last week’s energy surge. Inflation in the UK is now 3.0% and falling. The BoE is coming down from a restrictive policy stance with the Bank Rate at 3.75%. The economy is losing momentum and the labour market is soft. Unemployment is above 5%, the highest since the pandemic, while youth unemployment is approaching 16%.

Despite this very different backdrop the bond market reaction was severe. The two-year yield rose from 3.52% to 4.09% (where it as the time of writing this morning) and markets erased the probability of a rate cut later this month from around 90% to 0%. The market reaction suggests investors may be fighting the last energy crisis rather than the current one.

An energy shock is a textbook supply-side shock. While a prolonged conflict could eventually generate sustained inflation, there is currently no clear mechanism through which this shock would translate into a wage or demand-driven spiral.

Interest rates work by increasing the cost of debt and suppressing demand. In the absence of excessive demand it is difficult to see why the BoE should not look through this energy shock and maintain its dovish momentum.

The greatest danger in times of turbulence is not the turbulence. It is acting with yesterday’s logic and this isn’t 2022 - yet. 

The week ahead – what next for investment markets?

As the Iran conflict enters its second week, three questions increasingly dominate the outlook for energy markets and global risk assets. 

How does the war end?

As the conflict enters its second week and continues to escalate the outlook from here depends on several key variables: the remaining scale of Iranian missile and drone capabilities, the resilience of Gulf air defences, the degree of US military resolve and the ability of shipping routes to normalise. Even a limited number of projectiles could continue to disrupt traffic through the Strait of Hormuz or damage regional energy infrastructure, meaning that a prolonged period of volatility in energy markets cannot be ruled out. 

Will there be a battle for the Strait of Hormuz?

The Strait remains the single most important strategic chokepoint for global energy markets with an average of 20 million barrels passing each day (around a fifth of global supply). President Trump has offered US naval escorts and insurance guarantees for tankers transiting the waterway, but Iranian threats continue to paralyse trade. Even if the US military were able to reopen the Strait, Iran could still attempt to disrupt traffic again. With 4.5% of all global trade historically passing through the Strait disruptions will affect broader global trade. 

What does this mean for Russian oil?

The conflict has strengthened demand for Russian crude. The Trump administration has already granted India a sanctions waiver to continue purchasing Russian oil, reflecting concerns about the impact of Middle Eastern disruptions on global energy prices. In practice, Asian buyers were already turning to Russian barrels as Gulf supplies became less reliable, suggesting that Russia may benefit economically from the conflict even as geopolitical tensions rise.

This week in summary

• Geopolitical tensions surged as the US and Israel launched strikes killing Iran’s Supreme Leader, prompting widespread regional retaliation and raising fears of a major oil supply shock
• US equities fell amid continued AI disruption concerns and heightened trade policy uncertainty following the US Supreme Court’s tariff ruling
• In contrast, UK, European and Japanese markets rallied as investors rotated away from US mega cap technology into regions with more attractive valuations and improving policy and macro environments
• US producer prices came in higher than expected, complicating the disinflation trend, even as Treasury yields fell below 4% on safe haven demand
• China’s markets advanced as investors returned from Lunar New Year and looked to upcoming policy signals.

Market review – what’s happening now

Middle East: Escalation triggers global risk off positioning

Investors are bracing for potential volatility after the most dramatic escalation in the Middle East in decades. Over the weekend, the US and Israel conducted their largest coordinated strike on Iran to date, killing Ayatollah Ali Khamenei – the country’s long serving Supreme Leader. The operation followed the breakdown of negotiations around Iran’s nuclear programme, with President Trump calling the strike essential to ending Tehran’s nuclear ambitions.

Tehran retaliated within hours, launching an unprecedented wave of attacks across the region. Explosions were reported in Saudi Arabia, Qatar, Bahrain, Jordan and the UAE, and drone strikes caused significant disturbance and injuries at airports in both Dubai and Abu Dhabi. Airspace closures have already led to more than 3,000 flight cancellations, with further disruption expected in the days ahead.

The potential human cost of a widening conflict is deeply concerning, and the prospects for a straightforward diplomatic resolution appear remote. Early market indicators point clearly towards safe haven positioning, with gold moving back toward record highs. We expect the US dollar and US Treasuries to strengthen, while risk assets may remain under pressure. Despite OPEC (a group of major oil-producing countries that work together to control how much oil they produce and help influence global prices) assurances that supply will be increased, any threat to activity in the Strait of Hormuz is likely to keep upward pressure on oil prices.

United States: AI concerns and tariffs weigh on sentiment

US equities endured a volatile week as investors continued to grapple with uncertainty around the long term impact of AI, a tense geopolitical backdrop and a shifting trade environment.

A widely circulated research note early in the week reignited fears that rapid advances in AI could disrupt labour markets, erode traditional corporate moats and compress margins across several industries. Software names remained particularly fragile, with many previously defensive companies experiencing drawdowns of up to 50% over recent months. Sentiment improved somewhat following stronger than expected results from Salesforce and Snowflake, though debate among investors remains highly polarised. Some see a rare buying opportunity in high quality compounders, while others argue that their historical advantages have been permanently weakened. Our view lies somewhere in the middle, though we believe caution remains prudent at this early stage of the AI adoption cycle.

Trade policy was again in focus. Following the US Supreme Court’s ruling last week, the administration confirmed that tariffs on some countries would rise from 10% to 15%, with potential for broader global measures under the 1974 Trade Act. US–Europe tensions resurfaced, though we expect these developments to be overshadowed in the near term by events in the Middle East.

Economic data offered a mixed picture. Producer price inflation accelerated sharply, registering its largest monthly increase since mid 2025, while factory orders fell 0.7%, reversing the prior month’s strength. Consumer confidence ticked higher but remains well below its 2024 peak. Jobless claims were broadly steady, pointing to a labour market that is cooling gradually rather than deteriorating sharply.

Safe haven demand pushed Treasury yields lower, with the 10 year falling below 4% for the first time since November. Earnings season has remained robust, with nearly three quarters of S&P 500 companies beating expectations and revenue growth running above 9% year on year.

International: Europe supported by earnings, Asia navigates shifting policy landscapes

Europe once again outperformed US markets this week, with UK and European indices reaching new highs as investors rotated away from US mega cap technology. Strong corporate earnings helped offset geopolitical uncertainty. German business confidence continued to improve, while French sentiment softened slightly. Inflation readings across the continent were mixed but remain broadly aligned with the European Central Bank’s path toward lower rates. In the UK, expectations for additional rate cuts later in the year provided further support to domestic equities.

Japanese markets reached new record highs, supported by optimism around the fiscal and monetary outlook under Prime Minister Takaichi. The yen weakened further as two perceived dovish nominees were put forward for the Bank of Japan’s Policy Board. Tokyo core Consumer Price Index (CPI) rose modestly above expectations, lending cautious support to a gradual tightening path.

In China, markets advanced during a shortened post holiday week. Travel activity surged during Lunar New Year, though per trip spending remained subdued, signalling ongoing consumer caution. Shanghai continued to loosen property market restrictions, and the central bank moved to temper yuan appreciation by cutting foreign exchange forward reserve requirements to zero.

The week ahead – what next for investment markets?

Monday: Impact of Middle East developments on global markets

Markets will absorb the first full day of trading following the weekend’s dramatic escalation. Oil, gold, the US dollar and Asian currencies will be key indicators of risk sentiment.

US PMI data (Manufacturing Monday; Services Wednesday)

Purchasing Managers Index (PMI) is an economic indicator that shows the health of a countries manufacturing or service sector. Both readings are expected to remain firm, supporting the broader narrative of economic resilience.

US Initial Jobless Claims (Thursday) and Nonfarm Payrolls (Friday)

Consensus expectations point to broadly stable jobless claims and a softening in payroll growth.

Eurozone CPI (Tuesday)

Investors will look for further evidence that disinflation is holding despite energy related risks; consensus is for a flat reading of 1.7%.

Written by Leah Bramwell, Head of Tailored Investment Solutions

This week in summary

• European and UK equities reached fresh highs, supported by strong earnings and a continued rotation into cyclicals and ‘old economy’ sectors, as investors broaden leadership beyond US mega-cap technology
• The US Supreme Court struck down President Trump’s sweeping global tariffs under the International Emergency Economic Powers Act; markets appear comfortable that trade tensions are unlikely to escalate materially in the near term, though policy uncertainty remains
• Oil prices rose more than 5% on the week as US–Iran tensions intensified, reintroducing a geopolitical risk premium and raising the possibility of further volatility in energy markets
• UK inflation slowed to 3.0% and labour market conditions softened, strengthening the case for Bank of England (BoE) rate cuts; in contrast, the Federal Reserve (Fed) signalled patience, supporting the US dollar and reinforcing policy divergence across regions
• In the week ahead, with limited macro data, focus will remain on US trade developments, geopolitical risks in the Middle East and the durability of the ongoing rotation in equity markets.

Market review – what’s happening now

European and UK equities push to fresh highs

European equities closed at a fresh record high, rising 2.3% over the week, while UK equities gained 2.5%, also hitting fresh highs while extending their year-to-date strength. The advance was driven primarily by strong earnings and continued rotation into cyclicals, particularly industrials and consumer-facing names.

Performance reflects a combination of improving sentiment toward European growth and more attractive relative valuations compared with the US. After a prolonged period of underperformance, investors are increasingly willing to re-engage with the region as earnings resilience becomes clearer.

The UK market also benefited from this rotation. Its heavy exposure to energy, materials, financials and other ‘old economy’ sectors continue to work in its favour in an environment where investors are broadening leadership beyond US mega-cap technology companies. Many of the UK’s largest companies also earn a significant proportion of their revenues overseas, which has helped cushion the impact of slower growth at home.

The US Supreme Court ruled against President Trump’s sweeping global tariffs under the International Emergency Economic Powers Act, determining that the statute does not authorise the President to impose tariffs. The decision struck down Trump's reciprocal tariffs applied globally, as well as targeted import taxes the administration said were meant to address fentanyl trafficking. 

This ruling represents Trump's biggest legal defeat since returning to the White House and undercuts his signature economic policy. The White House swiftly pivoted to alternative tariff mechanisms reinforcing a global 15% levy on all global trade. Equity markets appear comfortable that trade tensions are unlikely to escalate materially in the near term while domestic legality is the main component of trade uncertainty.

Oil rises as geopolitical tensions escalate

Brent crude moved back above US$71 per barrel and West Texas Intermediate approached US$67, marking weekly gains of more than 5% and the highest levels in around six months. The move reflects escalating tensions between the US and Iran, with Washington signalling that diplomatic patience may be running thin. 

The President has given Iran a two-week ultimatum to agree a new nuclear deal or face serious consequences - a clear threat of military action. This would most likely be a limited and targeted strike. 

The US has significantly increased its military presence in the region, representing the largest build-up since the 2003 invasion of Iraq. Shipping costs on key Middle East routes have surged, with supertanker hire rates nearly tripling this year. 

With the geopolitical premium returning there is a risk that further escalation produces a sharp, temporary spike. Such moves would tighten financial conditions and weigh on global growth expectations.

Inflation and interest rates

UK inflation slowed to 3.0% in January from 3.4%, the lowest level since early 2025. Combined with a softer labour market, unemployment rising to 5.2% and moderating private sector wage growth, the data strengthened the case for a March rate cut from the BoE. Money markets now anticipate two 25 basis point reductions by year-end, with around an 80% probability assigned to a March cut.

Gilt yields edged lower, with the 10-year closing at 4.35%. The combination of softer inflation, labour market cooling and weak growth provides policymakers with greater flexibility, even as fiscal and political uncertainties linger.

In contrast, Fed officials in the US signalled a more patient stance. Several policymakers indicated rates may remain unchanged for “some time”, reflecting a resilient labour market and signs of firming goods inflation. The dollar recorded its strongest week in four months as rate cut expectations were pared back.

In Europe, inflation dynamics look more favourable near term, though bunds may remain rangebound given rising defence spending and associated government bond supply. In Japan, softer inflation (national CPI slowed to 1.5% in January from 2.1% in December) and promises of measured fiscal expansion from the new Prime Minister benefited long-dated Japanese government bonds.

The week ahead – what next for investment markets?

With a relatively light macro calendar, attention will remain firmly on US trade policy following the Supreme Court’s decision and the administration’s response. Markets will watch closely for any escalation through alternative tariff channels and for signs of pushback from trading partners.

Geopolitics will also remain front of mind. Any further deterioration in US–Iran relations could inject renewed volatility into energy markets and risk assets, particularly if oil prices extend their recent gains.

Finally, as earnings season continues and with some significant companies due to report this week, investors will look for confirmation that the broadening of equity leadership beyond US mega-cap technology is sustainable. 

Written by Thomas Hibbert, Chief Investment Strategist