Weekly Markets Review

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