Weekly Market Recap

Last week saw the Iran-U.S. conflict enter its ninth week, and what had been cautious market optimism around a negotiated resolution gave way to a more sober assessment.

Early last week, reports emerged via Axios that Iran had submitted a proposal to reopen the Strait of Hormuz. This would reportedly involve the U.S. lifting its naval blockade, agreeing to a new legal framework for the Strait and deferring nuclear negotiations to a later date.

The U.S. indicated the offer was insufficient, and by mid-week, reports suggested President Donald Trump was being briefed on new military operations and had told aides to prepare for an extended blockade.

Over the weekend, the U.S. began escorting vessels through the Strait, coming under fire in the process. The escort plan was dropped after just one day but has been followed by news of a potential peace plan between the U.S. and Iran. The deal is expected to revolve around a moratorium on uranium enrichment by Iran, sanctions relief by the U.S., and both sides lifting restrictions on transit through the Strait of Hormuz.

These developments were reflected in the oil market. Futures prices are still sloping downward, suggesting that prices are high now but will fall in the future. Spot prices (the cost of buying an actual barrel of physical oil) fell on the latest news but remain elevated, above even the short-term futures prices.

As supplies of crude have been slow to arrive at the refineries, companies have drawn down on inventories of oil products, which have been declining. For example, kerosene inventories in Europe have dropped sharply, leading airlines to cancel flights.

There is growing optimism that these inventories will begin to be replenished through an eventual return of Gulf supplies. If not, the European market will end up buying kerosene and other oil products from other regions, allowing oil to flow through the markets that are prepared to pay the highest price.

For example, a supply decline of 10% would necessitate a 10% reduction in energy consumption, but this may not happen in the regions with the lowest inventories. Therefore, the most obvious implication is the inflationary impact. This was something for policymakers to ponder last week, when all the major central banks were reporting.

Central banks: Hawkish drift and no action

As anticipated, none of the central banks changed their policies last week.

The Federal Reserve (the Fed) held rates at its final meeting under current Chair Jerome Powell. He will almost certainly be replaced as chair by Kevin Warsh, who is in the process of being confirmed by the Senate.

RBC Wealth Management (U.S.)’s Tom Garretson, a senior portfolio strategist specialising in fixed income, points out that there has not been much pushback on Warsh. Blanket statements that he is an ‘impressive’ and ‘outstanding’ candidate who used to be at the Fed have been nearly universal.

Tom questions that appraisal: “The highlight of his entire CV is basically his time at the Fed during the Global Financial Crisis, but his only notable accomplishments were seeking to raise rates when unemployment was still around 8%, and then warning about the potential hyperinflationary impact of quantitative easing, which he ultimately resigned from the Fed over, and which ultimately never occurred.”

Kevin Warsh is President Trump’s selection because the President was frustrated that Jerome Powell’s Fed was not cutting rates fast enough. But now that Warsh is about to arrive, he will find it hard to persuade the Fed to cut given that inflation is on an upward trajectory due to the Iran-U.S. conflict.

It would not be surprising if his relationship with President Trump were to become a tense one from the start.

Elsewhere, the European Central Bank, Bank of Japan (BoJ) and Bank of England (BoE) all held interest rates. However, these are expected to start rising in June.

The key development was a hawkish shift in market pricing. At the start of last week, UK and Eurozone markets were discounting approximately two rate hikes by year-end. By Friday, this had edged towards the possibility of three, reflecting the inflationary impulse from elevated energy prices.

The Bank of England’s Monetary Policy Report laid out three scenarios:

1. energy prices follow the futures curve lower, with no second-round effects, still justifying roughly two rate hikes.
2. prices remain elevated between current levels and the curve, with moderate wage effects.
3. prices rise further with significant second-round effects, implying rates will rise by over one percentage point to 5.25–5.50%.

Even the benign scenario now appears to justify further tightening. This contrasts with comments made by BoE Governor Andrew Bailey over the past month, for example, when he described how the market’s “still pricing us to raise rates… I think they’re getting ahead of themselves.”

Additional anxiety over the direction of interest rates and oil prices was a headwind to markets but the earnings season was a tailwind.

Equity markets adopted a risk-off tone as last week progressed, with European indices falling around 1% on Thursday. U.S. equities bucked that broader move, driven by generally good earnings numbers on Wednesday, when the four hyperscalers of the ‘Magnificent Seven’ mega cap stocks (Microsoft, Meta, Amazon and Alphabet) reported their Q1 earnings.

The results were mixed, with Alphabet’s impressive results seeming to validate the full stack vertically-integrated model (infrastructure, language model, tools and applications). Meta, on the other hand, disappointed due to the costs of investment.

The dollar strengthened gradually, and Japanese government bonds sold off across the curve, with the yen breaching the 160-per-dollar level before an intervention by the BoJ to stabilise it.

Energy importers like Japan have suffered downward pressure on their currencies from the rise in energy costs and resulting higher import costs. Others include Turkey and India, which have also used reserves to attempt to stabilise their currencies.

At the same time, Gulf states that would normally accumulate reserves, especially at times of high energy prices, haven’t done so while their cargoes cannot reach the market.

Taken together, these two groups have reduced the pace of reserve accumulation and, therefore, the structural demand for gold. This creates short-term pressure on the gold price, which will continue until reserve accumulation can return to normal.

Thereafter, the case for holding gold seems as strong as ever. The U.S. runs a large and persistent current account deficit and a deeply negative net international investment position, consuming more than it produces and financing the difference by accepting dollar-denominated loans from the rest of the world.

It’s understandable why other countries would balk at holding the majority of their foreign exchange reserves in dollars, and gold benefits as result.

Coming up – 6 May 2026 to 11 May 2026

Strait talking:

Negotiations will continue in order to try and establish a firm agreement to open the Strait of Hormuz.

More earnings:

We are beyond halfway in earnings season, so there will be fewer surprises but a possible continuation of the strong trend of companies surpassing expectations.

U.S. employment:

There will be lots of jobs data, including the Job Openings and Labor Turnover Survey and the non-farm payroll report, which is expected to show 60,000 new jobs having been created during April.

The geopolitical stand-off between the U.S. and Iran over the Strait of Hormuz dominated market sentiment throughout the week. Oil prices returned to above USD100 per barrel and risk appetite came under pressure.

Last week opened with both sides claiming the Strait was open to traffic, only for Iran to close it again after the U.S. failed to lift its naval blockade. A vessel was seized by the Americans for attempting to violate the restrictions, marking the first such incident.

Talks were scheduled in Islamabad, Pakistan last Tuesday, but Iran initially signalled it had no plans to send negotiators. By midweek, the U.S. had chosen to maintain the blockade while extending the ceasefire without an end date, a pragmatic acknowledgement that setting another deadline it might not enforce would damage credibility.

By Thursday, Iran had formally stated it had no plans to participate in negotiations, pushing Brent crude higher once more.

This led to a fall in anticipation of the reopening of the Strait of Hormuz. At the beginning of the week, there was a 60% chance of the Strait being reopened by the end of May, according to the Polymarket prediction market. By the end of the week, that had fallen to 34%. The implications of a further five weeks of disruption are stark, causing additional tightening in the energy markets.

Notably, while crude oil prices have retraced somewhat from their peaks, the pass-through to consumer fuel prices has been asymmetric, petrol prices at the pump remain stubbornly high despite some easing in wholesale markets. Towards the back end of the week, prices were rising once more.

This is frustrating because there’s growing evidence that the UK economy was picking up before the war began. UK retail sales numbers released for March show that UK consumers have been able to dip into accumulated savings, so the war has not slowed their consumption. 

It will not take long for the effects to be more pronounced as the GfK consumer confidence survey showed consumers are anxious about the economy, and business optimism fell to its lowest level since COVID-19 according to the Confederation of British Industry.

The UK is not alone in this. Global purchasing managers indices (PMIs) showed that businesses are slowing production and raising prices. Most countries are experiencing price increases not seen since the brief window of extraordinary inflation in 2022.

Inflation is bad for political leaders. The decline in President Donald Trump’s net approval rating has started to accelerate.

In the UK, it’s yet another challenge for UK Prime Minister Sir Keir Starmer, in addition to the difficult testimony he gave to Parliament regarding the Peter Mandelson vetting affair, and the even more difficult evidence heard from former civil servant Oly Robbins, who oversaw the process.

The combination of these factors has made gilts the worst-performing major bond market since the onset of the war.

UK inflation data released last week offered few surprises. Inflation has picked up due to energy. The combination of the survey data and PMIs caused expected interest rates to rise from a single increase in 2026 to two hikes for both the UK and Europe.

We are often asked why central banks would increase interest rates when the economy is struggling due to high prices elsewhere. The answer is that if it seems like higher oil-related prices feed through into higher wages, the central bank faces a wage price spiral, which can only be broken by deliberately weakening demand, done by raising interest rates.

In April, the Bank of England’s Decision Makers Panel of firms said it expects firms to raise prices by 4.4% over the next year, and for inflation to reach 4%, double the BoE’s target. 

However, the BoE’s agents, who speak to businesses and gauge how they are feeling about things, learned firms are worried about their ability to pass on price increases, which means they are more likely to ‘absorb’ them (suffer weaker profits). If companies do not pass on the price increases, the BoE will not need to raise interest rates.

Corporate earnings: Strong but facing elevated expectations

Earnings season continues with quite strong numbers overall emerging from businesses.

At a time when valuation multiples have contracted (the S&P 500 12-month forward price-to-earnings ratio has declined from 22.9 to 20.1), corporate earnings have been the engine driving equity markets higher.

With about a quarter of U.S. companies having reported, aggregate earnings are coming in around 10% above expectations, producing a blended year-over-year growth rate of 14.4%. Technology has been the standout, with earnings up 46% year-over-year. 

Corporate balance sheets remain in good shape, with interest coverage for U.S. non-financial businesses at very high levels, leaving ample capacity for continued investment.

Companies tend to beat their short-term earnings estimates by design, they edge down their guidance to reach something achievable. But longer-term expectations are high and must be met in order to justify the current valuations. Several cyclical, sector-specific, and structural factors suggest meeting currently elevated expectations will be challenging.

The boost to the economy from lower bond yields appears to be over. Fiscal policy for advanced economies in 2026 is projected to be neither loose nor tight. U.S. jobs growth has slowed to zero, and historically, every time non-farm payroll growth has dropped to zero or below, corporate earnings have followed. Earnings recessions have occurred roughly once every four years; the last was in 2023, implying one could be due by 2027.

The main anxieties facing company earnings at the moment are around AI-related capital expenditure by hyperscalers, which has boomed. The four major hyperscalers, Microsoft, Meta (Facebook), Amazon and Alphabet (Google), are expected to spend over USD600 billion this year, up from USD200 billion just two years ago. However, there are legitimate questions about what returns they are likely to make on this investment.

The relevant CEOs themselves have acknowledged they’re investing not solely for attractive returns but for survival, a dynamic reminiscent of a prisoner’s dilemma, where mutual investment compresses margins.

So, while this seems very different from the previous tech bubble because these companies are incredibly profitable at the moment, there are some genuine reasons to fear that future profitability could disappoint.

Coming up – 28 April 2026 to 4 May 2026

Rates on hold: 

The Federal Reserve announces policy on Wednesday, while the BoE and European Central Bank announce rates on Thursday. All are expected to keep rates on hold.

U.S.-Iran conflict: 

Mobility within the Strait of Hormuz will be the most important issue.

Big Wednesday: 

Microsoft, Alphabet (Google), Meta and Amazon will all report Q1 results.

The Middle East conflict remained the focus last week.

Following the breakdown of U.S.-Iran negotiations, last week the U.S. imposed a naval blockade on Iranian ports and coastal areas. This represented a shift in strategy from the previously threatened strikes on domestic Iranian energy infrastructure.

This pivot was reportedly driven by U.S. Central Command’s concerns over the depletion of munitions stocks required to sustain a prolonged bombing campaign.

The blockade’s practical enforcement was tested early in the week, with markets closely watching the passage of the Rich Starry, a Chinese-owned, Malawian-flagged vessel previously blacklisted for sanctions violations, through the Strait of Hormuz. The ship ultimately turned back, suggesting the blockade is, for the time being, holding. Tanker traffic through the Strait has effectively been curtailed.

The geopolitical calculus remains complex. Helima Croft of RBC Capital Markets cautioned against assuming China would pressure Iran toward a deal. She noted that Beijing has amassed significant energy stockpiles and may view the redeployment of U.S. military assets away from Asia, and the running down of American missile inventories, as a net strategic benefit.

On the other hand, the blockade imposes real economic costs to the Chinese energy supply, which doesn’t improve the already strained bilateral relationship between Washington and Beijing.

By mid-week, however, sentiment shifted materially. The President, Donald Trump, indicated that Iran had reached out to resume peace negotiations, with reports suggesting face-to-face talks would occur before the current ceasefire expires next week.

Over the last week, negotiations have continued on a number of official and unofficial fronts. Specific parameters related to Iran’s nuclear programme remain contentious, but as both parties are evidently able to restrict access to the Strait of Hormuz, it becomes harder for either one to use that as leverage.

During the weekend, the Strait appeared to have been reopened by Iran, but it was closed again as the U.S. failed to lift the blockade. These developments serve as a reason for optimism regarding a mutually beneficial agreement potentially being reached this week.

The market reaction to these developments was notably restrained throughout the week. Equity volatility indices fell back to levels consistent with those prevailing before the conflict’s onset, and an increasing number of global indices moved into positive territory relative to the start of hostilities. Brent crude, while still elevated at approximately USD94 per barrel, eased from its highs as the prospect of a diplomatic resolution introduced fresh supply expectations.

There is no question that markets appear complacent considering the significant economic risks that remain. It seems likely that the market reaction has more to do with the continued flow of new funds into markets, driven mainly by employment compensation, than with an appraisal of the earning potential of most companies.

The weekly employment data released, which runs up to 11 April, showed that there has been no discernible increase in job losses since the conflict began. While employment remains reasonably strong, pension contributions will continue to push stocks higher.

Companies that had stopped buybacks ahead of their earnings releases will be able to return to the market once they have reported, which will likely provide additional support for the markets.

The earnings season properly began last week and will step up this week.

U.S. inflation: Accelerating from an elevated base

The main concern for investors has been the risk of inflation. It detracts from growth and increases potential interest rates.

In the U.S., Consumer Price Index (CPI) data for March has shown an acceleration in headline inflation, jumping to 3.3% year-on-year. Unsurprisingly, the primary driver was a spike of over 20% month-on-month in the energy commodity category.

This represents the largest increase in the history of the data series, which extends back to the late 1950s. There were early signs of energy cost pass-through, most visibly in airfares, but critically, there has been no evidence yet of broad-based contagion.

The conflict is not the only factor affecting inflation. AI, for example, is both disinflationary and inflationary. While there is an expectation that AI will suppress ‘white collar’ wages and, thus, services inflation, AI-related demand has driven computer memory prices up over 2,000% in the past year and therefore maintained upward pressure on tech hardware prices.

What will the implications of this be for Federal Reserve (the Fed) policy? Markets are now pricing in the possibility of a single cut in the Fed funds rate through year-end. With inflation accelerating from an already elevated level, and having missed its target for an extended period, the Fed will require clear, sustained evidence of economic weakening before cutting rates.

Expected changes in interest rates this year

Two factors will be decisive.

First, the consumer: spending growth has held up at 2.5% year-on-year, but income growth has weakened to just 1%, pushing the savings rate down to a historically low 4%. Bank of America deposit data reveals a stark K-shaped divergence, higher earners are seeing wage growth near 6%, while lower earners are at approximately 1%.

Given that lower income households have a higher marginal propensity to spend, this divergence represents a meaningful risk to the consumption outlook.

Second, inflation expectations: market-based measures, such as five-year forward expectations, remain well-anchored, and survey-based measures show only a modest uptick – nothing alarming thus far.

UK: Growth remains resilient, but headwinds are gathering

UK monthly GDP data for February came in surprisingly strong at 0.5% month-on-month, reflecting an improvement in household confidence following the widely feared autumn Budget.

However, this pace is not considered sustainable, and the data pre-dates the onset of the Middle East conflict. Purchasing Managers Indices (PMI) readings have already softened, and elevated energy costs are expected to take the sting out of the year’s strong start.

The government announced a £600 million package of deferred costs for manufacturing businesses to help manage higher input cost inflation, a modest but directionally positive measure.

UK wage growth remains stubbornly above levels consistent with the Bank of England’s 2% target, effectively ruling out near-term rate cuts. Markets now expect one to two rate hikes by year-end, and gilt yields have risen accordingly. Sterling has maintained a firm footing near USD1.35, supported by the expectation of sustained higher rates.

Political risk has also entered the frame. The revelation that former U.S. ambassador Peter Mandelson failed the vetting process has placed additional pressure on Prime Minister Sir Keir Starmer. 

Prediction markets are now seeing the probability of Sir Keir’s departure by year-end jump from approximately 40% to 55–60%. This uncertainty contributed to gilts underperforming other European sovereign bonds.

Coming up – 21 April 2026 to 27 April 2026

U.S.- Iran cease fire:

Will the ceasefire hold and will the Strait of Hormuz be reopened? This will be the main concern for markets.

UK house prices:

Rightmove data will show how house prices are holding up now that mortgages have become more expensive.

UK jobs data:

The U.S. labour market is holding up well, but it remains to be seen how European labour markets will fare with higher energy prices.

Last week, markets gained for a second consecutive week, and credit spreads narrowed despite the single most important driver of market sentiment, the evolving situation in the U.S.-Iran war.

When European investors departed for the Easter weekend, President Trump’s deadline for the reopening of the Strait of Hormuz was hanging over markets. President Trump had promised to unleash a wave of strikes against power and desalination plants if the Strait was not reopened by Easter Monday. That deadline was extended to 20:00 local time last Tuesday (01:00 on Wednesday in the UK).

Shortly before that deadline, it was announced that a ceasefire agreement had been reached, which became the week’s defining moment. The ceasefire, agreed between the U.S. and Iran, is conditioned principally on the reopening of the Strait of Hormuz to commercial shipping. Iran confirmed the Strait would be ‘navigable’, but the details remain deeply contested.

The Iranian idea of an open Strait seemed to require transit fees, which is something that multiple regional and global consumers of Gulf oil have refused to consider, complicating the path to a durable resolution.

By the time European markets opened, it was clear that this ceasefire was imperfect. There was confusion over the terms, suggestions that the parties had agreed to different drafts and disputes over whether the ceasefire extended to action in Lebanon.

Several countries have refused to negotiate transit with Iran, and President Trump has made clear that transit fees are not part of the agreement. As a result, shipping did not meaningfully resume in the Strait ahead of scheduled talks between Iran and the U.S. in Islamabad, Pakistan over the weekend.

Disagreements extend beyond the issue of transit fees, with Iran also demanding reparations for war damage.

By the beginning of this week, the emphasis had changed, with President Trump instead choosing to impose a blockade on vessels bound for Iranian ports. U.S. officials announced this has prompted Iran to make contact again, and new talks are rumoured to be taking place this weekend.

What are the possible outcomes?

Helima Croft of RBC Capital Markets outlined three possible scenarios:

• The divide between Washington and Tehran’s negotiating positions proves too difficult to bridge and fighting resumes.
• A deal is reached that largely meets Iran’s established enrichment and missile priorities and comes with the added bonus of control of the Strait of Hormuz.
• A no-peace, no-hot-war pause of indeterminate duration emerges that renders the ultimate security of the region’s waterways unsettled.

The resilience of equity and credit markets would suggest that investors are not positioned for the first option. The extending deadlines, erratic social media posts, and lack of response to reports of ceasefire violations suggest that the U.S. is reluctant to escalate military action further, possibly due to the humanitarian or political consequences.

The central purpose of the initial action was to prevent Iran from achieving the capability to produce a nuclear weapon, but Iran now demands the right to enrich uranium without supervision.

It seems inconceivable that the U.S. could agree to that, as it would mark a huge backward step from the Joint Comprehensive Plan of Action (JCPOA) agreement, which President Trump pulled America out of in 2018.

By Friday, there had been no meaningful commercial traffic transiting the Strait of Hormuz since the ceasefire was announced. Oil prices remained within touching distance of USD100 per barrel, underscoring the continued tightness in energy markets.

Equity and credit markets remain strong

It may be surprising against this backdrop that equity and credit markets have remained resilient. For context, markets found stability prior to the ceasefire agreement, reflecting the fact that many investors reduced risk during the early weeks of the war.

Markets continue to enjoy inflows from relatively robust employment levels and companies are buying their shares back. Under such circumstances, the risks facing investors start to shift, with the potential for them to be under exposed to any good news, for example, Friday’s story that Ukraine’s top negotiator believes a potential peace deal with Russia is within reach.

European currencies and bonds all directly benefit from any easing of hostilities. UK bonds in particular offer the highest yields in the G7 because of the tendency to have higher interest rates. Policy is slightly restrictive already, so there’s a weaker case for interest rate increases.

Despite such high yields, the predominantly long-dated funding of the UK means that it has been protected to some extent from the sharp increases of bond yields in recent years. So, despite its bond yields being the highest in the G7, the rate it pays (the coupon on its bonds) is close to average.

As we’ve previously noted, the UK bond market and sterling closely reflect the economic reality of the UK economy, however the UK equity market is more international and very diversified across sectors.

The relatively high weightings in defensives and energy mean that it will remain more defensive than other equity markets if conflict intensifies, and it will benefit less than other major European markets from an easing of hostilities.

Coming up – 14 April to 20 April

Earnings season:

First-quarter earnings will be released for several companies this week, kicking off, as always, with the banks, but also including Dutch semiconductor equipment maker, ASML.

Informed views:

The International Monetary Fund (IMF) publishes its World Economic Outlook and Global Financial Stability reports this week.

China data:

Gross domestic product (GDP), industrial production and retail sales will be released by China on Thursday. The economy has struggled to maintain momentum recently and is exposed to higher energy prices and disruption from the war in Iran.

Markets return from the Easter break facing another key deadline in the U.S.– Iran war.

President Trump’s original deadline for reopening the Strait of Hormuz passed over the weekend and was extended to today at 20:00 local time (01:00 the UK) after which he had promised to target desalination and power plants (the emphasis seems to have shifted to bridges and power plants).

The threat of further military escalation is real, and equity and bond markets have made and held small gains over the last week. Markets are dispassionate and consider only economic consequences rather than political or humanitarian ones.

Even so, it might seem surprising that markets have remained calm, despite depleting energy reserves and system redundancy tightening the market further. From an economic perspective, an escalating conflict and a deadlocked one have largely the same implications. In both scenarios, the Strait of Hormuz (the Strait) is already largely closed with only a few vessels passing through on Iranian terms.

An escalation of the conflict, therefore, would not necessarily impede transit any more than the current situation already does. What matters is whether it moves the situation closer to, or further away from, an open Strait. With or without escalation, the Strait can reopen shortly after the end of hostilities, which can occur whenever the U.S., as the dominant military power in the region, chooses.

With the original aims of the action having been quite loosely defined, a form of regime change has occurred, as has a form of disarmament, though the recovery of enriched uranium seems like a far harder hurdle to clear. If the U.S. were to cease hostilities, Iran might continue disrupting shipping briefly as a deterrent against future action but would ultimately benefit more from allowing normal service to resume.

As long as the economic impact of the war doesn’t worsen and the economy keeps moving, maintaining hedges and short positions becomes increasingly costly, allowing markets to gradually stabilise. Most equity markets have recovered from their lows, indicating that technical support is kicking in, with last week’s sharp mid-week rally driven more by deeply oversold positioning than by any substantive change in the conflict’s trajectory.

The more consequential risk remains the Strait. An extended closure would push energy prices to levels where demand destruction begins, weighing on growth alongside demand for aluminium and other industrial metals. Brent crude traded above USD115 per barrel last week, and investors are now attempting to price in the growth implications.

The oil supply picture remains precarious. Research suggests that beyond mid-April, once de-sanctioned Russian and Iranian floating crude and strategic reserve stocks are drawn down, the oil deficit could rise from 4.5/5 million barrels per day to approximately 9/9.5 million barrels per day.

On prediction markets, roughly 50% of participants expect more than 20 ships to transit the Strait by the end of April, with only about 40% expecting 30 or more, well below the pre-war average of approximately 100 ships per day. Even 30 ships per day, combined with activated pipelines in Saudi Arabia, the UAE, and Iraq, wouldn’t restore pre-war supply levels. This implies oil prices would need to remain significantly elevated to balance the market.

Elsewhere, the Houthis’ entry into the broader conflict last week, threatening Saudi oil infrastructure, prompted retaliatory strikes on two of the world’s largest aluminium smelters in the region. The producer stated it had sustained significant damage, and it would take “considerable time” to bring capacity back online. For context, the Middle East accounts for approximately 9% of global aluminium production, and the two affected smelters produce around 3.2 million tonnes per year.

Gas prices have returned to levels last seen at their January peak, though they remain well below the 2022/23 extremes. The feed-through to consumer prices will take time but is now a clear risk to the inflation outlook.

European markets must now wait until tomorrow’s 01:00 deadline to see how the next phase of the conflict develops.

Quarterly performance (to 31 March):

Emerging markets were the best-performing major region over the quarter, while the U.S. was the weakest. Currency effects were material, the S&P 500 underperformed in local currency terms over the final month but outperformed in sterling total return terms due to dollar strength.

UK motor finance:

The FCA announced motor finance payouts of approximately £7.5 billion, nearly £2 billion below original estimates, with 12.1 million loans eligible for compensation of up to £829 each. This should benefit domestically focussed banks and lenders that had provisioned for higher figures.

Coming up – 7 April 2026 to 13 April 2026

U.S. jobs: 

The U.S. job openings and labour turnover survey will give a granular breakdown of how strong the jobs market was before the conflict broke out. The non-farm payroll report on Friday will then detail how many jobs were created or lost in the first month of the conflict.

The deadline: 

President Trump’s deadline for Iran to re-open the Strait of Hormuz on 6 April has passed and is now set for today at 20:00 local time, 01:00 (8 April) in the UK.

The battle for hearts and minds:

Several business and consumer surveys, as well as the regular flow of opinion polls, will gauge the impact of gasoline prices returning to levels last seen in mid-2022.

The markets are being reshaped by escalating Middle East tensions. This update explores energy shocks, inflation risks and sector winners and losers as investors navigate volatility, policy constraints and fragile confidence.

The dominant theme of the last week was the Iran war and its far-reaching consequences for global energy markets, risk assets and central bank policy. Europe saw sharp equity declines as escalatory rhetoric from both Washington and Tehran rattled markets.

This followed President Trump issuing a 48-hour ultimatum, demanding the reopening of the Strait of Hormuz (the Strait) and threatening strikes on Iranian power plants. But markets rallied as this was later extended to a five-day deadline and subsequently a ten-day deadline, reflecting the President’s assertion that progress is being made in negotiations between the two parties. Iran, however, was characteristically defiant: issuing counterthreats targeting U.S. military bases, energy infrastructure of nations perceived to be assisting the U.S. war effort, desalination facilities and notably financial institutions holding U.S. Treasury bonds.

As the week progressed, a familiar pattern emerged, brief risk-on rallies on hints of diplomacy, followed by renewed pessimism as the facts on the ground failed to improve. Last Tuesday (24 March), President Trump posted a lengthy statement claiming “advanced negotiations” with Iran toward a “complete and total resolution of hostilities.” Iran’s foreign ministry acknowledged that messages had arrived via intermediary countries but denied any direct negotiation with Washington, stating that its stance on the Strait “has not changed.”

By last Wednesday, a 15-point plan had reportedly been transmitted via Pakistan, prompting a modest risk-on session. Iran eventually confirmed it had rejected a U.S. proposal. By Friday, the consensus among the geopolitical experts remained decidedly pessimistic regarding the scope for near-term de-escalation.

Helima Croft, Managing Director and Head of Global Commodity Strategy and MENA Research at RBC Capital Markets, noted that despite a minor uptick in vessels transiting the Strait, she doesn’t expect anything close to a normalisation of flows. 

The appointment of hardliner Mohammad Bagher Zolqadr, the former commander of the Islamic Revolutionary Guard Corps (IRGC), to head Iran’s Supreme National Security Council could signal a further coalescence within the regime around an uncompromising stance.

Escalation and leverage

A consensus exists among many observers that Iran does need to end the conflict, as it’s inflicting considerable pain on both the regime and the populace. However, the Iranian leadership wouldn’t accept a deal if they can avoid it, without first demonstrating their ability to inflict economic pain through their control of the Strait. The ability to frustrate that waterway would be the strongest means of discouraging further acts of aggression against the regime.

Historically, energy spikes and erratic acts by President Trump have been good entry points into markets ahead of what can be sharp rallies as conditions normalise. But the signs are not yet there that this is a great buying opportunity. While classic risk gauges such as the VIX have risen, they aren’t excessively elevated given the severity of the downside scenario – a possible sign that investors are reluctant to abandon their positions ahead of a possible rebound.

There are some lasting concerns too. Policymakers have significantly less bandwidth to provide support than in previous crises. Inflation has been above target in both the UK and the U.S. for approximately five years. Higher-for-longer energy prices risk de-anchoring inflation expectations, constraining central banks from easing even as growth deteriorates. There’s now an expectation that central banks will raise interest rates.

Meanwhile, elevated government indebtedness in many countries limits the scope for fiscal stimulus. In a recession, falling tax revenues and rising automatic stabiliser spending (welfare benefits) would compound the debt problem further. For now, back-channel talks continue with the hope of de-escalating the tensions.

Troop movements, however, suggest that the U.S. could be prepared to seize some territory (perhaps Kharg Island, through which most of Iran’s oil exports flow) or enriched uranium supplies, or to clear the coastal areas from threats to shipping. This could just be posturing, but recent history has suggested that troop movements do tend to precede deployments.

UK firms start to feel a costs pinch

European markets remain understandably pre-occupied by the Middle Eastern conflict, and specifically the impact on energy prices, which makes the UK’s official consumer price index statement seem less important overall. However, some data, such as the purchasing managers indices (PMIs), remain relevant.

Because they’re based upon companies’ surveyed responses since the outbreak of the conflict, the PMIs confirm that businesses are experiencing the fastest acceleration in input prices since 2023. This was most pronounced in manufacturing, but services output prices were affected too, although not enough to immediately offset the higher input costs.

The tone from policymakers has remained hawkish. Bank of England Chief Economist Huw Pill discussed how uncertainty shouldn’t be used as an excuse not to act to contain inflation. Fellow Monetary Policy Committee member Megan Greene discussed how there will be lasting inflationary effects from the conflict even in a “best-case” scenario.

By contrast, Deputy Governor Sarah Breedon did acknowledge that second-round effects would be less likely now than in 2022, due to the weaker labour market. That is unquestionably true, but, having spent most of the last four years missing the inflation target materially to the upside, policymakers feel compelled to err on the side of the hawks.

Sectors to be impacted differently?

Throughout Europe, the pass-through of higher energy prices affects companies via changes in monetary policy and more directly as well. High bond yields mean lower real estate valuations as well as less deal flow, because the financing costs for new deals have risen. European real estate sector yields, which had fallen to their lowest since 2022, have risen to their highest since 2023.

Sectors such as consumer services and retail, on the other hand, will see less volume growth because of the real income compression from energy price inflation. Price earnings ratios are at the lower end of their range but don’t currently stand out.

All these factors combine to affect auto sales, where financing costs, running costs and general economic confidence are all relevant considerations.

Coming up – 31 March 2026 to 7 April 2026

American jobs expectations:

The hope is that 51,000 new U.S. jobs were created in March despite the disappointing 92,000 net loss during February.

Early inflation estimates:

Several European countries estimate inflation for the month of March including the first wartime price increases.

War in Iran:

It seems likely that most news will surround progress towards a de-escalation, or alternatively the increasing prospect of U.S. troops entering Iran.

The current overarching theme is the evolving Iran war and its impact on global energy markets. Market participants have materially pushed out their expectations for the duration of the crisis.

RBC Capital Markets commodity strategist Helima Croft, following meetings in Washington, extended her estimated timeline for the conflict and associated energy disruption.

Even if the White House seeks an early exit due to rising economic costs, an emerging consensus suggests Iran would likely continue fighting for some time to deter future Israeli and U.S. strikes.

Energy prices have fluctuated in rhythm with the ebb and flow of attacks on energy assets. Israel struck Iran’s South Pars gas field, the world’s largest natural gas reserve, prompting Iran to intensify attacks on Qatari LNG facilities.

Qatar Energy confirmed missile strikes on several facilities early last Thursday morning (19 March), with sizeable fires reported (since contained) and extensive further damage. Attacks on energy assets seemed to reduce after intervention from President Trump.

The Strait of Hormuz remains a focal point. Reports suggest Iran may have begun laying mines, though this is unconfirmed.

Notably, Iran appears willing to negotiate safe passage with individual countries; India, Turkey, France, and Italy have all reportedly opened discussions, suggesting the Strait has not been aggressively blocked at this stage. Tanker traffic, however, remains severely disrupted.

How are the central banks responding?

As war continues, the big development was hearing from all the major central banks about how it is affecting their thinking.

The Federal Reserve (Fed)

The Fed held rates steady for the second consecutive meeting, as widely expected. The real substance came from updated projections and Chair Powell’s press conference, which together amounted to a hawkish hold.

Core personal consumption expenditure (PCE) inflation forecasts for 2026 and 2027 were both revised upward, reflecting sticky inflation and energy price pressures, with the target now not expected to be reached until 2028.

Long-run gross domestic product (GDP) growth was upgraded to 2%, the highest on record, and the long-run neutral rate rose to 3.1%, the highest since 2016, both signalling optimism around AI-driven productivity gains.

The median Federal Open Market Committee (FOMC) member still projects one rate cut this year, but Powell stressed this hinges on inflation progress that looks increasingly uncertain.

Notably, he declined to call the current energy shock transitory, given the succession of supply shocks in recent years, a theme echoed across central banks globally.

The productivity upgrade aligns with the views of Kevin Warsh, Trump’s nominee for the next Fed chair, who argues AI will act as a disinflationary force. However, several FOMC members have cautioned that such gains could raise the neutral rate rather than facilitate cuts. With core PCE at 3.1% and above target for nearly five years, the bar for easing remains high.

The Bank of England (BoE)

The BoE held rates in an unanimously hawkish decision, a surprise, as markets had expected two dissenting votes in favour of a cut. Even the typically dovish Swati Dhingra acknowledged that a prolonged supply shock could warrant tighter policy.

Mechanical estimates suggest even a modest 10% rise in gas and petrol prices would add roughly half a percentage point to the consumer price index including owner occupiers’ housing costs (CPIH), with larger increases producing proportionally greater effects.

These are the direct effects on prices, but if they should push inflation to the psychologically important 4% threshold, history suggests more aggressive household inflation expectations would follow.

The labour market offers some comfort, with the vacancy-to-unemployment ratio below the BoE’s equilibrium estimate and surveys pointing to relatively loose conditions. Ironically, the early signs of stabilisation in unemployment earlier this year and the strongest payrolled employee growth since October 2024, could end up tipping the BoE’s hand towards tighter policy.

The 10-year gilt yield has approached 5%, levels not seen since the financial crisis. The move in gilts has been larger than in most major eurozone sovereign markets, reflecting both inflation concerns and heightened anxiety around UK fiscal sustainability.

There is a clear relationship between the rise in a country’s 10-year yield and its debt-to-GDP ratio. The UK’s persistent inflation problem, worse than the eurozone’s, and expectations that the government may respond to the crisis with more deficit-spending (both potentially inflationary policies), are compounding the sell-off.

The European Central Bank (ECB)

As expected, the ECB held rates steady for a sixth consecutive meeting.

President Lagarde highlighted the Iran conflict as creating upside risks to inflation and downside risks to growth and notably avoided repeating that the ECB is in a “good place,” instead describing it as “well positioned” to navigate uncertainty.

Staff economists significantly raised their 2026 inflation forecast to 2.6%, although they still expect a return to target by 2027–28.

The ECB also published alternative scenarios given the uncertain outlook, with the worst case projecting a euro-area recession accompanied by a sharp spike in inflation.

The Bank of Japan (BoJ)

The BoJ held its key rate at 0.75% in an 8:1 decision, with the sole dissenter in favour of a hike to 1%.

The bank cited the Middle East situation and rising oil prices as a new risk, though Governor Ueda said he needed more time to assess the impact.

He noted that spring wage talks are expected to yield solid results, with attention now on whether higher wages spread to smaller businesses.

Unlike other major regions, there has been little change in Japanese interest rate expectations.

Coming up – 24 March 2026 to 30 March 2026

G7 meeting:

Foreign ministers from the G7 countries meet to discuss the Iran war on Thursday.

Economic outlook:

The OECD will publish its economic outlook.

Central banks speak:

As central banks have emerged from their quiet periods, speakers will have an opportunity to finesse the generally hawkish messaging which they delivered to the market last week.