The Middle East continues to dominate markets
Over the weekend, the US and Iran negotiated under a 14-day ceasefire framework announced by US President Donald Trump, which is set to expire on 22 April. The situation remains highly uncertain. So far, negotiations haven’t been successful, with the US and Iran leaving Pakistan, where the weekend talks were held, without an agreement. Several key issues are still unresolved. These include Iran’s nuclear programme, Israel’s role in the region, the conflict with Lebanon and, most importantly for the global economy, the status of the Strait of Hormuz.
Only a limited number of vessels have passed through this critical chokepoint in recent days. Under normal conditions, it handles around one-fifth of global oil and gas shipments, as well as other essential commodities such as fertilisers and speciality gases, including helium. Iran has also reportedly imposed transit fees of up to USD 2 million per vessel, which Trump has asked to remove. In addition, the US Administration now threatens to block all maritime traffic entering and exiting Iranian ports and coastal areas still today. This is in contrast to its initial plan, announced last Wednesday, to reopen the straight immediately to restore energy flows and help reduce global energy prices.
Energy prices did fall sharply last week. However, markets remain sceptical about both the durability of the ceasefire and whether there is a clear path towards a broader de-escalation. Brent crude rebounded from a brief low of just below USD 95 meanwhile to slightly above USD 100. This price action is consistent with our base case of the conflict lasting one to two quarters. In that scenario, we expect Brent crude to trade broadly between USD 95 and USD 120. We believe this would likely lead to weaker growth and higher inflation in 2026 than previously expected.
The data already points to slowing economic momentum. March purchasing managers’ indices and consumer confidence measures declined across most regions. At the same time, China’s factory prices returned to positive year-on-year growth for the first time since October 2022. Inflation in Western economies has also started to edge higher again, reaching 2.5% in the Eurozone, 3.5% in the UK and 3.3% in the US. Against this backdrop, we expect one rate hike each from the European Central Bank and the Bank of England this year. The US Federal Reserve could still deliver one rate cut in 2026, but all this depends on how the situation with Iran and energy prices develop.
Preferring time in the market to timing the market
Despite ongoing uncertainty, the ceasefire and negotiation efforts are encouraging. We therefore remain comfortable with our recent trades to improve overall portfolio quality as a hedge against geopolitical risks. Most recently, we have strengthened our fixed income allocation by increasing exposure to European and US government bonds, as well as emerging market debt in local currencies. We have also brought our US dollar exposure back to neutral as it tends to strengthen in times of market stress. Given the recent equity sell-off, our ‘insurance’ warrant position – in portfolios where this is applicable – appreciated so we decided to take profits and keep the remainder in place.
We are still underweight bonds overall, and continue to favour equities and commodities, including gold. Equity markets, at longer horizons, are typically driven more by corporate earnings than by geopolitics. Our focus, therefore, turns to the upcoming first-quarter earnings season in the US, which begins this week. Rather than reacting to short-term headlines, our approach is to keep portfolios invested in the market. This is supported by broad, high-quality diversification across assets such as gold, inflation-linked bonds and explicit hedges against inflation and geopolitical risks.
This week | US-Iran talks, inflation data, and earnings season
Markets will also have to digest yesterday’s Hungarian elections ousting Victor Orban after 16 years with centre-right, pro-EU rival Peter Magyar winning power. Alongside the start of earnings season on Wall Street, this week’s key macroeconomic focus will be on price data. This includes final March inflation figures for the Eurozone (Wednesday) and producer price data in the US (Tuesday), where pressures may echo the recent uptick seen in China. In the US, the Fed’s Beige Book for February (Wednesday) is expected to confirm a resilient economic backdrop. This will be followed by industrial production data for March (Thursday).
In China, first-quarter GDP growth, which we expect to be close to 5%, will be released on Friday. March data for retail sales and industrial production will be published at the same time and should reinforce the picture of relatively solid momentum, in particular regarding the export-driven industrial sector. Even so, financial markets are likely to remain focused on developments in the Middle East and their implications for energy prices. Any renewed upward price pressures could further intensify concerns around stagflation.