Weekly market commentary

With the first quarter’s earnings season now largely complete, the US-Iran conflict has reasserted itself as the dominant source of cross-asset volatility, with the latest developments firmly in “will they, won’t they” territory. President Trump signalled over the previous weekend that a peace deal was largely negotiated with reports pointing to a potential 60-day ceasefire extension that would see the Strait of Hormuz reopened and Iranian mines cleared, in exchange for sanctions waivers on Iranian oil exports. Despite both sides being actively engaged in negotiations, tensions appeared to flare once again, with the US launching “self-defence” strikes on Iranian military infrastructure, which was met with retaliatory strikes, an attack on a US airbase and a promise of “more decisive” responses to further aggression. 

Despite the back-and-forth and continued risk of further escalation, markets appear to be looking through the near-term noise. Brent crude oil fell almost 9% through the week as investors priced in an eventual deal, while equities continue to grind higher, with a number of major indices hitting fresh all-time highs. The S&P 500 led the way closing at 7,563 on Thursday, extending a rally that has now delivered eight straight weekly gains, the longest streak since late 2023. 

Policymakers and central banks, however, are less sanguine. ECB Executive Board member Isabel Schnabel argued that a European rate hike in June would be needed, even if peace talks with Iran yield a deal, noting that the damage to energy infrastructure and supply chains has already been done and that the second-order effects of high energy costs are increasingly spilling over into the broader consumption basket. Eurozone headline inflation hit 3% in April, and Schnabel warned that “looking through is no longer an option” given the size and persistence of the shock. Schnabel’s hawkish tones have been echoed internationally as well, with US Fed Governor Lisa Cook highlighting that inflation is “clearly moving in the wrong direction”, and Bank of Japan Governor Ueda cautioning that oil price shocks are “tests of the entire inflation regime”. It’s a reminder that even if markets are comfortable with the direction of travel, the longer-term inflationary impacts of the conflict may take considerably longer to abate.