Investment Viewpoint: The waiting game continues
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Markets and macro insights with Bernard Swords, Chief Investment Officer
Key takeaways
- During the second week of the Middle East conflict, we have seen continued escalation and energy prices climb higher, however overall trading remains orderly.
- Energy-linked sectors and low energy intensive sectors performed relatively well, while more cyclical and energy intensive sectors lagged.
- Inflation remains sticky (core inflation is rising slightly in both the euro area and US), pressuring bond markets.
- Despite volatility, there is still a slight preference for risk assets, particularly in structural growth sectors.
What has been the market impact of the conflict in the Middle East?
- The second week of the conflict in the Middle East has now passed, and the situation unfortunately remains in an escalation phase. Public statements from the parties involved show little sign of deescalation for the moment. Energy prices continue to rise but have eased from their peak.
- Broader financial markets have also come under pressure, though trading conditions have remained relatively orderly. Global equity markets fell 1.4% in local currency terms during the week, but the stronger US dollar helped cushion returns for euro-based investors, reducing the decline to roughly 0.7%. Year-to-date world equities remain in positive territory, up 1.4%.
- Inflation worries are weighing on bond markets. Last week the Euro Aggregate index was down 0.7% and is now down marginally (-0.3%) in 2026.
How are different financial sectors performing?
- Given the ongoing uncertainty, we expect news flow to remain challenging in the coming weeks. However, history suggests that as the economic impact of higher energy prices becomes clearer, the incentive to bring such conflicts to a close tends to increase. Within equity markets last week, sectors linked to power production, energy, and utilities performed relatively well.
- In addition, areas with low energy intensity, such as Information Technology and Communication Services, also posted modest gains. By contrast, more cyclical, energy intensive sectors were the weakest performers. Bond markets have also struggled as expectations for future interest rates have moved higher, partly in response to rising energy prices.
What does recent financial data tell us?
- Inflation data was reviewed, and recent figures have been somewhat disappointing. In the euro area, core inflation edged up to 2.4% from 2.2%, and in the US, the core Personal Consumption Expenditures (PCE) measure remains above 3% after a slight uptick last month. This combination of sticky inflation and rising energy prices has added pressure to bond markets. Nevertheless, we believe the recent weakness in bonds may be somewhat overdone.
- On the growth side, data has been encouraging. In the US, stronger capital investment has supported activity. In the euro area, fiscal measures in Germany have played a role, while in China an improvement in international trade has helped lift conditions. This more resilient economic backdrop provides support for maintaining a slight preference for risk assets, even as market volatility has increased.
- Within labour markets, the main area of concern is the US, where the latest employment report proved disappointing. However, these figures have been volatile from month to month, and it remains unclear whether the softness reflects weaker demand for workers or changes in labour supply linked to immigration policy. Overall, the mix of economic data continues to support our emphasis on structural growth sectors within equity portfolios. These sectors tend to be less sensitive to energy prices, which is particularly beneficial in the current environment.
Looking Ahead
Looking ahead, the key events this week will be the meetings of the European Central Bank’s Governing Council and the US Federal Reserve. No changes in interest rates are expected, but markets will be paying close attention to the commentary surrounding recent geopolitical developments. We will also receive industrial production data from the euro area, China, and the US, as well as China’s retail sales figures.
