Investment Viewpoint: What easing tensions mean for markets and portfolios

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways

1. The geopolitical situation improved late last week and boosted investor confidence. Markets reacted positively to reports that the Strait of Hormuz had been opened to shipping again but given headlines over the weekend this is now in doubt. Although the dispute over access to the Strait continues, a ceasefire between Israel and Lebanon at least signalled a striving for de‑escalation. We continue to monitor these circumstances and their effect on markets.
2. Equities rose last week due to better headlines and earnings strength. Global equities gained just over 3% in euro terms over the week, with company results adding momentum.
3. Tech and AI-related names led the gains, while energy-linked and defensive sectors lagged. Strong updates from ASML, TSMC, and Samsung supported IT and communication services, while Utilities, Oil and Gas, Consumer Staples and Healthcare were weaker.
4. Bond markets were supportive as yields moved lower. The euro area 10‑year yield fell back below 3%, helped by lower oil prices and a more patient tone from European Central Bank (ECB) speakers.

What factors drove markets higher last week?

• Financial markets continued to recover last week, delivering solid returns as several encouraging developments helped to lift investor confidence. One of the most positive headlines was the announcement that shipping routes through the Strait of Hormuz had opened again. Although access now seems in doubt once more, the importance of securing it has reached the top of the global geopolitical agenda.
• The announcement of a ceasefire between Israel and Lebanon pointed to a de‑escalation in Middle East tensions, tensions that have weighed on markets in recent weeks.

What effect did geopolitical developments have on equities?

• Equity markets responded positively to these developments, with global equities rising just over 3% in euro terms over the week. While easing geopolitical risks played an important role, company earnings were also a key driver of market performance. The strongest gains were seen in information technology and communication services. In recent weeks, several companies central to the artificial intelligence (AI) supply chain, including ASML, TSMC, and Samsung, reported good results and upgraded their sales and profit forecasts.
• Such reports and upgrades reinforce the view that investment in AI remains robust, even if the pace of growth is beginning to moderate slightly. The weakest sectors were those related to energy prices (Utilities, Oil and Gas) and defensives (Consumer Staples and Healthcare).

What is driving bond yields right now?

• Government bond yields moved lower over the past week, with the euro area 10 year yield falling back below 3%. A significant factor here has been the decline in oil prices, with Brent crude oil seeing a reduction to the amount of over half of its rise at the beginning of the US-Iran conflict. In addition, comments from members of the European Central Bank (ECB) suggested a more patient approach to future policy decisions, which helped to steady fixed income markets.
• On the economic front, the International Monetary Fund (IMF) published updated forecasts which showed little change to global growth expectations for the year. While earlier upgrades had been considered, these were subsequently offset by geopolitical uncertainties. The IMF’s current baseline points to global growth of around 3.1%, broadly in line with long term trends.

What does China’s latest economic data tell us about its economy?

• First quarter GDP growth in China came in at 5% year on year, slightly better than expected and an improvement on the previous quarter. However, some signs of slowing emerged towards the end of the quarter, particularly in retail sales, which suggest more subdued consumer activity. While growth remains within official targets, this may reduce the need for additional government policy support in the near term.

The week ahead: what to watch out for

In the US and euro area, business and consumer sentiment surveys will be released. We will also have retail sales figures from the US, giving us a good picture of how businesses and consumers are responding to recent volatility and higher energy prices.