Investment Viewpoint: Staying disciplined through market uncertainty

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways

1. Markets paused after a strong start to the year. Global equities were flat last week in local currency terms, and euro area bonds fell by around -0.4%. This pause was to be expected, given that equities have already risen by around 6% year-to-date.
2. Tensions in the Middle East remains the main market driver. Negotiations are in a state of flux, but it does look like there may be a pathway to reopening the Strait of Hormuz.
3. Sector performance reflects energy price sensitivity and earnings resilience. Energy and utilities outperformed in the context of higher energy prices, while technology also held up well on strong earnings results (especially in the US and parts of Asia).
4. Economic momentum is diverging, with the US more robust than the euro area. US PMIs moved back into expansion territory, while the euro area surveys showed weakening to below the growth threshold and deteriorating consumer confidence.

What were the main trends in markets last week?

• Global equity markets were flat last week in local currency terms as strong earnings news offset the impact of the continuing conflict in the Middle East. Fixed income markets recorded modest losses, with euro area bonds down approximately 0.4%. Given that equity markets have risen by close to 6% so far this year, some consolidation at this point is to be expected.
• Attention remains firmly focused on developments in the Middle East, particularly the situation concerning the Strait of Hormuz and what it could mean for global energy supply. While there is still great uncertainty it looks like we could be moving towards a reopening of the Strait, even if there is not a full settlement of the conflict. Worries about potential supply disruptions have continued to influence markets.
• Bond markets have also paused following earlier weakness. Recent comments from the European Central Bank (ECB) about potential interest rate increases have been more measured, and while there is no clear improvement in the overall economic situation yet, the ECB’s cautious approach has already been reflected in market prices. As a result, fixed income markets appear (for now) to be on a more stable footing compared to recent weeks for now.

Which sectors performed best- and what does it tell us about where investors are looking for resilience?

• Within equity markets, performance has reflected these energy-related concerns. Energy and utilities were among the strongest sectors, benefiting from higher energy prices. Technology stocks also performed well, supported by the continuance of strong company results, particularly in the US and parts of Asia. More broadly, sectors that are less exposed to high energy costs and which show greater earnings resilience have tended to perform better than more energy-intensive and cyclical areas of the market.

How is the US performing compared to Europe and does this change the outlook for financial markets?

• Recent economic data has highlighted growing regional differences. Business surveys in the US and Europe pointed in opposite directions. In the US, purchasing managers’ surveys moved back into expansion territory, suggesting improving momentum. By contrast, surveys in the euro area weakened further, with overall activity slipping below the 50 level that typically separates growth from contraction. This softness has been most evident in services linked to consumer spending.
• Consumer confidence data in the euro area has also deteriorated, reinforcing concerns that higher living costs are starting to weigh on household spending. By contrast, US retail sales data for March was stronger than expected. Importantly, this was the first month in which higher energy prices were fully reflected, yet there was little evidence of an immediate impact on consumer activity. That said, it remains possible that spending could soften in the coming months if elevated energy prices persist.
• Looking ahead, financial markets may continue to move sideways unless there is a clear change in the geopolitical backdrop or more decisive news from the Middle East. While the ongoing earnings season is providing support for equities, this strength is currently concentrated in areas tied to longer‑term structural growth rather than to more traditional cyclical sectors.

The week ahead: what to watch out for

We will receive the first‑quarter GDP releases for the United States and the euro area; however, these figures are unlikely to materially influence market sentiment, as conditions have evolved significantly since the end of March. The business sentiment surveys to be released this week, the Manufacturing ISM in the US and PMIs from China, will give a better indication of how current developments could affect economic activity. We will also receive the latest US Consumer Sentiment report, which is likely to show a subdued mood.