Investment Viewpoint: Keeping perspective during market uncertainty

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways

1. Geopolitical tensions are driving volatility, with Middle East developments and rising energy prices weighing on both equity and bond markets.
2. The European Central Bank signalled greater uncertainty around inflation and policy timing with every meeting now ‘live’, and the US Federal Reserve dialled back expectations for rate cuts.
3. Markets remain cautious but orderly with equity declines relatively contained. Sector performance continues to diverge.

What was driving markets last week?

• Last week was dominated by the ongoing conflict in the Middle East and central bank policy meetings. Both equity and bond markets moved lower as the conflict remained in an escalation phase and energy prices continued to rise. Disruption to global energy supply chains remains a concern, particularly due to the effective closure of the Strait of Hormuz, which has led to supply pressures in parts of the Asia-Pacific region. To date, these disruptions have not materially affected Europe or the United States, although higher energy prices are being felt globally. Central bank comments led to a significant upward resetting of interest rate expectations.
• There have been attacks on energy infrastructure by both sides in the conflict, contributing to continued market uncertainty. Some reassurance was taken from comments by the Israeli Prime Minister indicating an intention to avoid further strikes on Iran’s energy facilities, alongside suggestions that Iran’s nuclear and missile capabilities had been significantly curtailed. However, this was reversed on Saturday by President Trump imposing a deadline on Iran to reopen the Strait of Hormuz within 48 hours or risk a strike on Iran’s power plants. At time of writing, Trump has announced that there have been ‘productive conversations’ with Iran and military strikes on Iranian power plants are suspended for a five-day period.

How has market performance been impacted? 

• As of last Friday, world equities are down 6.4% in local currency (-5% in euro terms) and the euro area bond market is down 2.4%. But year-to-date the declines are modest; world equities are down 2.7% (1.2% in euro terms) and the bond market is down just 0.6%. This reflects an underlying belief that the conflict is unlikely to cause lasting damage to the global economy and that inflationary pressures will be relatively transitory.
• Within equity markets, performance has continued to vary by sector. Energy-intensive sectors such as materials and industrials have been under pressure, while energy producers and utilities have performed relatively well. Less energy-intensive areas of the market, particularly parts of the technology sector, have shown greater resilience. This highlights the benefits of maintaining exposure to long-term structural growth themes.

What were the outcomes of the European Central Bank (ECB) and US Federal Reserve meetings last week?

• At its most recent policy meeting, the ECB adopted a more cautious tone than financial markets had been expecting. Updated ECB forecasts showed higher expected inflation, both headline and core, alongside weaker economic growth projections for 2026 and 2027. Of particular note was the ECB’s assessment that core inflation is now likely to remain above its target level for longer than previously anticipated.
• The ECB also adjusted its communication around the stance of monetary policy. While previous statements had described policy as being in a good place, the latest commentary suggested policy is now “well positioned to navigate this uncertainty” a subtle, but meaningful shift that signals greater uncertainty about the path ahead. This change, combined with higher inflation forecasts, has led some market participants to bring forward expectations of potential policy action.
• Taking all factors into account, the ECB faces a difficult balancing act. Higher energy prices linked to geopolitical tensions may lift inflation in the short term, but it remains unclear whether these increases will feed through into broader and more persistent price pressures across the economy. As a result, it may be too early for policymakers to draw firm conclusions. While interest rate expectations have moved higher, our assessment is that markets may be running ahead of the ECB’s likely timetable, with policymakers more likely to wait for clearer evidence before making any changes. But the ECB has said that every future meeting is ‘open and live’ for changes to interest rate policy. Decisions will be based on the latest economic data.
• In the United States, the Federal Reserve also struck a cautious tone, highlighting the inflationary risks associated with higher energy prices and geopolitical uncertainty. Expectations for interest rate cuts this year have been erased, placing upward pressure on bond yields across maturities.

Looking Ahead

Markets will remain dominated by developments in the Middle East conflict. The only data of significance is the business sentiment surveys from the euro area (the PMI’s), but these will be regarded as backward looking.