Investment Viewpoint: Markets lift on easing tensions

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways

1. Markets moved higher, with equities and euro area bonds gaining, supported by a US–Iran agreement that eased geopolitical tensions.
2. The tone from the Federal Reserve turned more hawkish at its latest policy-setting committee, with a strong emphasis on the inflation outlook and the need to bring inflation back towards target levels.
3. US economic data remains resilient, pointing to continued strength in underlying demand.
4. The broader outlook for financial markets has improved, with easing tensions helping to reduce inflation risks and support growth.
5. Our positioning remains unchanged with a modest overweight exposure to risk assets.

It was a positive week for financial markets. What was the key driver of this?

• Both equities and euro area bonds delivered gains last week – and a key driver of this improvement was the signing of a memorandum of understanding between the US and Iran, which was seen by investors as a meaningful step towards easing tensions in the Middle East.
• Encouragingly, shipping activity has also begun to resume through the Strait of Hormuz. While it will take time for supply chains and inventories to normalise fully, the reopening of this critical trade route suggests that recent disruptions are beginning to unwind. Markets are increasingly hopeful that this agreement could lead to a more lasting de-escalation of the conflict.
• Equity markets responded strongly to these developments, rising by over 2% in euro terms over the week. Gains were led by more economically sensitive, or cyclical, sectors, particularly information technology.
• The improving outlook for the Middle East has reduced a significant risk to global economic growth while also easing concerns around inflation, particularly through lower energy price pressures. This shift in sentiment was reflected in euro area bond markets, where yields declined across the curve.

What was the outcome of the US Federal Reserve’s meeting – and how did it impact markets?

• Midweek, markets experienced a period of weakness following the latest meeting of the US Federal Reserve’s policy-setting committee. This marked the first meeting under the new Chair, who surprised markets by placing a strong emphasis on the inflation outlook and the need to bring inflation back towards target levels.
• The Federal Reserve’s ‘dot plot’, which captures policymakers’ expectations for interest rates, showed a notable shift, with around half of members now anticipating a rate increase before the end of 2026. This represents a more cautious stance than had been expected and led to an increase in short-term US bond yields, although longer-term yields edged slightly lower.
• The more hawkish tone from the Federal Reserve has influenced US bond markets in particular, pushing up expectations for future interest rates. While this has had some impact on equities globally, market performance continues to be driven primarily by growth expectations.
• It is also worth noting that the Federal Reserve’s actions reinforced its independence, with the new Chair signalling a clear commitment to its mandate, regardless of external political pressures.

What were the main economic data releases last week?

• On the economic front, recent data continues to point to relative resilience in the US economy. Retail sales rose by 0.7% month-on-month, significantly ahead of expectations, indicating robust consumer demand. Industrial production was more modest but still positive, suggesting steady, if unspectacular, growth.
• In contrast, China’s economic performance remains mixed. While industrial production showed solid year-on-year growth, retail sales have weakened, both on a monthly and annual basis. This ongoing softness in consumer activity highlights challenges in China’s domestic economy and increases the likelihood of further policy support measures.

What is the outlook for financial markets – and what does it mean for our investment strategy?

• Looking ahead, the overall outlook for financial markets has improved. The easing of geopolitical tensions should help reduce inflationary pressures globally and support economic growth.
• Against this backdrop, maintaining a modest overweight exposure to risk assets continues to appear appropriate. We continue to see merit in equities, particularly in sectors such as information technology, which are benefiting from structural growth trends and remain a focus within our portfolios.
• That said, it is important to recognise that we are at a later stage of the economic cycle, and valuations in some areas already reflect a more optimistic outlook.
• In fixed income, euro area bond yields have declined and may have further room to fall, providing some support for returns. With portfolios remaining fully invested, we believe this positioning continues to be appropriate in the current environment.

The week ahead: what to watch out for

In the week ahead, the economic calendar is relatively light but still includes some important indicators. In the euro area, the latest business sentiment surveys, including the purchasing managers’ indices (PMIs), will provide insight into whether recent signs of stabilisation are continuing, particularly as energy-related pressures begin to ease. In the US, attention will focus on the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, as well as data on consumer spending. Together, these releases will help shape expectations for the future path of monetary policy.