Sp-oils of war

• Brent Crude oil rose +27% during the week, in dollar terms
• The US dollar strengthened against other major currencies

• Equities slid as the Iran war continued, but relatively the US fared better

Global equity markets ended a volatile week lower, as investors fretted about the escalating conflict in the Middle East disrupting energy supplies and stoking inflation. Oil prices surged, with Brent crude jumping from around $79 to $102 per barrel at the time of writing. Brent has now risen by roughly 67% this year. The key risk to energy markets is the effective closure of the Strait of Hormuz, a narrow 24-mile-wide channel through which roughly 20% of global oil and liquefied natural gas (LNG) supplies flow.

Although stock markets retreated last week, the US fared best, falling -1.4%. Not all heavyweight names fell: Microsoft advanced around +3.9%. Elsewhere, markets slipped between -5% and -7% (all in sterling terms). Despite the falls, many markets are still positive on a year-to-date basis, at the time of writing.

Away from geopolitics, the US labour market shed 92,000 jobs in February rather than gaining an expected 60,000. January’s data was also revised down and the unemployment rate ticked up to 4.4% from 4.3%. This weakness might prompt the US Federal Reserve to cut interest rates, though policymakers now have the impact of war to consider. 

AI investment continues to support technology sector spending and earnings, with many software companies recovering recent share price weakness. However, investors are closely monitoring risks within US private credit markets, particularly around leverage levels and potential investor redemptions.

Historically, geopolitical shocks tend to produce short-term volatility rather than lasting bear markets, unless they lead to a sustained economic slowdown. With the situation in the Middle East evolving, markets will likely be volatile in the near term. We continue to monitor developments closely and assess their implications for global growth, inflation and financial markets.

If Chancellor Reeves’ Spring Forecast did little to move UK gilt yields, the same was not true of events in the Middle East. The cost of borrowing jumped from around 4.23% before her fiscal update to 4.64% in the time since. The government wanted the statement to be a non-event, opting to have one major update each autumn. Its official forecaster, the Office for Budget Responsibility, cut its 2026 growth target to 1.1% from 1.4%, and nudged up estimates for 2027 and 2028 to 1.6% from 1.5% respectively.

The Chancellor reported that the UK’s fiscal buffer had increased from £21.7bn to £23.6bn. But there’s now a big asterisk against this assumption given the war in the Middle East. In short, an energy shock may mean more inflation and higher-for-longer interest rates, making borrowing and interest costs more expensive, crimping growth, weakening the labour market and potentially reducing income tax receipts. In this scenario, many variables are beyond the Chancellor’s control. The longer this conflict runs, the more likely it is that Reeves will face tough choices around tax and spending in the autumn.

Leaders at China’s National People’s Congress in Beijing have set their lowest annual growth target since 1991. The range of 4.5% to 5% for 2026 recognises weak domestic demand and international trade friction. At home, China is still struggling with the overhang of an acute property crisis and infrastructure splurge, weak domestic demand and deflation. Abroad, China is confronting a more mercantilist United States whose tariff regime has thrown sand into the gears of international commerce. China’s record trade surplus of $1.2trn last year – partly due to booming exports to non-US markets – shows how important overseas trade still is to its economic growth model.

China is also unveiling its five year plan for 2026 to 2030 at this year’s congress. It comes during a period of relative short-term weakness in manufacturing. With a figure below 50 signalling contraction, the poor China Federation of Logistics & Purchasing Index reading of 49 was attributed to an extended Lunar New Year.

• India resumes buying Russian oil – Amidst rising prices, the US is temporarily relaxing its sanctions to grant India a 30-day waiver to buy Russian oil
• Tariffs – Treasury Secretary Scott Bessent stated that he expects a 15% global tariff to soon come into force, and that tariffs would revert to where they were before the US Supreme Court’s decision within five months
• European inflation – A flash print suggested European inflation rose to 1.9% between February 2025 and 2026, from 1.7% previously. Despite being below the European Central Bank’s 2% target, policymakers are concerned that a prolonged war in the Middle East could push up inflation
• Kraken Financial – The cryptocurrency exchange’s banking unit has become the first digital bank to gain access to the US Federal Reserve’s secure wire payments system, meaning it doesn’t have to route payments through intermediary banks

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