Market overview
Who to believe? On the one hand, US President Trump who posted on Truth Social that productive talks with the Iranians over the weekend included discussions on “a complete and total resolution of hostilities in the Middle East”—so successful were the talks that Trump lifted the ultimatum he gave Iran over the weekend to reopen the Strait of Hormuz, a key shipping channel through which 20% of global oil and gas passes, within 48 hours or the country’s power plants would be ‘obliterated’. On the other hand, the Iranian regime who put out a statement denying any negotiations took place.
Arguably, the answer does not matter. What matters for investors is the timing of Trump’s post and the reaction of financial markets. For Trump’s claim came on the back of another difficult week for global equity and bond markets after attacks on Iran’s South Pars field, the world’s largest gas field, and retaliatory attacks on the world’s largest liquefied natural gas (LNG) facility in Qatar threatened to escalate and prolong the conflict. A weak opening by financial markets on the morning of Monday 23 March may well have been the deciding factor for Trump.
For as the past year has shown Trump keeps a close eye on markets—when sentiment takes a sharp knock, Trump has a tendency to back down. So, whether or not talks with the Iranians did take place, is perhaps beside the point. What is very much the point, is that the US president’s post suggests he is looking to de-escalate. The Trump Always Chickens Out (TACO) trade that markets have been banking on appears to be back on the table. This caused a swift US$10 drop in the oil price to below last week’s low and a 3% swing in European stock markets and US stock futures from a near 2% deficit to a 1% gain. Before the positive news, US stock futures were trading at their lowest level since September 2025 and around 8% beneath their YTD highs.
Trouble is, this time round even if the latest TACO does have legs and leads to de-escalation, the energy crisis will take time to resolve—full production at affected sites will not be back online anytime soon. However, sentiment could swiftly improve and this can play just as large a role, if not larger, on inflationary forces going forward. The sharp moves in government bond yields last week indicate that concerns around shifting inflation expectations have gone well beyond the direct impact from energy prices.
Various central bank meetings held last week alluded to this. As expected, rates in the UK, Eurozone, Japan and US were kept on hold. Less expected were hawkish voting patterns (Bank of England policy makers voted unanimously to hold interest rates) and hawkish commentary from central bankers (the European Central Bank hiked its inflation forecast for the year to 2.6% from 1.9% in December). While a 70-basis point shift in inflation forecasts for this year should not be dismissed, it in itself is not commensurate with some of the moves we’ve seen in short-term bond yields.
After more than three weeks of conflict, central banks are pricing in a deeper impact on global growth and inflation. And based on market moves over the course of the week, investors have been doing the same. Trump has taken note. Question is, does Iran have the appetite for a TACO?
Weekly market moves and economic news:
With the Middle East conflict showing no signs of de-escalating, global equities were always going to be on the backfoot and so it proved with the MSCI All Country World Index (MSCI ACWI) ending the week down 1.8% (-3.0% YTD).
United States:
In the US, the main US stock market underperformed global equities by the tiniest of margins posting a 1.9% loss for the week (-4.7% YTD). The Strait of Hormuz’s continued closure as well as the targeting of key energy infrastructure and producing fields by both sides drove another leg-up in the price of oil. At US$100+, the price of oil is ratcheting up inflation concerns and at the same time dampening down expectations for interest rate cuts.
No surprise then that the Federal Reserve (Fed) voted to hold interest rates at 3.50% to 3.75% at the latest policy meeting by a 11-1 majority. Updated forecasts from central bank officials showed a median estimate of one more rate cut for the year, unchanged from their prior projection, while forecasts for both inflation and economic growth during the year were revised higher.
And no surprise that against such a backdrop, growth stocks were hardest hit with a 2.4% weekly loss (-9.5% YTD), with small caps not far behind off 1.7% (-1.5% YTD). Value held up better nursing a 1.3% loss (+0.8% YTD). US Treasury yields continued their upwards march. The yield on the 10-year Treasury note increased 10 basis points to 4.38% (up 21 basis points YTD); while the 2-year Treasury yield rose 18 basis points to 3.90% (up 43 basis points YTD). A higher-than-expected producer price index print for February poured further fuel on inflation concerns. The index was up 0.7% during the month compared to 0.5% in January, meaning on an annual basis prices are up 3.4%, a step-up on the 2.9% posted in January.
United Kingdom:
Despite a 3.2% loss for the week, London’s large caps were still (just about) in positive territory for the year (+0.7% YTD). The same can’t be said for mid-caps which, after shedding 3.2%, ended the week down 4.6% for the year. The about-turn in UK interest rate expectations from rate cuts to up to four rate rises in 2026 has seen sentiment towards the more domestically focused mid-caps take a turn for the worse.
Similarly, the yield on the 10-year UK gilt spiked 17 basis points to 4.99% (up 52 basis points YTD). Here the Bank of England’s latest rate setting meeting would not have helped. Not so much that rates were held. More so, that the decision to do so was unanimous which, while this ought not to have been a surprise given the geopolitical situation, appears to have caught the market off guard. The prospect of higher interest rates benefited sterling which ended the week at US$1.33 compared to US$1.32 previously.
Europe ex UK:
European equities were the week’s underperformers after the MSCI Europe ex-UK Index declined by 3.9% (-4.1% YTD). As well as the escalating conflict in the Middle East, investors also had the outcome of the latest European Central Bank (ECB) rate-setting meeting to digest. While the decision to keep rates on hold was widely expected, perhaps what was not was ECB President Christine Lagarde’s warning that higher energy prices will have a “material impact” on near-term inflation and that “incoming information” will be closely monitored to inform future policy.
At the national level, Germany’s main stock market was among the worst performers after falling 4.6% (-8.6% YTD); Switzerland’s was not far behind with a 4.0% loss (-6.1% YTD); while Italy’s closed down 3.3% (-4.4% YTD); and France’s 3.1% (-5.9% YTD). The yield on the 10-year German Bund inched six basis points higher to 3.04% (up 19 basis points YTD). Finally, as with sterling, the euro strengthened against the US dollar to US$1.16 from US$1.14.
