Market overview
The first credible signs of a de-escalation in the Middle East conflict were not enough to prevent another week of financial markets moving lower, with both stocks and bonds falling last week. Signs from Washington of a growing desire to stabilise the situation were not enough to prevent global equities ending last week on their lows, although there were tentative signs of some support in the fixed income space.
Thus far it appears that bond markets have almost solely focused on the higher expected inflation due to the disruption in the Strait of Hormuz and looked through the adverse impact predicted for economic growth. A shift towards the latter from the former would provide support for bonds.
Last week began with markets braced for a further escalation in the conflict after US President Trump threatened to ramp up attacks but a weak opening in financial markets on Monday 23 March seemingly triggered an about turn. An initial 5-day postponement of increased US attacks on Iranian energy plants unless they reopened the Strait of Hormuz was extended by a further 10 days later in the week as Trump appeared to look for an off-ramp. Cue the re-emergence of the Trump Always Chickens Out (TACO) trade.
However, in this instance, it may well take two to TACO and a sharp market rally on Monday 23 March fizzled out. Iran continues to hold out and compared to last year’s US-China tensions over trade tariffs, the situation is far more dynamic and contains a lot more moving parts. Brent crude oil, an international benchmark, fell around 10% on the day, but continued to hold above the US$100 a barrel mark and ended the week not far from where it began above US$110.
Reports of 10,000 additional US ground troops being deployed to the region has done little to support the de-escalation narrative. While Trump claims that control of Kharg Island, the Iranian export hub in the Strait of Hormuz, would give the US the upper hand, financial market participants are far from convinced. Bringing a significant number of ground troops into the conflict is fraught with risk, raising the chances of more US casualties and prolonging the duration of the war.
For now, events in the Middle East continue to be by far and away the main driver for markets. The conflict has lasted longer than many initially thought but there is still a feeling that when a resolution occurs it may occur rapidly. Compared to the Liberation Day tariff-induced declines just under 12 months ago the market declines since the beginning of the conflict have been more orderly, perhaps because investors are conscious of how quickly things can snap back on positive news. The problem for now is that it seems likely it will take more than de-escalatory hints from Trump to provide the catalyst for a market recovery.
Weekly market moves and economic news:
Global equity and bond markets were under pressure last week despite signs that Trump is looking to de-escalate the conflict in the Middle East. The MSCI All Country World Index fell 1.8%, taking the YTD return to -3.0%.
United States:
US equities declined for a fifth consecutive week, as the Middle East continues to take its toll, finishing down 1.9% (-4.7% YTD). Tech stocks underperformed (-2.1% on the week, -6.7% YTD), as did growth stocks (-2.4% on the week, -9.5% YTD). The value index fared slightly better, falling 1.3% and remains in positive territory for 2026 (0.8% YTD). Small caps moved into negative territory after a weekly decline of 1.7% (-1.5% YTD).
US Treasuries also fell, with the 10-year Treasury yield increasing 10 basis points on the week to 4.38% (21 basis points higher YTD). The 2-year Treasury yield rose 18 basis points to 3.90% (up 43 basis points YTD). The Federal Reserve meeting was not a major market mover, although it did perhaps lean on the hawkish side and supports the notion that there will be no rate cuts for the foreseeable future.
United Kingdom:
UK equities fell more than peers last week, declining 3.9% (-4.1% YTD). Gilts continued to be under pressure, with the 10-year gilt yield rising 17 basis points to 4.99% (up 52 basis points YTD). The pound appreciated against the US dollar, closing the week at US$1.33.
Forecasts from the OECD laid bare the problems facing the UK economy due to the Middle East conflict. 2026 GDP growth is now expected to be 0.7% (1.2% prior), the steepest downward revision among G20 economies. Inflation is also expected to be a growing problem, predicted to rise to 4% this year — the second highest rate in the G7. This has markedly changed the expected path for the Bank of England base rate in derivatives markets, with two quarter-point increases priced in. However, the OECD believe the rate will be kept unchanged at 3.75%.
Europe ex UK:
European stocks underperformed last week, with the ongoing energy price rises expected to impact the region more than counterparts. On the week, German benchmarks fell 4.6% (-8.6% YTD), French bourses declined 3.1% (-5.9% YTD) and Italian indices dropped 3.3% (-4.4% YTD). Broader weakness in the US dollar was reflected in the euro rising to US$1.16.
