Weekly Comment: Markets move to the beat of the (oil) drum

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Forget about February’s US non-farm payrolls data coming in considerably below expectations (92k loss, compared to the 60k gain pencilled in) or a better-than-expected US Purchasing Managers’ Index (PMI) reading indicating a further expansion in economic activity in February—when it came to what drove markets last week, the oil price was the only game in town. From bonds to stocks, markets closely tracked the performance of the black stuff in response to renewed hostilities in the Middle East.

At the beginning of the week, a relatively small uptick in the price of oil was accompanied by modest weakness in global equities and only a slight movement in government bond yields, a reflection of the view that the US/Israeli attack on Iran would follow the same playbook as the 12 Day War in June 2025. In other words that the conflict would be short-lived and contained, that the key Strait of Hormuz would largely remain open, and that global trade flows would therefore suffer only minimal disruption.

Within a few days, it became clear that Iran was not keeping to the script, instead looking to turn the conflict into a regional one by launching missiles and drones at neighbouring Gulf states. The result? The Strait of Hormuz has effectively been closed, meaning up to a fifth of global oil and gas output cannot be shifted. Oil storage facilities in the Gulf region are being filled, leaving producing countries with little option but to consider shutting down production. Cue a more significant jump in oil prices (Brent crude, an international oil benchmark, rose 27% for its largest weekly gain since at least 1991) followed by a shift in the narrative to one centred around a global inflationary shock and possible interest rates rises to counter it. Further weakness in stock markets and a meaningful rise in government bond yields were triggered, as the growing risks to global growth and inflation were priced in—fundamentally stock market returns are mainly driven by growth and/or inflation over the longer term, all else being equal.

In Oil moves above US$100 as Middle East conflict escalates, we take a closer look at the impact of higher energy prices on global growth and inflation but, needless to say, the higher the oil price, the larger the impact.  Question is, does a higher for longer oil price scenario mean another TACO (Trump Always Chickens Out) moment could be on the cards? After all, adverse market movements have made US President Trump back off in the past and the US mid-term elections are fast approaching.  At this point, it is hard to see an obvious off-ramp for Trump or that he is even looking for one, but there may come a time when a choice may have to be made between his domestic and foreign agendas.

Until then and while events remain fast-moving, we continue to believe diversification remains the best way to manage risk in tandem with maintaining a long-term perspective and avoiding knee-jerk reactions—there has yet to be an event from which markets have not recovered, including World Wars, financial crises and pandemics. The best way to target consistent returns over time, in the face of a world with continual risks, is an investment process that removes emotional reactions, paired with an awareness of client risk profiles and time horizons.

And as for the week ahead, forget about the latest US inflation numbers or GDP estimates for the UK and the US, all eyes will likely once again be on global oil prices.

Weekly market moves and economic news:

The MSCI All Country World Index (MSCI ACWI) ended the week off 3.7%, bringing the year-to-date (YTD) gain down to 0.5%.

United States:

With the conflict in the Middle East escalating over the course of the week and risks to global growth and inflation rising in tandem, stock markets were always going to be on the back foot. Although the main US stock market ended the week 2% lower (-1.3% YTD), it fared notably better than European peers.  Value stocks, previously the year’s pace setters, were left nursing a weekly loss of 3.4% (+3.6% YTD), while growth closed off 0.7% (-5.5% YTD).  Small caps bore the brunt, closing down 4.0% (+2.0% YTD).

A paring back of interest rate cut expectations in response to a potential inflationary shock saw the yield on the 10-year Treasury note move 20 basis points higher to 4.14%, (down three basis points YTD), while the 2-year Treasury yield rose 18 basis points to 3.56% (up nine basis points YTD).

United Kingdom:

Love or loathe her, spare a thought for UK Chancellor Rachel Reeves who gave her Spring Statement last week. “Inflation is down. Borrowing is down. Living standards are up…and the economy is growing”, so said the chancellor at the despatch box, just as oil and gas prices were ticking higher and as the odds of a Bank of England interest rate cut were lengthening.

Against the uncertain backdrop, London’s markets lost ground. In the stock market, large caps finished 5.7% lower (+4.0% YTD), while mid-caps were off 5.2% (+0.5% YTD). Bond markets were not immune with gilts yields moving higher to adjust to the higher inflationary / interest rate outlook. The yield on the 10-year gilt jumped 40 basis points to 4.63% (up 15 basis points YTD). Sterling ticked lower against the US dollar, closing at US$1.34 compared to US$1.35 previously.

Europe ex UK:

The MSCI Europe ex-UK Index switched into risk-off mode too, ending the week 5.8% lower (+0.3% YTD). At the national level, Germany’s main stock market shed 6.7% (-3.7% YTD); France’s -6.8% (-1.9% YTD); Italy’s -6.5% (-1.5% YTD); and Switzerland’s -6.6% (-1.3% YTD). An increased chance of an interest rate hike from the European Central Bank to tackle the inflationary forces unleashed by the conflict saw the yield on the 10-year German Bund move 22 basis points higher to 2.86% (flat YTD). And as with sterling, the euro weakened against the US dollar to US$1.16 from US$1.18.

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