As the Middle East conflict enters its fifth week, recent developments are pointing to a clear shift from an initial oil disruption towards a broadening supply shock.
Economic indicators are beginning to show the strain, with concerns gaining traction as pressure on both growth and inflation intensifies. On the financial markets, gold stabilised at around USD 4,500 per oz, while fixed income was volatile and equities stayed under pressure throughout the week, weighed down by a persistently elevated risk environment.
Market recap
Beyond the numbers
Macroeconomics
Against a backdrop of heightened uncertainty, economic indicators have begun to reflect some concerns about the conflict in the Middle East and its consequences for both growth and inflation trends. The March flash Purchasing Managers' Index (PMI) came in generally softer than expected. The composite PMI has decreased over the month, from 51.9 to 51.4 in the US, from 51.9 to 50.5 in the eurozone, and from 53.7 to 51.0 in the UK.
Confidence in the manufacturing sector remained positively oriented, except in the UK due to rising inventories caused by fears of disruption to global trade. Confidence in services came in lower than expected as demand weakened. Prices have surged, adding to concerns about inflation risks.
Consumer confidence indices also weakened in the US, the UK, France, Germany, and Italy due to rising concerns about inflation. The flash March Consumer Price Index (CPI) in Spain was higher than expected at 1.5% month-on-month (m/m) and 3.5% year-on-year (y/y) after 2.5% y/y in the previous month due to rises in oil prices.
This week, the focus will be on the final global PMI business confidence in manufacturing and services, which should confirm the pause in services. In the US, ISM (manufacturing and services) should confirm this situation, and prices paid will probably show a strong monthly rise.
US labour data for March will be released (non-farm payrolls, ADP, and JOLTS surveys): the consensus expects 60,000 job creations and a stable unemployment ratio at 4.4%, but downside surprises remain possible. The eurozone flash CPI for March is expected to rebound by 1.3% m/m, and by 2.6% y/y from 1.9% y/y in the prior month due to higher energy prices.
Equities
Global equities retreated for the fourth consecutive week, with the MSCI ACWI total return down 1.5%, bringing the total decline since the start of the conflict in the Middle East on 28 February close to correction territory at -8.4%. While the drawdown has pushed volatility to levels not seen since ‘Liberation Day’ in April 2025, valuations have only fallen back to the 10-year average at 16.7x 12-month forward price-to-earnings (P/E) ratio, from 18.8x at the end of February.
Despite an initial rally at the start of last week amid optimism that the Middle East conflict could de-escalate, sentiment deteriorated through to the end of the week as conflicting headlines undermined confidence in the possibility of a near-term resolution.
US equities fell the most, with the S&P 500 down by 2.1%, weighed down by a sharp decline in the Magnificent 7 group of stocks (-4.9% versus the S&P 500 Equal-Weighted Index -0.6%), where legal woes hit Meta (-11.4%) and Alphabet (-8.4%), while persistent concerns surrounding the software sector weighed on Microsoft (-6.6%).
As long as the conflict in the Middle East persists, equities are likely to remain under pressure as investors assess the potential impact on household demand and corporate profit margins, alongside the path forward for interest rates amid inflationary pressures.
In this respect, upcoming macro data will be closely watched to gauge any potential damage to growth estimates and recalibrate forward expectations, with corporates having now entered the quiet period ahead of Q1 results, set to kick off in mid-April.
Conflicting headlines about the prospect of a near-term resolution weighed on equity sentiment.
Fixed income
Given the uncertainty relating to the ongoing US-Israel-Iran conflict, fixed income markets remained volatile throughout the week, even if the final weekly changes were mild. Returns were again negative last week, and on a month-to-date basis, Treasuries are down 1.5%, investment grade (IG) and high yield (HY) -2%, additional tier 1 securities (AT1s) -2.6% and emerging markets (EM) -3.6%. Still, spreads started the year near historic lows and have widened only modestly, remaining at relatively undemanding levels, with IG widening 20 basis points (bps) from the January lows, AT1s by 50 bps and HY by 80 bps, all still standing below their respective 10-year averages.
Differentiation is emerging among more vulnerable countries. Pakistan, which imports 80% of its energy from the Persian Gulf, has seen its dollar-denominated bonds post the largest monthly drop in three years, while India and Türkiye are also under pressure, with the rupee hitting record lows and Turkish local rates selling off sharply.
Rates continued to move upwards, with US 10-year Treasury yields touching 4.48% on Friday before easing to 4.40% this morning. This is a clear break out of the 3.95-4.20% range that had held since September and represents the highest level since last summer. Two-year rates also broke the 4% mark during the week but settled below that level. In Europe, the Bunds rose past 3% and are now close to 3.10%, which is their highest level since 2011. In the UK, rates remain very volatile despite ending the week a few basis points lower. 10-year gilts continue to trade at around 5%, a level last seen in 2009.
This week's focus will undoubtedly remain on the conflict in the Middle East, with markets looking for any clues on the reopening of the Strait of Hormuz. The longer the Strait remains closed, the greater the impact of the energy shock, which is likely to be increasingly reflected in wider spread movements.
The 10-year US Treasuries broke through their September–to–date range of 3.95%–4.20%, hitting 4.48% last Friday.
Forex & Commodities
Last week, the USD edged higher against most of the G10 currencies, with the US Dollar Index rising to levels of above 100. The USD has maintained a stable backdrop, and it has further modest appreciation potential in the short term due to any prolonged conflict in the Middle East. There are several important US labour market data releases over the coming week. Any concerns of a weaker US labour market are likely to be overshadowed by the events in the Middle East, meaning that USD valuations should remain supported in the near term.
The USD/JPY fell below levels of 160, following comments from one of Tokyo’s top officials – Atsushi Mimura – who stated that the authorities may intervene in the currency markets if current conditions persist. This is an explicit warning, and markets should not underestimate the probability of a significant FX intervention, which would drag the USD/JPY towards lower levels. Currently, USD/JPY spot rates are above previous intervention levels.
The main event for the EUR over the coming week will be the publication of March CPI data, which are expected to print at around 2.6% y/y (headline). Markets have moved to price in three 25-bp European Central Bank (ECB) rate hikes by year end, and a stronger EUR on any upside CPI surprises is unlikely. Higher oil and gas prices pose a real threat to the eurozone’s current account surplus, which could result in a material EUR/USD decline on any prolonged Middle East conflict.
Gold has stabilised at levels of around USD 4,500 per oz. Institutional investors have increased their net long gold futures positions for the first time in 2026. However, retail investors have continued to reduce their exchange-traded fund (ETF) exposures, albeit by a small amount. US real rate expectations – proxied by US 10-year Treasury Inflation-Protected Securities (TIPS) yields - have risen to levels of above 2% in recent weeks. This explains part of gold’s recent decline, though this correlation did not hold during 2025 to any extent. The large positioning shakes-outs suggest that gold does not have significant downside from current levels.
The USD edged higher against most of the G10 currencies and retains modest short-term appreciation potential.
Energy
The past week’s developments confirm a clear shift from temporary disruption to a persistent and expanding supply shock, justifying an upgrade of the average 12-month Brent oil price outlook from USD 85 per barrel to around USD 100. Brent could average USD 120 and USD 110 per barrel in Q1 and Q2, respectively before starting to normalise at USD 100 per barrel in Q4, and USD 90 per barrel in Q1 2027. Quarterly averages do not mean target or maximum price, as spot prices can spike meaningfully above quarterly averages.
The Strait of Hormuz remains effectively closed. Flows are no longer market-driven but selectively controlled by Iran through bilateral agreements with China, India, Thailand, and Pakistan. Crucially, the system has lost its buffers, with storage getting close to being full, meaning that production will need to shut down, and it will take months to bring it back online, or even years should infrastructure be physically damaged.
This tightening is compounded by a deepening global supply shock, with an estimated 10 million barrels per day of production shut-ins, further exacerbated by disruptions outside the region. Notably, Ukrainian strikes have reportedly disabled about 45% of Russia’s export capacity (around 2 million barrels per day). Over the weekend, Russia has implemented a petrol export ban. Temporary sanctions relief on Russian and Iranian crude, along with the release of strategic reserves, are providing limited offset.
The conflict in the Middle East is broadening geographically with continued attacks causing physical damage to critical civilian infrastructure, such as Kuwait’s international airport, and industrial infrastructure in the region such as ports in Oman, the United Arab Emirates and Saudi Arabia, oilfields, Saudi Arabian refineries, gas fields in Iran, liquefied natural gas (LNG) facilities in Qatar, and aluminium plants in Bahrain and Saudi Arabia. Peace negotiations have stalled, with a new deadline of April 6 being set, and conflicting messages being sent. Additional US troops are being deployed, while the entry of the Houthis creates a second major chokepoint risk in the Red Sea, putting alternative export routes such as the Bab al-Mandab Strait, a main route for trade flows to the West, and Yanbu port, the loading port for Saudi Arabia’s rerouted crude, at risk.
Taken together, persistent flow restrictions, multi-region supply losses, rising and materialised risk of infrastructure damage, thinning inventory buffers, the physics of production and processing restart, and mandatory refilling of global reserves, mean that oil prices need to remain structurally higher to rebalance supply and demand, making an approximately USD 100 per barrel average the appropriate central case rather than a temporary spike. Further significant oil and oil-products price rises could result in demand destruction, as this is evident in several Asian countries where fuel rationing and energy-saving measures are already being implemented. While such impacts are unlikely to reduce prices in the near term, they should ultimately reduce consumption and drive long-term investment relocation to renewables and coal.
Oil prices are expected to remain structurally higher to rebalance supply and demand, with an average of USD 100 per barrel as the central case.
The opinions expressed herein are correct as at 30 March 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
