The rapid rebound of equities from their war-related losses continued last week with global markets up 3-3.5% for the second week running. Somewhat surprisingly, global equities are actually now a little above their levels at the start of the conflict, 2% in local currency terms and 1% in sterling terms.
Last week’s gains were led by the US, which has staged one of its swiftest ever rebounds and is now up 12% from its low on 30 March and 4% above its pre-conflict level. In sterling terms, the gain is a little less at 9% as the dollar has unwound some of its war-related increase. But before we get too carried away with the renaissance of the US, it is worth noting that even now US equities have still underperformed the rest of the world by 5.5% this year.
So why the rapid recovery? In large part (but not totally – see below) it is of course down to the market’s growing confidence that both the US and Iran are now seeking an ‘off-ramp’ – to use the particularly grating (to my ears at least) phrase of the moment – and that the Strait of Hormuz will be open to traffic again sooner rather than later.
There was indeed the positive news last Thursday that Israel and Lebanon had agreed a 10-day ceasefire. Trump also announced that Iran had agreed to give up their ‘nuclear dust’ and Iran even said it was reopening the Strait of Hormuz. The only problem was that Iran then flatly contradicted Trump’s claim and changed its tune re the Strait, highlighting the problem that there is no single voice in Iran (not that the latter improves matters in the US).
The picture deteriorated further over the weekend with the US seizure of an Iranian vessel, Iran’s threat to retaliate and Trump’s renewed threat to bomb every single power plant in Iran. A renewed round of peace talks on Tuesday is once again hanging in the balance with the ceasefire due to expire on Wednesday.
However, we have been here before and it still looks more likely a case of two steps forward, one step back rather than the other way round. European markets are only down around 0.5% or so this morning. Still, equities seem more convinced of this positive direction of travel than other markets.
The Brent oil price did retreat as low as $87 per barrel on Friday, down from its March high of $115, but is back up to $96 this morning. Markets are assuming the oil price will still be $75-80 by year-end, $10 higher than before the conflict. Bonds did rally last week but only returned 0.5% or so and yields remain significantly higher than before the war started.
The IMF certainly took a rather circumspect view of the global economic outlook in its latest set of forecasts. Highlighting the current uncertainties, it now refers to its main scenario – a relatively short conflict with disruptions fading by mid-year – merely as its ‘reference forecast’ rather than its base case. It also presents two alternative scenarios, the adverse and the severe.
But sticking with the reference forecast – because that does still seem the most likely outcome – the outlook is not that bad. The IMF has cut its global growth forecast for this year since January but only by 0.3% to 2.9% and sees a recovery next year to 3.5%.
The press made a big song and dance about the UK growth forecast being downgraded by 0.5%, more than elsewhere. But truth be told, it’s a bit of a red herring. The main reason was the unexpectedly weak UK growth late last year which last week’s data now show did not continue into the new year. GDP grew more strongly than expected in February and was up 0.5%, both over the month and the previous three months.
We also had Chinese activity numbers out for the first quarter which saw no big surprises. While domestic demand remains relatively weak, trade continues to be a big support. GDP grew 5.0% on a year earlier, up from a 4.5% gain in the fourth quarter and in line with the Government’s target of 4.5-5% growth for 2026 overall.
More importantly for markets, the US earnings season has got off to a good start with the big banks reporting strong profits on the back of record revenues from trading. With the S&P 500 set to see first quarter earnings up at least 15% on a year earlier, this is providing a major support for the US market.
Earnings growth is far from only a support in the US. Global earnings are expected to grow 20% this year, led by a stellar 45% gain in emerging markets partly on the back of a surge in Korea.
In short, the bounce in equities does now look somewhat overdone given the continuing uncertainty over how long it will take both sides to find a face-saving off-ramp. But as we have emphasised throughout this conflict – unless you’re a trader at one of the big investment banks or have inside information about Trump’s next tweet (a current source of investigation in the US) – trying to trade the volatility will probably end only in being whipsawed.
We have largely stuck with our existing positioning in the belief that this geopolitical sell-off will play out like most previous ones and that the reference scenario of the IMF – or something close to it – will most likely prevail. If this is the case, the market trends seen before the crisis will very likely reassert themselves and our portfolios should benefit. At the same time, the diversified nature of our positioning should offer some protection if the more adverse scenarios were to materialise.
This coming week, April business confidence numbers for the US, EU and UK out on Thursday will be closely watched to gauge the impact of the war. On Tuesday, US retail sales will also be a focus, as will the Senate confirmation hearings for Kevin Warsh, Trump’s nominee to be the new Fed chair. Finally, we have UK labour market and inflation data out on Tuesday and Wednesday.
Rupert Thompson – Economist