What Happened Last Week
- Oil vs Equity Divergence: Markets rallied last week on hopes that the conflict in the Middle East could de-escalate, even as oil prices rose.
- Quarter-end Rebalancing: Quarter-end flows and technical dynamics helped drive the market rally amid negative headlines.
- Daring Raid: Hope is building again for de-escalation after a covert U.S. rescue operation deep in Iranian territory kicked off a fresh round of talks.
What We’re Watching This Week
- Ceasefire Negotiations: The U.S. and Iran are reportedly negotiating a ceasefire ahead of a new deadline from President Trump for Iran to reach a deal.
- Hormuz Traffic: Tanker traffic in the strait will remain the highest-fidelity signpost for investors going forward.
- Inflation Data: Inflation reports will help assess the starting point for price pressures before the next print begins to reveal the effects of the war.
Investment Management Team’s Views
Markets rallied despite continued strength in energy prices, marking a notable divergence from earlier in the conflict. Equities posted their strongest week since the war began, led by higher beta growth stocks and international markets such as Europe and Japan, even as those regions remain more exposed to higher energy costs. The tone was broadly constructive, with cyclicals outperforming defensives, energy stocks lagging, bond yields declining, and the dollar weakening. This positive cross-asset reaction stood in contrast to oil, which continued to push higher and reached new highs. Consumer-facing pressures are also on the rise, with gasoline prices touching above $4.00 per gallon on average and mortgage rates moving higher. While the energy backdrop remains tight, incremental signs of progress, including improving flows through the Strait of Hormuz and broader diplomatic engagement, may be enough for markets to begin looking through the near-term disruption.
Stronger data and improved positioning helped reinforce the shift in sentiment. Economic releases pointed to a more resilient backdrop than expected, including firm retail sales and labor market data alongside better-than-feared inflation reports in Europe. At the same time, quarter-end rebalancing flows and derivative positioning likely amplified the rally in last week’s low liquidity environment. The sentiment improvement also reflects a reduced sensitivity to negative headlines and a greater willingness among investors to re-engage with risk in the new quarter. While growth momentum is not as strong as in prior cycles, the resilience of the consumer and evolving drivers of activity continue to support a constructive medium-term outlook, even as the range of outcomes remains very wide.
Investors’ attention in the week ahead will center on developments in the Middle East. Reports of ongoing U.S.-Iran discussions have introduced the possibility of de-escalation, though President Trump’s continued mixed messaging underscores how fluid the situation remains. After last week’s divergence between risk assets and oil prices, markets will be watching closely to see whether improving shipping activity and diplomatic engagement continue, or if renewed escalation pushes energy prices higher again. While upcoming inflation data will help frame the starting point for any energy-driven price pressures, investor focus will likely remain tied to the trajectory of the conflict.