Markets swing between rallies and sell-offs as Middle East talks remain uncertain

This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our Flagship Solution. Clients with bespoke discretionary or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.

Middle East | De-escalation and escalation phases

Financial markets remained volatile last week but also showed signs of recovery. This cautious optimism reflects hopes of diplomacy between the US, Israel and Iran. Even so, uncertainty is still high, with periods of tentative de‑escalation and renewed escalation.

The talks between the US and Iran have lifted market sentiment. The willingness of both sides to negotiate suggests there are limited alternatives to eventually reaching an agreement. However, there are several issues that are still not resolved, keeping tensions high and the Strait of Hormuz not reopened yet, and reminding investors that the path toward de‑escalation is unlikely to be straightforward.

China also plays an important role. It acts as an economic lifeline for Iran, notably through continued oil purchases. At the same time, Beijing faces growing external and diplomatic pressure to contribute to de‑escalation. Further escalation could be costly for China, given the impact on energy prices, global trade, and broader economic and financial stability. As a result, negotiation looks like the only viable long‑term path, even if periods of tension persist.

In the US, the domestic political context is becoming increasingly important. President Trump faces mounting pressure ahead of the November midterm elections. Low approval ratings and high energy prices are weighing on consumer sentiment, while he also appears to be losing support within his own base, partly due to earlier pledges to keep the US out of foreign military conflicts. In addition, rising funding needs and fiscal constraints could further incentivise efforts to avoid a prolonged or broader conflict. That said, these factors have not yet translated into a clear breakthrough, and policy signals remain mixed.

Looking ahead, attention will turn to the planned meeting in Pakistan this week, should it take place. Markets will be watching closely for any tangible progress, or at least indications that dialogue remains active and capable of preventing a further deterioration.

Global markets | A recovery, with investors watching its durability as uncertainty remains

In this context, the recovery in equity markets is striking. The US market has not only recouped the losses that followed the escalation, but the S&P 500 has reached a record high above 7,000. This points to optimism about the direction of travel. Investors appear to have set aside the risk of an immediate and severe stagflationary shock, continuing to expect the conflict to be temporary and followed by a relatively swift recovery with manageable economic consequences. This aligns with our base scenario.

At the same time, this confidence remains tentative. Key issues still aren’t resolved, including the situation in the Strait of Hormuz and the debate over Iran’s nuclear programme. With the broader Middle East security context still delicate, market sentiment is likely to remain highly sensitive to diplomatic signals and geopolitical developments.

Events over the past weekend in the Strait of Hormuz underscored this fragility. The waterway was briefly reopened under a fragile ceasefire arrangement, before being restricted again as the US maintained its blockade amid renewed tensions. These developments highlight how quickly conditions can shift, particularly in areas critical to global energy supply and trade.

The first‑quarter corporate earnings season is underway and appears to be off to a positive start. We maintain a moderate overweight position in equities, supported by recent market gains. This is combined with an overweight in government bonds and a slight overweight in cash to provide balance, while we remain underweight in riskier credit markets, where valuations do not adequately reflect lingering risks. We also hold positions in gold, inflation‑linked bonds, and, where applicable, an ‘insurance’ warrant that appreciates when equities fall, as additional risk mitigators.

This week | Sentiment and inflation in focus

Outside of the Middle East, Europe has a busy schedule, with the focus on confidence and inflation. Germany publishes the ZEW investor survey (Indicator of Economic Sentiment) on Tuesday, often seen as a forward-looking indicator of broad economic activity. On Wednesday, UK inflation figures are released, while the Eurozone publishes a flash estimate of consumer confidence. Thursday is a key day, with the purchasing managers’ indices (PMIs), another key gauge of business activity, are due from April for the Eurozone and its member countries. Germany then rounds off the week on Friday with the Ifo business climate index.

In the US, the focus is shifting towards consumer spending and labour market indicators. On Tuesday, March retail sales figures provide insight into consumer strength, while the weekly ADP National Employment Report offers an early indication of labour market trends. Later in the week, attention turns to the preliminary PMI figures for April, which give an initial glimpse of activity across manufacturing and services. The week concludes with the University of Michigan consumer sentiment index, which also includes an assessment of inflation expectations.

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