Markets: Quarterly review Q1-2026:

We saw global markets generally fall for the quarter much on the back of the US-Israel war on Iran, weakening US technology sectors, significant volatility, and accelerating Government debt loads. We saw energy and commodities move dramatically higher as supply was restricted. Many Government bonds sold off, fuelled by consequential concerns of higher inflation and interest rates. Given the tit-for-tat escalation we witnessed daily, substantial energy and chemical infrastructure across the Region could be damaged or destroyed; whereupon the impact on the global economy could become profound.

US markets fell over the quarter on the back of significant volatility, especially through March. The Fed kept rates at 3.5%-3.75% through the quarter and Kevin Warsh was nominated by President Trump as the next Federal Reserve Chairman. In February, the US Supreme Court ruled that Trumps’ IEEPA tariffs were unconstitutional. Subsequently Trump imposed a temporary 10% global tariff on all US imports for 150 days. Through the quarter, Tech sectors were volatile and trended downward as investors became concerned with over-valuation risks and broader monetisation models. More broadly, US investors were showing concerns that the prevailing economic strength would delay or prevent rate cuts for 2026. Further, employment related data were now showing increasing weakness on the back of frequent large downward revisions to previous data. Economic and inflation related data was increasingly pointing toward slowing or stagnant expectations too. The surprise attack by US and Israel upon Iran during positive negotiations caused significant turmoil for markets once the Straits of Hormuz was blocked off by Iran as a consequence; since a substantial global flow of energy, fertilizer and other critical chemical byproducts pass daily. Stocks and bonds retreated as investor sentiment switched to risk-off as uncertainty and concern for the global economy became evident through the days and weeks of conflict. We saw some countries impose restricted energy policies quite quickly. Energy and commodity sectors outperformed, especially after Trump paused energy sanctions on Russia and Iran to help plug some of the estimated 12-18m barrels/day shortfall in global supply.

European markets fell through Q1-26, particularly through March after hostilities erupted in the Middle East. In February we saw France finally adopt a budget for 2026 which aimed to increase defence spending while aiming to reduce their deficit from 5.4% GDP to 5.0% by end of 2026. Eurozone inflation rose from 1.9%pa to 2.5%pa, sparking concerns for economic activity going forward. The ECB kept rates unchanged through the quarter at 2.0% but warned that rates may rise should energy prices add to upward inflationary pressure. Tech was mixed for the quarter where we saw software sectors fall while hardware-related sectors rose. Consumer discretionary sectors fell significantly on the back of escalating cost-of-living impacts across Europe. Energy sectors outperformed, driven by supply and shipping impacts. PMI data showed 50.5 for March, a marked decline from 51.9 in February, adding further concerns for investors.

UK markets delivered a somewhat positive Q1-26, largely on the back of its large energy-related and basic materials sectors, and a weaker GBP. Healthcare, pharmaceuticals, and telecommunications sectors performed positively whereas consumer discretionary and technology sectors saw sharp declines. Inflation remained at 3.0% for March whereas the Q4-25 GDP grew just 0.1%. The BOE kept rates at 3.75%. Indeed, early in the quarter and since inflation appeared under control somewhat, the BOE had indicated that it was looking to reduce interest rates through H1-26. However, given the sharply increased cost of energy as a result of the Middle-East conflict, the BoE is now warning that rate increases are now likely in 2026.

Japanese markets were marginally positive by the end of Q1-26. February saw markets move higher after Takaichi won a landslide re-election victory, boosting political stability alongside pro-growth expectations through increased borrowing to fund the planned expanded budget stimuli. The BoJ maintained interest rates at 0.75%, and the Yen also weakened against most major currencies. However, the Middle East conflict deflated market sentiment substantially through March as energy prices spiked dramatically higher as supply fell sharply. Since Japan imports around 90% of its energy requirements from the Middle East, the economic risks and impacts to the Japanese economy are substantial. Consequently, investors pulled back across most sectors despite Japan’s’ large petroleum reserve. There is also the matter of Japan’s’ 1.2Tn reserves held in US Debt and whether they will be forced to substantially sell these down to subsidise domestic energy costs and thereby strengthen the Yen to help offset that expense.

Emerging markets ended the quarter marginally positive. Taiwan and Korea outperformed on the back of tech demand and a weaker Dollar. Latin America delivered a strong quarter whereas India underperformed. However, the Middle-East conflict impacted all EM markets noticeably through March with spiking energy and transportation costs on the back of uncertainty and supply-chain disruptions. Korea, and Taiwan were impacted by these events given their energy import dependencies, but India saw a larger impact much due to its lack of energy reserves and the weaker Rupee. Brazil, Colombia and Peru saw a strong quarter on the back of a weaker USD and accelerating commodity exports. Saudi Arabia also had a strong quarter on the back of higher oil prices after its Yanbu facility in the Red Sea was able to expand its output capacity. China marginally underperformed for the quarter as exports slowed somewhat due to demand and supply-chain disruptions; despite its diverse energy-mix and substantial energy reserves. South Africa underperformed on the back of higher oil prices and inflation concerns. Kuwait, UAE and Qatar underperformed due to their proximity to Iran, and their restricted product access to global energy markets.

By the end of the quarter, the Asia-Pac (ex-Japan) posted negative returns overall. Despite a strong performance through January and February we saw a sharp sell-off in March due to the Middle-East conflict after oil jumped to +$100 per barrel which in turn pushed investor sentiment decidedly risk-off. Thailand did manage to finish the quarter positively on the back of Bhumjaithai’s election which boosted pro-business expectations that helped exports. Indonesia underperformed much as a result of proposed regulatory changes causing confusion and uncertainty across their equity market.

Global bond markets saw substantial volatility through Q1-26 as investor sentiment juggled prevailing risks that changed almost daily. March in particular saw a broad sell-off of Government bonds globally as expectations and risks to the global economy, inflation, higher interest rates, and energy supply shocks sparked investor alarm. Indeed, some Central Banks that had indicated rate-cuts or neutral-rates for 2026 promptly reversed those expectations and were now indicating likely rate-rises through the year.

Global commodities outperformed for Q1-26. Energy in particular spiked higher on the back of the Middle East energy production and supply disruption caused by the US and Israel attack on Iran. We also saw substantial upward pricing momentum for petrochemical products as a result since a substantial portion of global supply is refined by Gulf countries. Agriculture, livestock, and industrial metals also delivered a positive quarter. Precious metals were also positive for the quarter despite elevated volatility as some central banks sold inventory to help offset the surging energy prices.

Andy Blandford