Yesterday was marked by a rebound in sovereign bonds on expectation that rising oil prices—which will send inflation soaring in the coming months—would also hit economic growth and, in turn, limit central banks’ ability to raise rates to the extent currently priced by markets. In other words, higher energy prices—and possible energy scarcity—could slow global economies enough to prevent central banks from tightening as aggressively.
A benchmark European 10-year yield moved lower after rising to its highest levels since 2011, the British 10-year gilt yield fell back below the 5% psychological mark, while the US 2-year yield—which best captures Federal Reserve (Fed) rate expectations—retreated to 3.80%, as Fed Chair Jerome Powell also said that longer-term US inflation expectations remained ‘in check’ despite the energy-led inflation wave already hitting the economy. ‘By the time the effects of a tightening monetary policy take effect, the oil price shock is probably long gone, and you’re weighing on the economy at a time when it’s not appropriate’, he said.
In summary, bond investors—including large institutional players—considered that yields had risen enough to become attractive.
And that’s fair: slowing growth will likely be the consequence of this energy shock, alongside tighter monetary policy to address the resulting inflation spike. But first, central banks – at least some of them – will adjust their rates to fight inflation. Depending on the impact on growth, they may later have to ease policy again. However, jumping directly to the conclusion that central banks will soon loosen policy—and that lower yields are good news for equities—is far-fetched.
The Stoxx 600 rebounded nearly 1% yesterday, while the FTSE 100 gained 1.61%. In the case of the FTSE 100, the rally in energy and mining stocks made sense, but for European companies facing another energy shock and higher rates, I found yesterday’s optimism weakly supported as a basis for a sustainable rebound.
In fact, early CPI figures for March confirm that inflation in Germany jumped from 1.9% to 2.7% y-o-y, and 1.2% over the month. Unsurprisingly, rising oil prices were the main driver.
A separate survey from the European Commission suggested a notable increase in selling price expectations, undoubtedly linked to soaring energy costs.
Other euro area countries will release their CPI updates in the coming hours and will likely confirm energy-driven price pressures.
For those still in doubt, European Central Bank (ECB) officials have been insisting that they will act to rein in inflation—and they are not necessarily looking past the short-term spike (like Powell does). This means rate hikes could be on the table this year for the euro area.
So I can’t help but think that there could be more pain ahead for global businesses—pain from higher energy prices and tighter financial conditions—before any relief.
In the US, falling yields failed to help the S&P 500 consolidate earlier gains, and the index quickly came under selling pressure, and closed the session 0.39% down.
US and European are better bid and oil is coming down from an early-session peak at the time of writing on news that Trump told his aids that he wants to end the war even if the Strait of Hormuz remains closed. But just before, mood was ugly on an Iranian struck on a Kuwaiti oil carrier near Dubai…
What’s interesting is that periods of economic slowdown don’t necessarily lead to a one-way market meltdown. Typically, market selloffs deepen into a recession and during its early months, after which looser central bank policies help markets recover. However, I feel that today’s uncertainty and negative developments have not yet been fully priced in to justify that conclusion. The Nasdaq 100 entered correction territory on Friday, while the S&P 500 is near 10% lower, hovering near correction levels. Rising energy prices are supportive for energy companies, but most other industries are facing higher operating costs and margin pressure—something that is not yet fully reflected in prices.
A FactSet chart shows that forward EPS continues to rise, driven by AI-related upgrades, resilient margins and strength in the energy sector—suggesting that markets are still pricing current earnings momentum while pushing the potential profit squeeze from higher costs further into the future.
The risk, therefore, is that markets are still buying today’s earnings story while choosing to worry about the oil shock tomorrow.
Meanwhile, oil prices continue to surge. WTI is trading near $104 per barrel, while Brent crude flirts with $110pb. US gasoline prices have rebounded to $3.38 per gallon yesterday – the highest since the Iran war began. Donald Trump may have told his aids that he wants to stop the war, but a few hours before he had threatened to destroy Iran’s energy infrastructure, and Houthi forces are now targeting alternative routes used to export oil from the Gulf amid disruptions in the Strait of Hormuz.
Higher oil prices continue to support a stronger US dollar. Major currencies remained under pressure yesterday despite relatively dovish comments from Jerome Powell—confirming that divergence between the Fed and other, relatively more hawkish, central banks does not necessarily drive short-term FX moves. The EURUSD slipped below 1.15 despite the rebound in German CPI and Powell’s balanced remarks on long-term US inflation expectations. Softer oil prices could eventually reverse the dollar’s strength, but as long as oil prices remain elevated, the dollar is likely to benefit.
Gold rebounds on the back of falling sovereign yields after testing technical support last week—the 38.2% Fibonacci retracement of the 2023 to January rally, which typically separates a continuation of the uptrend from a medium-term consolidation phase. Lower yields reduce the opportunity cost of holding non-interest-bearing gold.
The question now is whether gold can regain its safe-haven status and inflation-hedging appeal if equity market losses accelerate.
This will likely depend on a combination of factors, including oil prices, the US dollar and bond yields. For now, selling pressure appears to be easing, but the risk of further downside remains.
Markets will therefore continue to be driven by headlines and oil price dynamics, and until there is meaningful progress toward peace, any rebound in equities, bonds or gold is likely to remain fragile.
