Market Commentary

It was a case of more of the same yesterday really. Oil prices rose further, with Brent crude topping $100 p/b as Iran insisted the Strait of Hormuz must remain “closed”, bond yields were higher, stocks were lower, while the dollar continued its appreciation on FX markets. The latter strengthened by half a percent or so against both the euro and sterling and has extended its gains – and then some – overnight. It is currently trading at around $1.1440 vis-a-vis the single currency, its best level since late July last year, and at about $1.3260 versus the pound, just shy of last week’s 2026 to date high of circa $1.3250. EURGBP is holding a whisker above its year to date low, trading at £0.8625.

Yesterdays Events

Government bond yields rose further. US, German and UK 2-year yields increased by 5-10bps as the market pared back Fed rate cut expectations – less than one 25bps cut is now priced in for 2026 – and ratcheted up ECB and BoE rate hike bets – with almost 50bps and 20bps of tightening now expected for this year respectively. In equity markets, US stocks underperformed (which has been a rare enough occurrence since the war started) with the S&P 500 shedding around 1.5%, while the Stoxx Europe 600 closed around half a percent lower. The futures market, meanwhile, suggests there won’t be any relief for stocks today.

The International Energy Agency says the “the war in the Middle East is creating the largest supply disruption in the history of the global oil market.” It notes in its latest monthly oil market report that, “with crude and oil product flows through the Strait of Hormuz plunging from around 20 mb/d before the war to a trickle currently, limited capacity available to bypass the crucial waterway, and storage filling up, Gulf countries have cut total oil production by at least 10 mb/d”, adding that “in the absence of a rapid resumption of shipping flows, supply losses are set to increase.” Following a near 10% increase yesterday, Brent crude is trading at about $102 a barrel this morning.

The UK economy didn’t grow at all in January according to data published a short while ago, with GDP flat on the month after increasing by 0.1% in December. GDP did grow by 0.2% over the three months to January though, having contracted slightly in September-November, with increases in output in manufacturing and services more than offsetting a decline in construction output.

The Day Ahead

It’s a busy enough day in terms of economic data. PCE inflation – the Fed’s target measures of inflation – for January, job openings & layoffs (January), consumer spending (January), consumer confidence (March), and a 2nd estimate of GDP for Q4 2025 are all due in the US, which industrial production for January is scheduled in the Euro area.

Market Commentary

Oil prices remain elevated notwithstanding the International Energy Agency’s announcement that member countries had agreed to release a record 400m barrels of oil reserves. Brent crude rose by 5% yesterday, and is higher again this morning at over $96 per barrel, amid continuing attacks on shipping vessels in the Gulf. Concerns about the inflationary consequences of higher oil prices, and the potential response of central banks, contributed to a spike in government bond yields, which closed yesterday at their highest levels since the war began. In FX, the dollar remains on the front foot. EURUSD and GBPUSD have fallen to around $1.1550 and $1.3390 respectively, the former not far off its lows for the week so far of circa $1.1510 on Monday. The pound continues to nudge higher against the euro and at £0.8625 is now just shy of its best levels in 2026 to date (of about £0.8610 reached in early February).

Yesterdays Events

Government bond yields rose quite sharply as the market reassessed the outlook for central bank interest rates in light of continuing high energy prices. US yields rose by 6-9 bps, German yields by 5-12bps, and UK yields by 12-14bps, with the biggest increases for all three occurring at the short-end of the curve. There’s no let up this morning with yields heading further north at the start of play. Equity markets were under pressure, but held in fairly well all things considered, with the Stoxx Europe 600 shedding just over 0.5% and the S&P 500 ending broadly flat on the day. European stocks are on the back foot again this morning though, down around 1% at the open.

ECB members say they are closely monitor developments in energy prices and are ready to respond to upside risks to the inflation outlook. In this regard, the head of the German central bank, Nagel, warned that “if it becomes apparent that the current energy price increases will translate into broad consumer price inflation, the Governing Council will act decisively in a timely manner,” while also saying that, for now, he backs “a wait-and-see approach” as far as interest rates are concerned.

Yesterday’s US inflation data for February, which precede developments in the Middle East, were relatively benign. Headline and core inflation were in line with expectations – and unchanged from February  – at 2.4% and 2.5% respectively. Core goods inflation nudged lower again last month to 1%, down from a recent peak of 1.5% in September, while core services inflation was unchanged at 2.9%.

The Day Ahead

It is another quiet day ahead in terms of economic data. The main releases are in the US and include the regular weekly jobless claims, housing starts and building permits for January, and the trade balance, also for January.

Market Commentary

For the most part, a retreat in energy prices provided a favourable environment for markets yesterday with bond yields lower, stocks higher and the dollar a little weaker. However some renewed volatility in the oil price post the European close – after the US Energy Secretary Chris Wright erroneously stated that the US Navy had escorted an oil tanker through the Strait of Hormuz – saw US bond yields spike higher, US stocks reverse course, and the dollar regain ground. Hence EURUSD and GBPUSD are trading at around $1.1615 and $1.3425 respectively this morning, down from their best levels yesterday of circa $1.1670 and $1.3480. EURGBP is largely unchanged from yesterday morning at about £0.8650.

Yesterdays Events

US bond yields ended the New York session about 5-8bps higher across the curve. UK yields earlier ended 7-12bps lower on the day, with the biggest decline at the short-end of the curve, while German yields were also lower, mainly at the short-end of the curve with 2-year yields down around 6bps or so. Both are edging higher at the open this morning though, following the spike in US yields. European stocks had a very positive session, chalking up gains of 2-3%, but US indices ended flat to marginally lower, reversing earlier gains. In energy markets, Brent crude is at $90 per barrel this morning, up from a (brief) low yesterday of around $81, while European gas prices are marginally higher after falling by 16% yesterday.

Responding to the recent increase in energy prices, ECB President Christine Lagarde says “we will do all that is necessary to ensure inflation is under control and Europeans don’t suffer the same inflation increases like those we saw in 2022 and 2023,” though she adds that the central bank “won’t rush into a decision (on interest rates) because there is too much uncertainty, too much volatility” at present. The market is currently pricing in a circa 50% chance of a 25bps rate hike by June and is almost fully pricing in a hike by September.

The Day Ahead

It is another quiet day today in terms of economic data. The main release is the CPI report for February in the US (which obviously predates the jump in energy prices) with the consensus expecting headline and core inflation to come in at 2.4% and 2.5% respectively, which would leave both unchanged from January.

Market Commentary

Oil prices are swinging wildly. After surging to almost $120 a barrel in early trading yesterday, the price of Brent crude fell back to just under $100 after the G7 indicated it was willing to release oil reserves if necessary. It fell further to its low for the day of just under $84 following remarks by Donald Trump, who said the war in Iran was ‘very complete, pretty much’, before rebounding to close just shy of $99, but is back down at around $91 this morning (with European gas prices sharply lower too). The dollar ebbed and flowed in line with the moves in oil prices, ending little changed overall but well off its best levels of the day. EURUSD and GBPUSD closed at about $1.1640 and $1.3440 respectively, from lows of circa $1.15 and $1.3280, and are marginally firmer again at the start of play today. EURGBP nudged a little higher again yesterday and is currently trading at about £0.8650.

Yesterday’s Events

Bond and equity markets are also taking their cue from the moves in oil prices. US and German bond yields reversed an early increase to end lower to unchanged yesterday. UK bonds unperformed, though yields finished off their highs, with 2- and 10-year yields up around 10bps and 3bps respectively. Yields generally are heading lower this morning in tandem with the fall in energy prices. US equity markets ended in positive territory, led by the Nasdaq which gained almost 1.5%. European stocks closed around half a percent lower albeit well off their worst levels of the day, but they are rebounding strongly this morning, up almost 2.5% at the open.

Market expectations for central bank interest rates have also shifted with some paring back of the bearish moves seen lately. About 20bps of hikes from the ECB is now priced in for 2026, down from almost 50bps at one stage yesterday, while the market is back to pricing in some chance (circa 50%) of a Bank of England rate cut this year. About 45bps of easing is expected from the Fed, some 10bps more than was the case. All of this just goes to highlight that market rate expectations are certainly not set in stone!

The Day Ahead

It’s pretty quiet in terms of economic data today with existing homes sales and the small business optimism index in the US the only releases due. The focus for markets in any case will remain on developments related to the conflict in the Middle East.

Market Commentary

While Friday’s jobs report in the US was a good deal weaker than forecast – the economy shed almost 100k jobs in February – it didn’t do much to dent the dollar. It closed only marginally lower on the day, while gaining ground over last week as whole as it benefited (albeit modestly enough) from a ‘flight to safety’ bid amid the escalating conflict in the Middle East and rising oil and gas prices. Energy prices have surged further overnight – Brent crude is up almost $15 to over $107 per barrel – as fears grow of persistent disruption to supply, leading to renewed gains for the US currency. EURUSD and GBPUSD are trading at around $1.1530 and $1.3320 respectively this morning, both down around a cent from last week’s closing levels of $1.1615 and $1.3415. After falling by around a penny last week, EURGBP is largely unchanged from Friday’s close at about £0.8660.

Yesterday’s Events

The softer than expected jobs data resulted in a marginal decline in US 2-year bond yields on Friday. They were still up circa 20bps on the week though, while equivalent German and UK yields rose by 30 and 36bps respectively, as rising energy prices triggered fears of higher inflation and a rapid re-pricing of central bank rate interest rate expectations. Not surprisingly, yields are higher again this morning given the latest jump in energy prices. Along with the surge in oil prices overnight, European gas prices have climbed by 15% this morning (to EUR 61 per MWh). The market is now pricing in almost 50bps of hikes from the ECB by the end of this year, having been pricing in circa 15bps of cuts before the conflict in the Middle East erupted, and around 15bps in hikes from the Bank of England, having previously been expecting two quarter-point cuts in 2026.  The market still sees rate cuts from the Fed with about 35bps of easing expected, down from 60bps just over a week ago.

US stocks had their worst day of the week on Friday on the back of the employment report with the S&P 500 shedding just over 1%. This brought its decline over the week to 2%, considerably smaller though than the 5-7% fall in European stocks. Asian markets are a good deal lower overnight – the Nikkei in Japan is off 5% – while futures pricing points to falls for European and US stocks today.

Employment in the US fell by 92k in February according to Friday’s data, which was considerably weaker than the circa 50k increase expected and followed a gain of 126k in January, while the unemployment rate edged up to 4.4% from 4.3%. Hourly earnings growth was a bit firmer than expected though, ticking up to 3.8% y-o-y last month from 3.7% in January. The report overall casts some doubt on the Fed’s view, outlined at its January monetary policy meeting, that the labour market might be stabilising following a sharp slowdown in the pace of jobs growth over the second half of last year.

ECB member Schnabel says the central bank needs “to be vigilant as the current geopolitical environment creates upside risks” to the inflation outlook, adding that it must “carefully monitor the persistence of the energy-price shock, its impact on inflation expectations and any indication that firms start passing through higher input costs to their customers.”

The Days Ahead

Looking to the week ahead, clearly markets will be focused on developments in relation to the conflict in the Middle East. In this regard, the Financial Times reports this morning that G7 finance ministers will discuss a possible joint release of oil reserves in coordination with the International Energy Agency. Economic data due include CPI inflation (for February) and PCE inflation (January) in the US on Wednesday and Friday respectively, and GDP (January) in the UK on Friday.

Market Commentary

A renewed rise in energy prices – oil rose to a new high for the week of over $86 p/b at one stage – contributed to a further re-pricing of central bank rate expectations, higher bond yields and a decline in equity markets.  The dollar didn’t do a whole though, ending largely flat on the day overall. EURUSD and GDPUSD are trading at around $1.1610 and $1.3360 this morning, marginally firmer than yesterday morning’s levels, with EURGBP little changed at just under £0.87. While the focus for markets is clearly on the Middle East conflict, today’s jobs report (for February) in the US will attract plenty of attention. A stronger than expected report, at a time of increased concerns about the inflation outlook, might see the dollar extend its recent gains. A weaker than forecast report might not dent the dollar too much though, given the current environment.

Yesterday’s Events

Amid the rise in energy prices, the market priced out about 5bps and 10bps of Fed and Bank of England rate cuts for this year respectively, and priced in an additional 8bps or so of a hike from the ECB (leaving the chances of a 25bps increase by year-end at around 65%). This passed through to government bond yields. US 2-year yields increased by around 4bps and German and UK yields both rose by about 10bps, while long-dated yields were higher as well. Meanwhile, equity markets gave up Wednesday’s gains with the Stoxx Europe 600 shedding almost 1.5% and the S&P 500 down a bit more than half a percent.

Fed Governor Bowman, who has supported lowering interest rates to address downside risks to employment, notes that, since the central bank’s January monetary policy meeting, “we’ve started to see some more information that is pointing to signs of stabilizing in the labour market,” adding that she expects “to see a little more (job) hiring” in the period ahead.

The Days Ahead

Today’s jobs report in the US is expected to show the economy added about 55k jobs in February, according to the consensus forecast, down from +130k in January, while the unemployment rate is seen unchanged at 4.3%. Retail sales for February are also due in the US, while Euro area data include a 3rd estimate of GDP in Q4 2025 and a second estimate of employment growth in the same quarter.

Market Commentary

There was some respite for equity markets yesterday, with  US and European stocks both advancing, amid steady (oil) and lower (gas) energy prices. The dollar was under a little pressures as a result, but stronger than expected US economic data helped limit any downside for the currency. Indeed, with energy prices heading higher this morning, the dollar has resumed on the front foot, trading at about $1.1585 and $1.3320 vis-a-vis the euro and sterling respectively this morning (versus yesterday’s closing levels of $1.1635 and $1.3375). EURGBP continues to hover around £0.87. Its high and low this year are just shy of £0.88 and circa £0.86 respectively, highlighting the very narrow range that has prevailed in 2026 to date.

Yesterday’s Events

Oil prices steadied and European gas prices fell by around 10%, helped by US assurances that it will protect traffic through the Straits of Hormuz. However this is proving short-lived indeed with both moving higher again this morning, increasing by around 3% and 9% respectively. Hence yesterday’s equity market gains – which saw US and European indices advance by 1-2% – may also prove short-lived. In government bond markets, US yields nudged up by around 3bps across the curve on the back of the stronger than expected economic data, while German and US yields were flat to marginally lower on the day. Yields generally are heading higher this morning in line with the renewed rise in energy prices.

Services sector activity in the US picked up strongly in February according to the latest ISM survey, with the headline index rising to its highest level (56.1) since July 2022. Output and new orders both rose last month, while employment expanded for the third month in a row. With manufacturing activity picking up in January-February (according to the equivalent ISM survey for the sector), the economy looks to have started 2026 on a very solid footing.

ECB member Villeroy says the central bank is following energy prices and developments on financial markets very closely and will have a much more detailed economic assessment at their next Governing Council meeting in a couple of weeks. He notes that “everything will depend on the duration of the conflict, whether it’s a temporary phenomenon or a lasting phenomenon of rising prices” (which of course is the great uncertainty), but adds that he doesn’t “see any reason today why the ECB should raise interest rates.”

The Days Ahead

Economic data due today include weekly jobless claims and import prices (for January) in the US; retails sales (January) in the Euro area; and the construction PMI (February) in the UK. There are a few Fed and ECB members scheduled to speak over the course of the day.

Market Commentary

It was another day of rising energy prices, rising bond yields and falling equity markets. Perhaps the best that can be said is that energy prices and bond yields both finished off their highs of the day while equity markets finished off their lows of the day. In FX, the euro and sterling fell further against the dollar relative to Monday’s closing levels, hitting new 2026 to date lows of circa $1.1530 and $1.3250 respectively in the process. They have since managed to claw back some ground however, trading at about $1.16 and $1.3350 this morning. EURGBP continues to drift lower. It is hovering just below the £0.87 level, down a bit more than half a penny from last Friday’s close.

Yesterday’s Events

While oil and European/UK gas prices ended off their highs, they still rose by almost 5% and circa 23% on the day respectively. They are also edging higher again this morning, leaving them up 15% and almost 80% on the week so far. Given concerns about the pass-through to consumer price inflation, central bank rate expectations continue to adjust. The market now sees just one 25bps cut from the Bank of England this year (not fully priced in until late in the year), down from two previously, and is  pricing in about a 30% chance of a 25bps ECB hike by end-2026, having been pricing in some chance of a rate cut up to last Friday. Regarding the Fed, the market sees slightly less than 50bps worth of cuts this year, down from a bit more than 60bps priced in at the end of last week.

Government bond yields backed up further albeit finishing off their highs. UK yields rose by around 10bps across the curve; German yields increased by 3-6bps (with the largest increase occurring at the short-end of the curve); while US yields were about 3bps higher on the day. In equity markets, European stocks again underperformed the US. The Euro Stoxx 600 shed a further 3%, while the S&P 500 was off around 1.5%. Asian markets were quite a good deal lower overnight, though European indices are marginally in the black at the start of play today.

Headline inflation in the Euro area came in slightly higher than expected in February at 1.9%, according to the flash reading, up from 1.7% in January. The increase was due mainly to higher core inflation, i.e. excluding energy and food prices, which rose to 2.4% from 2.2%, with both core goods and core services inflation picking up last month (to 0.7% and 3.4% respectively). The annual rate of decline in energy prices slowed a touch to -3.2% in February from -4.0% in January.

The Days Ahead

Looking to the day ahead, economic data due include final PMI services readings for February in the main economies; producer prices and unemployment (both for January) in the Euro area;  and the ISM Services index and ADP employment report (both for February) in the US. The Fed also publishes its latest Beige Book, ahead of its monetary policy meeting in a couple of weeks. There are also a number of ECB members due on the wires during the course of the day.

Market Commentary

Concerns that rising energy prices due to conflict in the Middle East will push up inflation has led the market to pare back expectations for further Fed and Bank of England (BoE) rate cuts and to price out the already slim chances of any further policy easing by the ECB. The re-pricing of BoE rate expectations helped lift sterling off lows yesterday of circa $1.3315 and £0.8790 against the dollar and euro respectively, though it is revisiting its lows against the US currency this morning while trading at around £0.8740 versus the euro. The single currency is heading further south against the dollar, currently trading at about $1.1630, which is not far off mid-January’s 2026 to date low of just under $1.16.

Yesterday’s Events

Oil and gas prices remain under pressure as Iran says the Strait of Hormuz is now “closed”.  Brent crude has moved above $80 per barrel again, after briefly dipping back to just under $77 p/b yesterday, while European gas prices are up another 25% today after surging by 40% yesterday. If sustained, higher energy prices will push up headline inflation, which is particularly problematic for the Fed and BoE given inflation in the US and UK – at around 3% – is already running well above the 2% target (Euro area inflation is currently running slightly below target at 1.7%). Expectations for Fed and BoE rate cuts this year have been pared back as a result, to less than 50bps for the former and to just 25bps for the latter, with the next cuts in rates pushed out to late Q3 and beyond. The market has priced out any chance of an ECB rate cut this year, and indeed is now pricing in a small chance of a hike by year-2025.

The re-pricing of interest rate expectations has contributed to a sharp rise in government bond yields. UK and US 2-year yields are up around 12-13bps since last Friday’s close, while German 2-year yields are about 10bps higher. Yields further out the curve have also increased, with 10-year yields up about 12-14bps, essentially reversing last week’s decline in yields. Meanwhile, in equity markets, the S&P 500 (surprisingly) managed to end flat yesterday, erasing earlier losses, but the futures market points to a renewed decline at the open later today. The Euro Stoxx 600, in contrast, shed around 2.5% yesterday and it is down another 1% or so at the open this morning.

ECB Chief Economist Philip Lane says “the scale of the impact” of developments in the Middle East “depends on the breadth and duration of the conflict”, but acknowledges that “there would be a substantial spike in energy-driven inflation and a sharp drop in output if (the) conflict led to a persistent drop in energy supplies and disruptions in regional economic activity.”

The Days Ahead

For today, the focus for markets will remain very much on the situation in the Middle East and the impact on energy prices in particular. It is very quiet on the economic data front with a flash reading of Euro area inflation in February the only release of note.

Market Commentary

Oil prices have spiked higher following the US-Israel attacks on Iran over the weekend and the latter’s retaliatory actions across the region. Brent crude has jumped by around $7 per barrel – or almost 10% – from Friday’s close to just under $80 p/b, its highest level since mid-January 2025. The dollar is the main beneficiary so far in FX, gaining ground against the board including versus the Swiss franc and Japanese yen. EURUSD and GBPUSD are down around a cent and a cent and a half respectively from Friday’s closing levels, trading at about $1.17 and just below $1.3350 this morning. EURGBP is marginally firmer at about £0.8780

Yesterdays Events

Equity markets in Asia were mostly in the red overnight, with the Nikkei in Japan off almost 1.5%, while European stocks are down around 2.5% this morning. In government bond markets, Japanese 10-year yields are slightly lower, by 3-4bps, but perhaps somewhat surprisingly, equivalent US yields are a touch higher overnight, by 2-3bps (albeit following a sharpy decline of circa 15bps last week), while German and UK yields are marginally higher at the start of play today too.

Ahead of tomorrow’s flash Euro area inflation for February, German inflation came in a touch lower than expected last month at 2.0% according to data released on Friday, down from 2.1% in January. French and Spanish inflation were both higher than expected though at 1.1% and 2.5% respectively, up from 0.4% and 2.4% in January. The latest consensus forecast is for Euro area inflation to have remained at 1.7% last month.

The Days Ahead

Looking ahead, while clearly the focus for markets will be on developments in the Middle East, there are some important economic data due this week. As well as Euro area inflation, US releases include the latest ISM manufacturing and services surveys today and Wednesday respectively as well as retail sales and the key employment (non-farm payrolls) report on Friday. There are also a large number of ECB and Fed members due to speak over the course of the week.