As we move into the second quarter of the year, geopolitical tensions continue to dominate market sentiment. This week has been characterised by a back‑and‑forth pattern of escalation and de‑escalation, with both the US and Iranian presidents addressing their nations — each delivering distinct messages.
To start the week, the tone from US President Trump was plainly escalatory. He stated that he intended to seize all of Iran’s oil and even proposed invading Kharg Island, which handles 90% of Iran’s crude oil exports. These comments followed Trump’s claim that Iran’s new supreme leader, Mojtaba Khamenei, was either dead or gravely ill — a situation he suggested could lead to regime change. Despite criticism from what he described as “stupid people back in the US,” Trump appeared determined to prolong the conflict, increasing the risk of further casualties and higher costs. Brent crude responded by rising above $116 on Monday.
US Federal Reserve Chair Jerome Powell addressed markets during a visit to a Harvard economics class. While it was already widely understood that another rate cut was unlikely before his term ends in May, the rise in geopolitical tensions helped solidify the decision to keep policy on hold at 3.75%. Powell reiterated that the central bank has the flexibility to wait and observe how the conflict shapes inflation dynamics. Caught between its dual mandate of full employment and price stability, the Fed now faces downside risks to the labour market alongside upside risks to inflation — conditions that could justify movement in either direction. Despite this, markets increasingly expect the Fed to keep rates unchanged for the remainder of the year.
US retail sales rose by 0.6% in February, marking the strongest monthly increase in seven months. Auto and motor‑vehicle repair receipts rebounded by 1.2% after falling 0.7% in January, while sales at clothing stores climbed 2%. However, a prolonged conflict and persistently high oil and gas prices are likely to weigh on consumption data in the months ahead, potentially dampening the widely anticipated boost to consumer spending. The average US household received roughly $350 more in tax refunds under President Trump’s “One Big Beautiful Bill,” leaving consumers in a somewhat stronger position to absorb any near‑term price spikes — which could, in turn, lessen the immediate drag on the broader economy.
In the UK, Q4 2025 GDP growth was confirmed at 0.1%, matching the pace recorded in the previous quarter. This sluggish performance is a concern for Chancellor Rachel Reeves, particularly as the OECD has downgraded its 2026 growth forecast to 0.7%, down from 1.2% at the start of the year. The organisation highlighted ongoing weakness in the labour market and a contraction in business investment, partly driven by the rise in national insurance contributions introduced in April 2025. These factors, combined with the recent surge in oil and gas prices, continue to weigh on momentum. Investors are now pricing in two to three potential interest‑rate hikes before year‑end, although forecasting remains difficult given the uncertain duration of the US–Iran conflict.
Eurozone inflation, which had held steady around the ECB’s 2% target for the past twelve months, rose to 2.5% in March — the highest level since January 2025. Even so, the reading came in slightly below market expectations of 2.6%, while core inflation eased to 2.3%. Markets have since begun pricing in three rate hikes for the year, with the first potentially coming as early as April. However, this may simply reflect market reactiveness to the broader geopolitical backdrop, particularly as ECB policymakers have cautioned against moving too hastily. Future policy decisions will depend heavily on whether the data shows signs of second‑round price pressures emerging — for example, higher energy costs feeding into services and goods prices, or rising wage demands.
Equity markets rallied over the last couple of days as we headed into the Easter period. On Tuesday, Iranian President Masoud Pezeshkian signalled a willingness to engage in peace talks with the US, prompting strong daily gains from the S&P 500 and Russell 2000, which rose 3% and 3.5% respectively. Both presidents addressed their nations on Wednesday, with Mr Pezeshkian emphasising that Iran had never chosen the path of aggression, claiming all actions were taken in self‑defence. President Trump, by contrast, struck a far more confrontational tone after markets had closed, vowing to hit Iran “extremely hard” over the coming weeks and threatening to send the country back to the “Stone Ages” if a deal was not reached. While markets generally discount Trump’s rhetoric, the stark contrast between the two leaders’ messages has contributed to renewed uncertainty and diminished hopes of an imminent resolution to the conflict.
Nathan Amaning, Investment Analyst
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