Market Matters – Relief Rally; Fragile Peace
Relief rally driven by geopolitics, but conviction remains low
Markets staged a strong rebound following the US–Iran ceasefire and a sharp correction in oil prices, with the S&P 500 posting its best week since November. However, the rally faded into the weekend as negotiations failed to progress, reinforcing that markets have moved from pricing extreme downside risk to a more uncertain, unresolved base case rather than a durable resolution.
Broadening market participation signals selective risk re-engagement
The recovery has been notably broader than expected, led by Asia ex-Japan and emerging markets, with Europe and Japan also participating. The US has lagged somewhat, while China remains weak and bonds have not confirmed the move. This pattern suggests a rotation into previously oversold or less AI-sensitive areas, rather than a simple reversion to US-led growth leadership.
Energy-driven inflation shock complicates macro outlook
US CPI surprised to the upside (0.9% m/m), driven predominantly by gasoline, while core inflation remained contained. This reinforces the view of an energy-led shock rather than systemic inflation—yet one that could broaden if oil and shipping disruption persists. Markets are therefore balancing near-term relief against medium-term inflation transmission risk.
Divergence between resilient hard data and deteriorating sentiment
While labour markets and earnings expectations remain constructive, consumer sentiment has deteriorated sharply, with inflation expectations rising materially. This creates a fragile bridge between current economic resilience and potential future consumption weakness, particularly if real incomes are eroded by sustained energy costs.
Bonds remain the key macro battleground; earnings now critical catalyst
Fixed income markets are repricing toward a “higher-for-longer” policy path, with reduced expectations of Fed easing. Against this backdrop, the upcoming US earnings season—led by major banks such as Goldman Sachs and JPMorgan Chase—becomes pivotal. Sustained equity upside likely requires both stabilisation in oil and confirmation that earnings growth can absorb higher input costs and macro volatility.