Weekly Market Recap

Investors in the UK assessed rising inflation risks linked to the war in the Middle East, with sterling falling to its lowest level since early December and the country’s Office for Budget Responsibility warning that the conflict could have “very significant impacts” on the UK economy.

On the data front, the S&P Global UK Construction PMI fell in February, reflecting lower new orders among builders. UK house prices rose in February by a higher-than-expected 1.3% year over year (YoY), according to the closely watched Halifax House Price Index.

Data from the Institute for Supply Management (ISM) indicated that US economic activity continued to expand in February. The institute’s manufacturing Purchasing Managers’ Index (PMI) came in at 52.4 for the month, registering the second straight month of expansion and just the third month over 50 in 40 months (readings above 50 indicate expanding activity). The reading was down modestly from the prior month but ahead of consensus estimates. Employment saw a notable month-over-month (MoM) improvement, while the prices paid component of the index hit the highest level since June 2022.

The ISM services PMI also surprised to the upside in February, rising 2.3 points to 56.1, ahead of estimates for around 53.9 and the highest reading since July 2022. February was the 20^th consecutive month of expansion in the services sector. Strength in new orders, business activity, and employment supported the headline figure, while prices paid grew but eased somewhat from January.

Meanwhile, labour market data from the week painted a mixed picture. Private payroll processing firm ADP reported that private sector employment increased by 63,000 jobs in February, ahead of consensus estimates and up from January’s downwardly revised 11,000. The reading was the highest monthly total since November, driven by job gains in construction, education, and health services.

Other data from the week supported the narrative of a stabilising labour market. Initial jobless claims for the week ended 28 February came in at 213,000, slightly below estimates and in line with the prior week’s revised level. Consulting firm Challenger, Gray & Christmas also reported a sharp decline in layoffs in February, with US-based employers announcing about 48,000 job cuts during the month, down from about 108,000 in January.

However, sentiment shifted Friday after the Bureau of Labor Statistics reported that nonfarm payrolls declined by 92,000 in February, well below expectations for a gain of around 60,000, and the unemployment rate ticked up to 4.4%. The weaker report could complicate the Federal Reserve's decision-making, as policymakers balance signs of labour market cooling against potential inflation pressures from rising energy prices amid escalating conflict in the Middle East.

The military action in the Middle East sent oil and gas prices surging, prompting concerns about the effects of prolonged higher energy prices on economic growth and inflation. Data released by Eurostat, the European Union’s statistical agency, indicated that even before the Iran conflict, annual inflation in the eurozone hit 1.9% in February, higher than both the 1.7% registered in January and market expectations. Traders’ expectations for monetary policy shifted dramatically, with the probability of the European Central Bank raising rates increasing to more than 50%.

The seasonally adjusted unemployment rate in the eurozone fell to an all-time low of 6.1% in January, marginally lower than both the previous month and analyst expectations. Youth inflation also declined to 14.8% from 15%.

Italy’s gross domestic product (GDP) rose by 0.3% in the last months of 2025 compared with the previous quarter. Gross fixed investment and housing helped drive economic growth, while net foreign demand detracted due to higher imports and lower exports. Meanwhile, the country’s unemployment rate declined to 5.1% in January, significantly lower than the 5.5% rate registered in December 2025 and the 5.6% rate economists had expected.

China outlined its economic priorities for 2026 at the week’s National People’s Congress, the annual policy-setting parliamentary meeting. China set a GDP growth target range of 4.5% to 5% for 2026, the lowest since at least the 1990s and the first reduction since 2023. The budget deficit is projected at around 4% of GDP, roughly in line with last year, while the consumer inflation target remains at 2%. The targets mark the first year of China’s new five-year plan through 2030. Policymakers signalled continuity in their strategic focus on technology self-sufficiency and strengthening leadership in advanced manufacturing, even as headline growth expectations moderate.

Premier Li Qiang, in the annual government work report, said that China must “hone our capabilities to navigate external challenges.” He cited boosting domestic demand as the country’s top policy objective in 2026, with renewed emphasis on expanding investment. Beijing unveiled new financing tools to boost investment to CNY 800 billion (USD 116 billion), up from CNY 500 billion in 2025. Local governments will be permitted to issue CNY 4.4 trillion in special-purpose bonds to fund investment projects. The government also plans to issue CNY 1.3 trillion in ultra-long special sovereign debt, and CNY 250 billion in special bonds will be earmarked to continue its consumer goods trade-in programmes, down from CNY 300 billion allocated last year. Defence spending is set to rise 7%, the slowest increase since 2022.

February manufacturing data offered a mixed picture, highlighting resilience in external demand alongside softer domestic conditions. The official manufacturing PMI edged lower to 49.0 from 49.3 in January, remaining in contraction territory, though the reading may have been affected by the timing of the Chinese New Year. By contrast, the private RatingDog China General PMI compiled by S&P Global rose to 52.1 from 50.3 previously. The divergence reflects differences in survey composition: The official gauge skews toward large, state-owned and domestically oriented firms, while the private survey captures smaller, export-focused companies.

Markets were highly volatile amid uncertainty about the duration and scope of the conflict in the Middle East. Investors sought to assess the potential impact of higher crude oil prices on domestic inflation, given Japan’s significant reliance on oil and gas from the Gulf region.

Keeping a close eye on the fallout from the Middle East conflict, Bank of Japan (BoJ) Governor Kazuo Ueda said that, depending on how the situation unfolds, the impact on the global and Japanese economies could be significant. The impact could be felt through channels such as crude oil and other energy prices and international financial markets. While the conflict clouds Japan’s economic outlook, Ueda reiterated that the BoJ will continue raising interest rates if the economy and prices align with its quarterly projections. The yield on the 10-year Japanese government bond rose to 2.17% from 2.11% at the end of the prior week.

In the currency markets, the yen weakened to JPY 157.8 against the US dollar from JPY 156.1 at the end of the previous week. Finance Minister Satsuki Katayama said that the authorities were monitoring the decline in the yen with a strong sense of urgency, in close coordination with the US, and that intervention in the foreign exchange market remained an option to support the Japanese currency.

In domestic economic developments, hopes of sustained wage growth momentum were buoyed by the Japanese Trade Union Confederation, known as Rengo, asking its member unions to demand an average wage increase of 5.94% this year, only slightly lower than last year’s 6.09% request. Japan’s spring “shuntō” wage negotiations between labour unions and company management are closely watched by the government and the BoJ as they are a clear annual signal of whether wage growth is strong and broad enough to sustain a virtuous cycle of wages rising in tandem with prices to boost economic growth.

Australian GDP increased 0.8% quarter-over-quarter (QoQ) in the fourth quarter of 2025, consistent with expectations, with YoY growth accelerating 50bps to 2.6%. Domestic demand increased 0.5% QoQ, a marked step lower versus the 1.3% QoQ increase in the third quarter of 2025. Compositionally, household consumption rose only 0.3% QoQ, though this was offset by a solid increase in business investment. Encouragingly, productivity growth has improved to 1.0% YoY, in line with its average rate over the decade prior to COVID. Growth in unit labour costs also eased sharply to 3.3% YoY – a post-COVID low.

Growth in household spending increased 0.3% MoM in January, below the market consensus of 0.5% MoM, with YoY growth easing to 4.6%. Australia's goods trade surplus declined by AUD 0.7 billion to AUD 2.6 billion in January, against expectations for an increase. Exports fell 0.9% MoM, while data centre-related capital goods imports rose further. Residential building approvals fell 7.2% MoM in January, marking a second monthly decline. The outcome was much weaker than expected, with a 6.0% MoM rebound. Compositionally, the decrease was driven by a fall in the high-density dwelling sector.

Canada's markets last week were dominated by escalating Middle East tensions that drove oil prices sharply higher and rattled investor sentiment, with WTI crude topping USD 85 per barrel for the first time since 2024. The surge in energy prices shifted expectations that the Bank of Canada would hike rates in December, as the central bank typically reacts hawkishly to sustained increases in energy prices. Prime Minister Mark Carney continued his Asia-Pacific tour aimed at reducing reliance on the US, vowing to strengthen defence cooperation and economic security with Japan.

Last week, the MSCI All Country World Index (MSCI ACWI) lost -3.7% (0.5% YTD).

The S&P 500 Index finished a volatile week lower by -2.0% (-1.3% YTD) as investors digested escalating conflict in the Middle East in the wake of US and Israeli military strikes on Iran, rising energy-driven inflation risks, and some mixed economic data. Oil prices surged amid concerns about potential supply disruptions and broader geopolitical spillovers. Uncertainty about the conflict’s duration and its potential impact on energy markets also drove US Treasury trading, pushing yields higher as investors reassessed inflation risks and the outlook for Federal Reserve policy. The Russell 1000 Growth Index returned -0.7% (-5.5% YTD), the Russell Value Index -3.4% (3.6% YTD) and the Russell 2000 Index -4.0% (2.0% YTD). The technology-heavy Nasdaq Composite retreated -1.2% (-3.6% YTD).

In Europe, after several consecutive weeks of gains, the MSCI Europe ex-UK Index tumbled -5.8% (0.3% YTD). Risk appetite in Europe deteriorated significantly following US and Israeli military strikes on Iran and the subsequent widening of the conflict across the Middle East. Major stock indices retreated. Germany’s DAX Index declined -6.7% (-3.7% YTD), France’s CAC 40 Index fell -6.8% (-1.9% YTD), and Italy’s FTSE MIB Index dropped -6.5% (-1.5% YTD). Switzerland’s SMI lost -6.6% (-1.3% YTD). The euro weakened against the US dollar, closing the week at USD 1.16 for EUR, down from 1.18.

The FTSE 100 Index in the UK pared -5.7% (4.0% YTD), and the FTSE 250 Index decreased by -5.2% (0.5% YTD). The British pound depreciated against the US dollar, closing the week at USD 1.34 for GBP, down from 1.35.

Japan’s stock markets fell sharply over the week. The TOPIX Index lost -5.6% (9.1% YTD), and the TOPIX Small Index dropped -5.2% (11.1% YTD).

In Australia, the S&P/ASX 200 Index fell -3.1% (2.8% YTD) amid the US-Iran conflict and lower commodity prices. Australian government bond yields moved notably higher to reflect rising inflation risk. The Australian dollar weakened by -1.1% against the US dollar as investors chased safe-haven currencies.

In Canada, the S&P/TSX Composite pulled back -3.6% (4.7% YTD).

The MSCI Emerging Markets Index fell -6.9% (7.0% YTD). The Chinese, Indian, Taiwanese, South Korean and Brazilian markets contributed negatively.

China’s equity markets retreated as investors weighed the escalating conflict in the Middle East, along with its implications for oil prices and global growth, against Beijing’s newly unveiled growth target and policy signals. The onshore CSI 300 Index, the main onshore benchmark, slid -1.1% (0.9% YTD), and the Shanghai Composite Index pulled back -0.9% (4.1% YTD). Hong Kong's benchmark Hang Seng Index lost -3.3% (0.5% YTD). The MSCI China Index, which primarily comprises offshore-listed stocks, declined -3.0% (-3.8% YTD).

In Iran, the US and Israel conducted coordinated strikes on multiple targets inside Iran, killing the Supreme Leader Ayatollah Ali Khamenei—who had led the country for nearly four decades—alongside senior regime figures. Iranian authorities responded with missile and drone activity directed toward Israel, US-linked assets, and regional infrastructure. The scope of the strikes and retaliation marks the most significant direct escalation between the parties in years, raising concerns about broader regional involvement and potential disruption to energy infrastructure and shipping routes.

The escalation has brought the market's attention to two key uncertainties: the duration of the conflict and the risk of disruption to oil flows, particularly through the Strait of Hormuz. Roughly one-fifth of global oil consumption and a meaningful share of global liquefied natural gas (LNG) trade transits this narrow waterway, making it a well-known choke point for energy markets. Even without a full closure, heightened tensions can increase shipping and insurance costs and embed a geopolitical premium into energy prices.

Markets responded quickly to the escalation. Oil prices moved higher on fears of supply disruptions, with Brent crude rising sharply in the immediate aftermath. Energy equities outperformed, while broader global equity markets saw increased volatility and periods of risk aversion. Safe-haven assets, including US Treasuries and gold, attracted flows.

The primary transmission channel to global markets has been energy. According to T. Rowe Price energy analyst Priyal Maniar, the oil market entered this episode with modest oversupply and some spare capacity, suggesting that the market’s initial move reflects risk premium as much as confirmed physical disruption.

Emerging markets reacted in line with historical patterns seen during prior oil supply shocks. Countries that are net energy importers—particularly in Asia and Central and Eastern Europe—experienced currency weakness and higher bond yields as investors priced in the potential for higher inflation.

Looking ahead, markets are likely to focus on these variables:

(1) Energy supply continuity.

If oil and LNG exports continue to flow without sustained physical disruption, the current spike in prices may gradually retrace as the risk premium fades. If, however, damage to infrastructure or shipping routes proves persistent, energy prices could remain elevated, thereby reinforcing global inflation pressures.

(2) Duration of the conflict.

A short, contained episode may resemble previous flare-ups in the region, where volatility subsided once immediate risks receded. A prolonged confrontation—particularly one that disrupts Hormuz shipping or draws in additional regional actors—could increase the probability of more entrenched inflationary pressures and sustained volatility.

From a global perspective, higher oil prices act as a tax on consumers and businesses, potentially weighing on growth. At the same time, they provide revenue support to exporting countries. The net impact on global markets will depend on how persistent the shock proves and how quickly energy markets adjust through increased production, strategic reserves, or demand moderation.

Geopolitical shocks of this magnitude often drive sharp short-term repricing but do not always translate into lasting structural shifts. In some scenarios, a more durable resolution of regional tensions could ultimately reduce longstanding risk premia embedded in Middle Eastern assets. However, that outcome remains uncertain at this stage.

As the situation evolves, volatility is likely to remain elevated. We continue to monitor developments closely and assess their implications for global growth, inflation, and financial markets.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -1.0% (0.6% YTD), the Bloomberg Global High Yield Index (hedged to USD) -0.7% (0.5% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index -1.4% (0.3% YTD).

Over the week, the 10-year Treasury yield rose by 20bps to 4.14%, down from 3.94% (down -3 bps YTD). The 2-year Treasury yield increased by 18bps, ending the week at 3.56%, down from 3.38% (up 9bps YTD).

Over the week, the 10-year German Bund yield increased by 22bps, ending at 2.86% from 2.64% (flat YTD). The 10-year UK gilt yield rose by 40bps, ending the week at 4.63% from 4.23% (up 15bps YTD).