Weekly Market Recap

The unemployment rate in the UK unexpectedly fell to 4.9% for the three months to February. This was better than market expectations that the rate would remain unchanged at 5.2%. However, the drop was driven, at least in part, by fewer people looking for work, since economically inactive people are not included in the data.

UK retail sales rose 0.7% month-over-month (MoM) in March, exceeding a consensus estimate of 0.3%, raising prospects for Bank of England (BoE) interest rate hikes. Increased fuel purchases and non-food store spending accounted for much of the gain. However, the UK GfK Consumer Confidence Index dropped to -25 in April, the largest decline in a year and the lowest level since October 2023. The index measures confidence across both personal finances and the broader UK economy.

Flash PMI data showed that UK private-sector output growth accelerated in April, supported by rebounds in manufacturing and services activity.

The German Ifo Business Climate Index fell to 84.4 in April, the lowest reading since May 2020 and below market expectations of 85.5. The assessment of current conditions and future expectations both deteriorated. On an industry basis, manufacturing, trade, and construction registered among the largest declines in sentiment.

Consumer confidence in France deteriorated by more than expected in April, according to data from INSEE, the country’s official statistics agency. The index declined to 84 from 89 in March, marking the steepest decline since the start of the war in Ukraine.

Producer prices in Spain rose by 3.4% year over year (YoY) in March, driven by surging energy prices. This was the largest increase in a year.

The People’s Bank of China (PBOC) left its benchmark lending rates unchanged for the 11^th consecutive month in April, in line with expectations. The PBOC maintained the one-year loan prime rate at 3.0% and the five-year rate at 3.5%, as policymakers signalled confidence in the current growth trajectory despite lingering external risks. The move follows last week’s firm first-quarter growth data, in which GDP expanded 5% YoY, reducing pressure for immediate stimulus.

Chinese President Xi Jinping called for an end to hostilities between the US, Israel, and Iran and for the reopening of the Strait of Hormuz in a phone call with Crown Prince Mohammed bin Salman of Saudi Arabia. Xi called for an “immediate and comprehensive ceasefire,” adding that China remains committed to resolving disputes through diplomatic means.

Chinese AI startup DeepSeek rolled out preview versions of its new flagship AI model during the week, a year after jolting global markets with its low-cost approach to advanced AI. The Chinese startup introduced its V4 Flash and V4 Pro series, adapted for Huawei chip technology, highlighting strong coding performance and advances in reasoning and agentic tasks. The models also feature a 1-million-token context window, enabling entire codebases or lengthy documents to be processed in a single prompt. The launch builds on last year’s R1 model, which triggered a global tech sell-off by challenging assumptions around AI cost and compute intensity. Preview versions allow the company to include real-world feedback and make changes ahead of a final product launch.

Japan’s latest consumer inflation print showed that the costs of the war in the Middle East began to impact the broader economy last month. The core consumer price index (CPI) rose 1.8% YoY in March, accelerating from 1.6% in February and ahead of a consensus forecast of 1.7%. The pickup was driven by higher energy costs, notably gasoline prices, although government fuel subsidies helped offset these pressures.

In an environment of mounting upside inflation risks, investors continued to speculate about the potential timing of the Bank of Japan’s (BoJ) next interest rate hike. Uncertainty about the impact on growth and inflation from the war in the Middle East is complicating the BoJ’s gradual monetary policy tightening process, with investors now converging around the view that the central bank will adopt a “wait and see” stance and is unlikely to raise rates at its 27-28 April meeting.

The BoJ is expected to revise its inflation forecasts upward while downgrading its growth projections, given the significant shock from rising energy prices. Against this backdrop, the yield on the 10-year Japanese government bond rose to 2.43% from 2.41% at the end of the previous week.

The yen weakened toward JPY 160 against the US dollar. That level represents a threshold at which authorities could intervene in the foreign exchange markets to support the Japanese currency, having last done so in 2024. Japan’s Finance Minister Satsuki Katayama, in conversation with the Bloomberg news agency, again acknowledged that speculation is driving volatility in currency markets and that, for the first time, such volatility is deriving from the oil market. She said that Japanese authorities were in close contact with their US counterparts, including regarding the possibility of bold action.

The Australian flash composite output PMI for April rose to 50.1 after falling sharply in March. Reported activity in manufacturing remained weaker than that in services. Flash output price PMIs rose sharply further in April. The manufacturing output price PMI jumped to levels last seen in 2022, while the equivalent for services rose to its highest level since July 2023.

Prime Minister Mark Carney's Liberal Party secured a parliamentary majority on 14 April and subsequently signalled a more assertive stance on US trade relations, with Carney stating that Canada's "close ties to America have become weaknesses we must correct" and ruling out concessions ahead of free trade negotiations. On the economic front, March CPI data showed inflation rising 0.9% MoM, below the expected 1.1%, driven primarily by gasoline prices, while core inflation remained subdued. The Bank of Canada's first-quarter business and consumer surveys indicated improved business confidence and investment intentions, though concerns about the impact of the Iran conflict on oil prices and inflation expectations emerged.

Last week, the MSCI All Country World Index (MSCI ACWI) edged -0.2% down (6.3% YTD).

The S&P 500 Index finished the week higher by 0.6% (5.0% YTD), with several major US stock indexes hitting record highs, as generally positive economic data, ongoing strength in artificial intelligence (AI)-linked stocks, and upbeat earnings results helped offset continued uncertainty surrounding the US-Iran conflict.

Equities began the week on a cautious note following a strong three-week rally as hopes for near-term de-escalation in the Middle East faded. However, stocks rebounded on Wednesday after a ceasefire extension eased concerns, though heightened geopolitical uncertainty persisted through the end of the week.

Corporate earnings were also in focus, with nearly 20% of the S&P 500 companies reporting during the week. According to data from FactSet, 84% of S&P 500 companies that had reported through Friday beat estimates, with a blended YoY earnings growth rate of 15.1%—on pace for a sixth consecutive quarter of double-digit growth. Investor attention largely remained centred on AI demand and related infrastructure spending, signs of resilient consumer demand, and companies’ ability to manage higher costs.

Large-cap growth stocks outperformed their value counterparts, but small caps lagged behind large caps. The Russell 1000 Growth Index returned 0.6% (1.4% YTD), the Russell Value Index 0.2% (8.7% YTD) and the Russell 2000 Index 0.4% (12.7% YTD). The technology-heavy Nasdaq Composite rose 1.5% (7.0% YTD).

In Europe, the MSCI Europe ex-UK Index tumbled -2.3% (3.3% YTD). Traditionally defensive sectors such as utilities and telecoms outperformed, as the Strait of Hormuz remained largely closed and stalled negotiations between the US and Iran put geopolitical risk at the forefront. Major stock indices retreated. Germany’s DAX Index fell by -2.3% (-1.5% YTD), France’s CAC 40 Index dropped by -2.9% (0.5% YTD), and Italy’s FTSE MIB Index declined by -1.9% (7.1% YTD). Switzerland’s SMI decreased by -1.1% (1.9% YTD). The euro weakened against the US dollar, closing the week at USD 1.17 for EUR, down from 1.18.

The FTSE 100 Index in the UK lost -2.6% (5.8% YTD), while the FTSE 250 Index was down -2.5% (1.6% YTD) amid continued geopolitical tensions from the Iran conflict and fears of tighter monetary policy, while political uncertainty intensified as Prime Minister Keir Starmer's position appeared increasingly precarious amid the Mandelson saga. The British pound was little changed against the US dollar, closing the week at USD 1.35 for GBP.

Japan’s stock markets generated negative returns over the week. The TOPIX Index retreated -1.2% (10.1% YTD), and the TOPIX Small Index fell -2.7% (10.0% YTD), driven by the outlook for the war in the Middle East remaining unclear amid stalled peace talks between the US and Iran, despite strong gains in technology and AI-related stocks.

In Australia, the S&P/ASX 200 Index declined -1.8% (2.3% YTD) due to a lack of progress in US-Iran negotiations. Shorter-term Australian government bond yields rose modestly, while longer-term yields eased, with the curve flattening. The Australian dollar weakened against the US dollar by -0.7%.

In Canada, the S&P/TSX Composite decreased by -1.2% (7.7% YTD).

The MSCI Emerging Markets Index added 0.9% (15.3% YTD). The Chinese, Taiwanese, and South Korean markets contributed positively, while the Indian and Brazilian markets contributed negatively.

Chinese mainland equities were broadly stable over the week, consolidating gains following the prior week’s stronger-than-expected economic data and a limited pipeline of new domestic catalysts. The onshore CSI 300 Index, the main onshore benchmark, gained 0.9% (3.3% YTD), while the Shanghai Composite Index edged up 0.7% (2.9% YTD). Hong Kong's benchmark Hang Seng Index slipped -0.7% (1.7% YTD). The MSCI China Index, which primarily comprises offshore-listed stocks, lost -1.7% (-3.5% YTD).

In Romania, Romania’s markets were largely driven by an escalation in political risk after the Social Democratic Party withdrew support from Prime Minister Ilie Bolojan, forcing the government into a minority position. The split stems from disagreements over austerity measures aimed at reducing the country’s large budget deficit, leaving Bolojan to govern with a smaller coalition while seeking parliamentary backing on a case-by-case basis.

Romania is under pressure to deliver fiscal reforms tied to billions of euros in European Union (EU) funding. While the government is still targeting a reduction in the budget deficit to around 6.2% of GDP this year, the shift to a minority government increases the risk of delays or dilution of reform efforts. That said, there are some signs of continuity: The departing Social Democratic Party has indicated it may still support key EU-related legislation, and early elections appear unlikely given the risk of boosting far-right opposition parties.

In the near term, the situation remains fluid. Bolojan must secure a confidence vote within 45 days to stay in office, although he retains full powers in the interim unless a no-confidence motion succeeds. The government is also racing against time to pass required reforms and avoid losing up to EUR 8 billion in EU recovery funds that expire later this year.

In Türkiye, Türkiye’s central bank kept its benchmark one-week repo rate unchanged at 37% this week, in line with expectations, as policymakers grow increasingly cautious about the inflation outlook. The decision reflects rising uncertainty tied to the war in the Middle East, particularly its impact on energy prices and inflation expectations. In its statement, the central bank acknowledged that while economic activity is showing signs of slowing, recent geopolitical developments could create “secondary effects” that push inflation higher. Policymakers emphasised that they remain “highly attentive to upside risks on inflation,” signalling a more cautious stance than in prior meetings.

Importantly, the bank also indicated that underlying inflation is likely to pick up in April, and market expectations are already moving in that direction. Year-end inflation forecasts among market participants rose from 25.4% in March to 27.5% in April, largely due to uncertainty around global energy prices. Stronger language around inflation from the central bank suggests that it intends to keep financial conditions tight for longer, with short-term funding rates effectively anchored closer to 40% through liquidity management, even though the headline policy rate remains at 37%.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.2% (0.5% YTD), the Bloomberg Global High Yield Index (hedged to USD) -0.2% (1.5% YTD), and the Bloomberg Emerging Markets Hard Currency Aggregate Index -0.4% (0.9% YTD).

US Treasuries generated negative returns as yields increased across most maturities throughout the week. The market saw more muted responses to headlines surrounding the Strait of Hormuz than in recent weeks, and the midweek extension of the ceasefire appeared to lead investors to assume there would be no near-term resolution. Investment-grade corporate bonds and high-yield bonds also declined, although both markets held up better than Treasuries.

Over the week, the 10-year Treasury yield increased by 5bps to 4.30% from 4.25% (up 13bps YTD). The 2-year Treasury yield rose by 7bp, ending the week at 3.78% from 3.71% (up 31bps YTD).

Over the week, the 10-year German Bund yield increased by 3bps, ending at 2.99% from 2.96% (up 14bps YTD). The 10-year UK gilt yield rose by 15bps, ending the week at 4.91% from 4.76 (up 43bps YTD). Gilt yields rose following the retail sales data, with swaps pricing in two 25bps BoE rate increases in 2026 and a 30% chance of a third hike by year-end.