Global markets weekly update

U.S. equity indexes finished a volatile, headline-driven week mixed, as a relatively light economic calendar left investors largely focused on shifting geopolitical developments, oil price volatility, and continued pressure on large-cap technology stocks. Equities rallied to start the week amid optimism that the conflict in the Middle East could de-escalate. However, sentiment deteriorated through the end of the week, as conflicting headlines appeared to undermine confidence in a near-term resolution.

Ultimately, the S&P MidCap 400 and Russell 2000 indexes closed the week higher, both snapping four-week losing streaks, while the S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite all finished lower for the fifth week in a row. Large-cap value stocks outperformed their growth counterparts for the third consecutive week.

Preliminary data from S&P Global indicated that U.S. business activity growth moderated in March, with the Flash Composite Purchasing Managers’ Index (PMI) falling to an 11-month low of 51.4, down from 51.9 in February (readings above 50 indicate expanding activity). The deceleration was driven primarily by weaker services activity, while manufacturing output strengthened modestly.

The report highlighted a notable pickup in inflationary pressures, with input costs rising at the fastest pace in 10 months and firms passing through higher prices at the quickest rate since 2022. Businesses widely attributed the increase to higher energy costs and supply disruptions linked to the conflict in the Middle East. Employment also declined slightly, marking the first fall in over a year as “firms generally sought to reduce overheads in the uncertain economic climate.”

The Labor Department reported that initial jobless claims for the week ended March 21 came in at 210,000, a modest increase from the 205,000 reported for the prior week and in line with expectations. Meanwhile, continuing claims for the week ended March 14 decreased by 32,000 to 1.819 million, the lowest level since May 2024.

The economic calendar wrapped up Friday with the University of Michigan reporting that its March Index of Consumer Sentiment declined to 53.3, down from February’s reading of 56.6. The report noted that consumers’ short-term economic outlook dropped 14%, while expectations for personal finances in the year ahead declined 10%, although “declines in long-run expectations were more subdued.” Expectations for inflation in the year ahead rose to 3.8%, a 0.4 percentage point increase from February and the largest month-over-month rise since April 2025.

U.S. Treasuries finished close to unchanged despite some midweek yield volatility. T. Rowe Price traders noted that markets appear to be pricing in the possibility of a Federal Reserve rate hike as the conflict in the Middle East and subsequent rise in oil prices have increased inflation risks.

Meanwhile, high yield bonds were little changed, advancing early in the week amid encouraging geopolitical headlines before pulling back as broader optimism faded. Our traders also noted that investors’ focus on potential corporate mergers and acquisitions contributed to elevated trading activity in the market.

The pan-European STOXX Europe 600 Index advanced 0.35% in local currency terms. Sentiment was largely driven by uncertainty around how and when the conflict in the Middle East is likely to be resolved and the likely impact on economic growth. Among major stock indexes, Germany’s DAX was down 0.29%, Italy’s FTSE MIB rose 1.26%, and France’s CAC 40 Index climbed 0.47%. The UK’s FTSE 100 Index gained 0.49%.

Against a backdrop of higher energy prices, the European Central Bank (ECB) indicated that it stands ready to make changes to its policy “at any meeting” if required. However, bank President Christine Lagarde noted that it is too early to decide and that policymakers will have to assess the “nature, size, and persistence” of inflationary pressures caused by the Iran war. She also cautioned that markets are being “overly optimistic” about the economic impact of the conflict.

The March reading of the German Ifo Business Climate Index fell to 86.4, the weakest level since February 2025. This was better than expected but markedly weaker than the previous month. The future expectations component of the index was particularly soft, reflecting concerns about the effect that the war is anticipated to have on economic growth in Germany. More encouragingly, the country’s S&P Global Manufacturing PMI rose to 51.7 in March, up from 50.9 in February.

Business activity growth softened in March, according to the S&P Global Eurozone Composite PMI, which fell to 50.5 from the February reading of 51.9. Within this, new orders contracted for the first time since last summer and supply chains showed signs of severe disruptions.

The Organization for Economic Cooperation and Development (OECD) lowered its European growth outlook for 2026, citing the conflict in the Middle East, which it said will raise costs and lower demand. The organization is now forecasting eurozone growth of 0.8% for the year, down from its previous estimate of 1.2%. Its 2026 growth forecast for the UK was lowered from 1.2% to 0.7%.

The UK’s annual rate of inflation remained unchanged at 3% in February, according to the Office for National Statistics. However, observers noted that the data do not include the effects of the Iran war, which began on February 28 and has led to sharply higher oil and gas prices.

Japan’s stock market returns were mixed over the week, with the Nikkei 225 Index flat and the broader TOPIX Index up 1.1%. Elevated oil prices and the conflict in the Middle East weighed on investor sentiment, as Japan relies heavily on imported energy, raising concerns about higher costs for businesses, slower economic growth, and a potential squeeze on household spending. Prime Minister Sanae Takaichi signaled plans to strengthen the country’s response to the impact of the conflict, including a comprehensive review of oil supply and related products, as concerns grow about potential shortages and wider economic effects. The government began releasing state-held oil reserves during the week.

By the end of the week, the yen was hovering around JPY 160 against the U.S. dollar, a level where Japanese authorities intervened multiple times in 2024 to prop up the currency. In a fresh bout of verbal intervention, Finance Minister Satsuki Katayama said that authorities would respond firmly, including taking bold steps, and pointed to speculative foreign exchange moves, particularly those linked to developments in oil markets. The proximity to past intervention levels has kept currency volatility and policy risk in focus for investors.

Within fixed income, the yield on the 10-year Japanese government bond rose to 2.34%, from 2.26% at the end of the previous week, tracking higher global yields and reflecting firmer inflation expectations amid elevated oil prices and a weaker yen. The move also points to expectations of gradual policy normalization by the Bank of Japan (BoJ) although officials are likely to remain cautious and focused on underlying, wage-driven inflation rather than reacting to short-term, commodity-driven price pressures. At its March meeting, the BoJ left rates unchanged but kept the door open for a possible April rate hike.

On the economic data front, Japan’s nationwide core consumer price index rose 1.6% year over year in February, versus the consensus forecast of 1.7% and down from 2.0% in January. The slowdown was largely attributable to government energy relief measures, including subsidies for electricity and gas. The BoJ has indicated that inflation may temporarily soften due to these measures, although upward pressure on prices is then likely to persist, reflecting higher oil prices. Policymakers continue to emphasize that a sustained rise in wages will be key to supporting stable inflation. .

Chinese equity markets fell during the week, driven more by oil price concerns tied to the Middle East conflict than domestic macro surprises, as investors reassessed earnings pressure across transportation, industrial, consumer, and other energy-sensitive sectors. The onshore CSI 300 Index retreated 1.41%, while the Shanghai Composite Index fell 1.09% in local currency terms, according to FactSet. In Hong Kong, the benchmark Hang Seng Index lost 1.29%.

China’s government intervened to limit domestic refined fuel price increases, aiming to soften the impact of higher energy costs linked to the ongoing Middle East conflict. The National Development and Reform Commission announced that prices for domestic gasoline and diesel would rise by approximately 10%, about half of the increase expected under the government’s pricing mechanism. China is a net importer of oil, and about 45% of its shipments travel through the Strait of Hormuz.

China’s Ministry of Commerce said on Friday that it launched investigations into U.S. supply chain and renewable energy practices, mirroring Washington’s use of Section 301 tools and marking a further escalation in bilateral trade tensions. The move follows renewed U.S. efforts to revive tariffs after partial legal setbacks and comes ahead of a planned Xi-Trump summit in mid-May.

The six-month probes, with possible extension, target a wide range of U.S. measures, including import restrictions on Chinese goods, export controls on advanced technology, and limits on bilateral investment. Beijing signaled that some actions may breach World Trade Organization rules and existing agreements.

Earlier in the week, Beijing struck a more conciliatory trade stance, acknowledging worries from other countries about its large trade surplus and signaling a push toward more balanced trade through increased imports of more high-quality foreign goods. Speaking at the annual China Development Forum, Premier Li Qiang said that the government will open more business opportunities for foreign firms, including widening services sector access and boosting imports of medical products, digital technologies, and low-carbon services.

Profits of China’s major industrial firms jumped 15.2% in the first two months of 2026 from a year earlier, before the conflict in the Middle East started. For the whole of 2025, industrial profits grew 0.6% year over year. State-owned enterprise profits rose 5.3% in January and February, while those of private firms surged 37.2%, highlighting an uneven earnings recovery.

Market attention across Asia centered on the spillover from rising global energy prices as the Iran-linked oil shock forced governments to respond quickly to mounting inflation risks. The impact was uneven, with markets differentiating between energy importers and exporters.

In the Philippines, authorities declared an energy emergency and suspended parts of the electricity market to contain price spikes amid fuel shortages. With heavy reliance on spot energy imports and limited subsidies, inflation risks rose sharply. The central bank held rates steady but signaled tolerance for higher inflation, reinforcing concerns about external balances. Thailand and Malaysia raised retail fuel prices, surprising investors. While this is expected to lift headline inflation, markets appeared to view the moves as fiscally responsible. Malaysia’s exporter status helped cushion sentiment, though expectations for a potential rate hike increased. In Thailand, the move was seen as normalization, with limited immediate policy implications.

Elsewhere in Asia, South Korea shifted into “crisis mode,” announcing a bond buyback program to stabilize markets amid rising yields and tightening expectations. Government bond yields eased somewhat following the intervention, although the currency remained under pressure due to energy import dependence. India took a more targeted approach, cutting fuel taxes to limit inflation pass-through but raising longer-term fiscal questions. Indonesia combined fiscal discipline with liquidity support to cap bond yields as its local credit market came under strain, reflecting inflation risks, capital outflows, and growing scrutiny of sovereign creditworthiness.

This week, Mexico’s central bank (Banxico) surprised markets by cutting interest rates by 25 basis points (0.25 percentage points) to 6.75%, going against expectations for a pause. The decision was narrowly split, with two policymakers dissenting—highlighting growing disagreement about the appropriate policy path. The move came despite inflation surprising to the upside ahead of the meeting. While headline inflation has picked up, Banxico emphasized that core inflation has not accelerated to the same degree. Still, both measures remain above the bank’s 2%–4% target range, and policymakers acknowledged that inflation risks are skewed to the upside.

Banxico also revised its inflation forecasts higher in the near term, though it continues to expect inflation to return to target by mid-2027. At the same time, the central bank pointed to weak economic growth as a key concern and suggested that monetary policy remains restrictive enough to absorb external shocks. Looking ahead, policymakers signaled that they will assess whether “an additional cut” is warranted, suggesting the easing cycle may be nearing its end, with rates potentially settling around 6.5%.