2026 - Q1 market commentary

Energy price shock weighs on markets and rate expectations

Global markets were volatile as Middle East tensions pushed energy prices higher, unsettling equities later in the quarter. Rising oil prices have reignited inflation concerns, reducing the likelihood of rate cuts and raising the prospect that central banks may keep borrowing costs higher for longer.

While the US economy remains resilient and company profits robust, the labour market is weakening and consumer confidence has fallen.

In this update, Wesleyan reflect on these developments and take a look at some of the highlights and lowlights of the quarter, alongside our usual fund views and outlook from the Investments team.

Global market overview

It was a volatile quarter for global markets as rising geopolitical tensions in the Middle East pushed up energy prices, complicating the outlook for growth. Supply disruptions drove oil and gas prices higher, increasing concerns about inflation. Despite this, US stocks were resilient, supported by a solid economy and upbeat earnings outlooks.

US equities got off to a mixed start, unsettled by concerns over significant AI-related spending and uncertainty over President Donald Trump’s new tariffs. These worries proved to be short-lived, as renewed optimism around AI offset lingering concerns about the new technology, while market nerves eased after Trump’s tariffs came into effect at 10% rather than the threatened 15%.

It was also a strong earnings season, with roughly 80% of companies beating expectations and further signs that market gains were broadening beyond the biggest names.

European and UK equities performed strongly in the early part of the quarter. European stocks reached record highs following a string of upbeat company results, while the FTSE 100 rose above 10,000 points for the first time, supported by solid economic data and robust corporate earnings.

In Asia, Japanese equities were among the top performers, reaching new highs after Prime Minister Sanae Takaichi’s decisive election win boosted expectations of more government spending and tax cuts.

Towards the end of the quarter, worries about the knock-on effects of the Iran conflict unsettled global markets. Equities came under pressure after oil and wholesale gas prices surged following US military strikes on Iran, raising concerns over potential disruption to global energy supplies and renewed inflation pressures.

Rising energy costs weighed on market confidence, with fears that sustained price pressures could tip the global economy toward recession.

Oil prices moved sharply over the period, climbing above $100 a barrel for the first time in four years. Gold prices remained steady, as recent market swings and a strong dollar made it less attractive.

Markets rallied towards the end of March following reports that the US had sent a potential peace plan to Iran. US and European stocks advanced as the US showed more signs it was trying to de-escalate the war with Iran. Asian equity markets also posted broad gains, with Japan leading the way.

Bond markets

Global bond yields rose to their highest since May 2024 after energy costs surged due to the crisis in the Middle East. Bond yields rise as prices fall and vice versa.

US Treasury bond yields climbed to their highest in months after speculation the US Federal Reserve (Fed) may raise interest rates to combat inflation. The yields on 10-year bonds rose to their highest since last summer, while two-year yields also surged.

The UK government’s 10-year borrowing costs climbed sharply, reaching their highest level since the global financial crisis. The 10-year gilt yield rose above 5%, a level seen as highlighting the UK’s exposure to higher energy costs.

Interest rates and inflation

Rising energy costs as a result of the conflict in the Middle East have dented hopes of rate cuts from central banks. Surging oil prices have reignited inflation fears, raising concerns that policymakers may keep borrowing costs higher for longer, with the possibility of rate increases if price pressures persist.

Inflation is expected to rise, but how this pans out will depend on the duration of the conflict and whether the Strait of Hormuz reopens, allowing tankers through.

In the face of growing inflationary pressures and weak job data, the US Federal Reserve held rates steady in the range of 3.5% to 3.75%. Inflation remained stable at 2.4% in February ahead of the energy shock triggered by the US attack on Iran. However, analysts have warned the conflict could push it above 3% in the coming months.

Amid rising energy prices, the Bank of England kept interest rates on hold at 3.75% at its March meeting and signalled it could be forced to increase borrowing costs in the coming months. UK inflation held steady at 3% in February, with rises likely as the year progresses. Before the Iran war, the Bank had been predicting inflation would fall close to its 2% target rate in April.

The European Central Bank (ECB) left interest rates on hold at 2% for the sixth consecutive meeting, despite rising price pressures. Eurozone inflation came in higher than expected in February at 1.9%, up from 1.7% in January. There are now worries that the war in Iran could push it over the ECB’s 2% target.

US economy remains robust despite emerging headwinds

The US economy has remained broadly resilient this year, but signs of strain are emerging. Consumer spending barely rose in January, suggesting momentum was already fading. More recently, conflict in Iran has pushed gasoline above $3.80 a gallon, the highest level since October 2023. The rise threatens to undermine Trump’s efforts to ease the cost of living and has weighed on consumer confidence.

The labour market has also softened. Payrolls fell by 92,000 in February, while unemployment ticked up to 4.4%. Combined with rising fuel costs, the slowdown complicates the Fed’s path, leaving policymakers balancing weaker growth against persistent inflation pressures.

While inflation had been easing before the conflict, the UK’s reliance on oil and gas has raised concerns it could rise again. Consumer confidence has fallen to a two-year low, with younger people in particular facing mounting financial pressures. Petrol prices have climbed to their highest level since the Ukraine war, rising by nearly 10p per litre, while diesel has increased by around 20p.

The labour market remains sluggish. The unemployment rate held at a five-year high of 5.2% in the three months to January, while wage growth slowed. Joblessness has trended higher since 2022, with businesses pointing to recent tax rises as a key factor weighing on hiring.

Recent manufacturing optimism in the eurozone is fading after industrial production fell in January, weighed down by a slowdown in Germany, Italy and Spain. The sector had shown tentative signs of recovery, supported by looser fiscal policy and increased defence spending, but this is now threatened by rising energy prices.

As a major energy importer, Europe is vulnerable to the US–Iran conflict, which risks stalling growth and holding back investment. Industry has already faced persistent headwinds, including higher energy costs after Russia’s invasion of Ukraine and intensifying competition from China. While the eurozone economy remains resilient, US tariffs are weighing on growth and adding to inflationary pressures.

China’s large oil stockpiles should in the short term help shield its economy from supply disruptions in the Middle East. China cut its annual growth target to a record low of 4.5% to 5%, the lowest expansion since 1991. China’s economy rebounded in early 2026, with growth in domestic consumption and investment, although this may prove hard to sustain due to the war with Iran.

China’s exports surged by 20% in the first two months of the year, despite trade tensions with the US. China achieved a record trade surplus of $1.2 trillion last year, after making deeper inroads into markets outside the US. While trade with the US has fallen, it has made up for this with growth in other markets, including Latin America, Africa and Southeast Asia.