Global markets remained volatile this week. The conflict involving Iran continued to dominate sentiment, with markets reacting to every headline around ceasefire proposals, attacks on energy infrastructure and the prospects for a broader de-escalation. While hopes of diplomatic progress briefly improved sentiment early in the week, those gains proved short-lived as the parties remain far apart on the terms of any agreement. As a result, oil remained central to the market narrative, with investors increasingly concerned that a prolonged period of elevated energy prices could add to inflation pressures at a time when growth signals across major economies are already becoming more mixed.

Higher energy prices are already starting to feed through into consumer and business expectations, complicating the outlook for central banks. If oil remains elevated for longer, policymakers may have less room to ease interest rates, even if economic momentum continues to soften. In the United States, for example, average gasoline prices have climbed to nearly $4 per gallon from around $2.80 at the start of the year, adding meaningful pressure to household budgets and reinforcing fears that higher energy costs could filter through into a broader range of goods and services.

In the United States, the economic backdrop remains mixed. Business activity is still expanding, but growth has slowed, with softer services activity offsetting some improvement in manufacturing. At the same time, pricing pressures have begun to pick up again, largely due to higher energy costs and supply chain disruptions linked to the Middle East conflict. This suggests that inflation risks may be re-emerging even as economic momentum moderates.

The labour market, however, continues to provide an important source of stability. Jobless claims remain relatively low and layoffs are still contained, indicating that businesses are not yet reacting aggressively to the more uncertain economic outlook. Even so, consumer sentiment weakened further in March as households grew more cautious about both the economic outlook and inflation. Against this backdrop, markets remained unsettled, with investors weighing two competing risks: slower growth on the one hand, and the possibility that the Federal Reserve may need to keep interest rates higher for longer if inflation proves more persistent.

In Europe and the UK, the economic backdrop is also becoming more fragile. Survey data pointed to slower growth in March, with eurozone business activity easing, German business confidence weakening and the OECD lowering its 2026 growth forecasts for both the eurozone and the UK. The common thread is that higher energy prices and geopolitical uncertainty are placing additional strain on economies that were already growing modestly.

At the same time, inflation remains sticky enough to limit how quickly central banks can respond. The European Central Bank has indicated that it stands ready to act if necessary, but policymakers say it is still too early to judge whether the recent rise in energy prices will translate into a more persistent inflation problem. In the UK, headline inflation held around 3% in February, while softer retail sales, weaker consumer confidence and slowing services activity suggest that households are becoming more cautious again.

In Japan, higher oil prices and yen weakness remained central to the outlook. As a major energy importer, Japan is particularly exposed to rising oil costs, both through higher business input costs and pressure on household spending. At the same time, the yen’s weakness has kept the risk of official currency intervention in focus for investors. Although inflation softened somewhat in February, much of the decline reflected temporary government energy relief measures rather than a meaningful easing in underlying price pressures. As a result, the Bank of Japan is likely to proceed cautiously with any further policy normalisation.

China entered this period of geopolitical uncertainty with some tentative signs of improving momentum. Industrial profits rose strongly in the first two months of the year and revenues also improved, suggesting that parts of the corporate sector began the year on a firmer footing. While these figures can be influenced by Lunar New Year timing effects, they nevertheless point to some stabilisation in business conditions, particularly among private firms where profit growth was notably stronger. Even so, China remains exposed to the broader global environment. Higher oil prices present a challenge for an economy that is a significant net importer of energy, prompting authorities to cap domestic fuel price increases to help cushion households and businesses. At the same time, trade tensions with the United States resurfaced, with Beijing initially striking a somewhat more conciliatory tone before later launching new investigations into US trade and supply chain practices.

Overall, the week reflected a mixed but generally cautious tone across global markets. In the United States, equities remained under pressure, with the Dow Jones down 0.90%, the S&P 500 declining 2.12%, and the Nasdaq falling 3.23%. European markets were more resilient, with the Euro Stoxx 50 edging up 0.08% and the FTSE 100 gaining 0.49%. In Asia, performance was mixed, as Japan’s Nikkei 225 was broadly unchanged on the week, while Hong Kong’s Hang Seng fell 1.24% and China’s Shanghai Composite declined 1.09%. Bond yields moved modestly higher across most major developed markets as investors continued to weigh inflation risks and the interest rate outlook. In commodities, Brent crude oil fell 4.47% to $107.34 per barrel, although it remains sharply higher year to date, while gold was little changed on the week and is up 2.44% for the year.