Macro
Geopolitics dominated the macro narrative this week, with the Iran conflict driving both inflation expectations and cross-asset positioning and introducing extreme headline volatility. Market sentiment oscillated between early optimism around a potential de-escalation, driven by signals that the U.S. may be willing to accept a partial resolution without a full reopening of the Strait of Hormuz, and renewed concern following a more aggressive shift in rhetoric later in the week. The net result is a highly unstable equilibrium: markets are still anchored to a “temporary shock” framework, but with growing recognition that the timeline and economic damage remain uncertain and potentially prolonged.
The macro regime is increasingly characterised by a supply-driven inflation shock with lagged growth consequences. Oil and gas disruptions continue to act as the primary transmission channel, but second-round effects are building through food, fertiliser, and industrial costs. This reinforces a shift toward a stagflationary baseline, where inflation rises immediately while growth slows progressively. Despite this, market pricing continues to reflect expectations of eventual normalisation, as seen in extreme backwardation in energy curves, suggesting a disconnect between physical market stress and forward expectations.
In the U.S., incoming data continues to support a resilient but gradually softening economy. Labour market signals remain firm, with payrolls rebounding (178k) and unemployment at 4.3%, reinforcing the absence of near-term recession risk . However, underlying details are less constructive: participation has declined, underemployment has edged higher, and forward-looking components of surveys (ISM new orders, employment) are weakening. Elsewhere, retail sales and consumer confidence surprised modestly to the upside, though sentiment remains fragile with pessimistic skew in qualitative responses. Taken together, the data points to a late-cycle dynamic: activity is holding up, but momentum is slowing at the margin.
This backdrop is feeding directly into the Fed’s reaction function, which is becoming more asymmetric. With inflation still near ~3% and at risk of re-accelerating due to energy, policymakers are signalling a clear preference to err on the side of tighter policy, even as growth risks rise. Markets have responded by removing most easing expectations for 2026 and pricing a higher-for-longer path with residual upside risk to rates, particularly at the front end. The key constraint remains the nature of the shock: tightening in response to a supply-driven inflation impulse raises policy-mistake risk, but failing to act risks de-anchoring expectations.
Globally, the trade-off is more adverse. Europe is already showing signs of weakening demand alongside rising inflation pressures, with sentiment indicators deteriorating and inflation expectations rising sharply. Growth expectations have been revised lower (~0.5% for 2026), while inflation is drifting back toward ~3%, reinforcing the stagflation narrative. In Asia, the shock is transmitting through both energy and trade channels, with manufacturing activity weakening and currencies under pressure. The global picture remains consistent: uneven exposure, but synchronised direction: higher inflation, weaker growth.
Overall, the macro environment is transitioning into a policy-constrained late cycle, where central banks prioritise inflation credibility while growth risks build beneath the surface. The key inflexion remains the point at which growth deterioration becomes dominant enough to force a policy pivot. Until then, the regime remains defined by elevated inflation risk, high geopolitical uncertainty, and rising probability of policy mistakes, with markets still underpricing the second phase of the shock.
Rates
Treasuries sold off across the curve over the week, with yields finishing near local highs after a sharp reversal following the March payrolls release. The 10Y closed around 4.35% (it was relatively stable this week within a 5 bps range) and the 30Y near 4.91% (also stable, 2 bps range), retracing an earlier rally that had briefly pushed the 10Y back toward the 4.25% area. The move in yields was led by the front end, where repricing of policy expectations accelerated, driving a modest but persistent bear flattening across 2s10s and 5s30s. The price action reinforces a market that is increasingly reactive to data and geopolitics rather than anchored to a stable macro path.
The key framing remains the Fed’s dilemma under a supply shock. Jerome Powell set this out clearly: policy is “in a good place”; initial supply-driven inflation can be looked through; and the critical variable is whether inflation expectations become unanchored. This has been consistently echoed by other Fed officials, who emphasise optionality and a willingness to move in either direction. The implication is clear: the Fed is not validating the market’s hawkish repricing, but it is also not in a position to ease quickly.
This tension is now fully reflected in market pricing. The stronger-than-expected March jobs print (178k) triggered a decisive shift, with markets effectively pricing out 2026 rate cuts, leaving only ~1bp of easing versus several bp previously. At the same time, the Fed has little incentive to tighten into an energy-driven shock with uncertain persistence. The result is a rates market defined by policy paralysis, where timing uncertainty dominates directional conviction.
Curve dynamics reinforce this interpretation. Front-end yields have borne the brunt of the repricing, driving flattening across key segments, while the long end remains anchored by a combination of growth uncertainty and structural demand. However, the bear-flattening phase is showing signs of fatigue. With policy expectations now broadly reset, the marginal risk is shifting toward duration, where term premium remains sensitive to supply, inflation expectations, and positioning.
Supply and positioning continue to exert pressure beneath the surface. Treasury bill auctions were well absorbed, but dealer balance sheets have expanded materially, with holdings reaching a record $557B. This reflects intermediaries absorbing elevated issuance, creating a latent overhang in duration. Even with FY26 net issuance projected to decline materially, near-term supply dynamics and balance sheet constraints are likely to keep pressure on long-end yields upward.
Globally, the same dynamic is visible. The energy shock has pushed inflation risk higher across jurisdictions, but central banks remain cautious. The ECB is increasingly framed around a hike-or-hold decision rather than cuts, while the BOJ’s tone remains incrementally hawkish. In contrast, the BOE is pushing back against premature expectations of tightening, highlighting downside risks to growth. This divergence reinforces a global backdrop where policy paths are less synchronised and increasingly data-dependent.
Cross-asset signals remain contained. US 5Y CDS tightened modestly to ~38bp, indicating that credit markets are not signalling stress. This suggests the sell-off in rates is primarily driven by macro repricing and supply dynamics rather than systemic concerns. At the same time, flows into the belly of the curve and steady demand for intermediate duration highlight a market beginning to position for slower growth beyond the immediate inflation impulse.
In general, the rates market is operating without a clear anchor. The Fed is constrained by a supply-driven inflation shock it cannot easily offset, leaving policy reactive and path-dependent. The front end has largely repriced the shift in expectations; the risk is of a rotation toward longer maturities, where term premium, supply, and positioning dominate. The trajectory from here depends on the persistence of the energy shock. A prolonged conflict sustains inflation and delays easing, while any credible de-escalation would likely trigger a sharp reversal, with growth concerns reasserting and the curve moving back toward steepening.
Credit
Credit markets remained open, but tone deteriorated, with dispersion increasing across instruments and a clear shift away from indiscriminate carry toward selective risk pricing. Public markets led the repricing, while private credit entered a liquidity- and confidence-driven adjustment phase.
Private credit was the dominant theme, with the clearest stress signal coming from Blue Owl Capital. Its ~$36B flagship vehicle (OCIC) saw redemption requests equal to 21.9% of its shares in Q1, while its tech-focused fund (OTIC) saw redemption requests equal to 40.7% of its shares in Q1. Both were capped at the standard ~5% quarterly gate, implying investors received only ~25% and ~12% of the requested liquidity, respectively. This was multiples above peer redemption levels and marked a step-change in investor behaviour.
Across the complex, the pressure for redemption broadened. KKR (K-FIT) saw 6.3% requests, while Apollo Global Management and Ares Management both faced ~11–12%. Industry-wide, ~$13B of redemptions were requested this quarter, with >$4.5B effectively trapped behind withdrawal limits. Inflows softened net outflows, but flows have clearly decelerated, and pro-rata payouts in some vehicles fell below 50%, confirming liquidity is being rationed rather than absorbed.
This is structural rather than idiosyncratic. Private credit has grown to ~$2T (≈14–15% CAGR over the past decade), increasingly distributed through semi-liquid vehicles to retail channels (~20% of the base, largely recent). These structures combine long-duration, illiquid loans with periodic liquidity features, often supported by fund-level leverage (up to ~2:1 in BDC frameworks). The result is a clear mismatch: legally robust, but increasingly misaligned with investor expectations under stress.
The trigger appears multi-factor. Part liquidity mismatch, part sentiment shock, and part sector-specific concern, particularly around software exposure and potential AI-driven disruption to borrower cash flows. The latter has become a focal point, reinforcing differentiation within credit. Public markets already reflect this: HY spreads widened (~250 → ~325 bps), CCC risk is repricing sharply (~1,800–1,900 bps), while higher-quality and securitised credit remain relatively resilient.
The divergence between public and private credit continues to widen. Listed markets are repricing in real time, while private valuations remain model-based and lagged, creating uncertainty around true loss recognition. Secondary activity is beginning to reflect this, with hedge funds reportedly bidding for liquidity at steep discounts (~30%), effectively creating a shadow price discovery mechanism for otherwise illiquid assets.
Importantly, this is not yet a systemic event. Policymakers have not identified contagion into the banking system, and the prevailing institutional view remains that the sector is undergoing repricing rather than collapse. The adjustment mechanism is expected to come through wider spreads, tighter liquidity, and more selective capital allocation rather than disorderly defaults.
Outside private credit, primary markets remain functional for high-quality issuers, with record Q1 EMEA issuance (~€145B) led by large borrowers, while banks continue to optimise balance sheets via risk transfers. Rating activity and restructuring remain consistent with early-cycle deterioration rather than broad stress.
In general, credit is weakening beneath the surface. Public markets are pricing in selective stress, while private credit is adjusting amid liquidity constraints and eroding confidence. The current phase reflects sector-specific pressure and structural mismatch.
Equities
US equities rebounded sharply in a holiday-shortened week (closure for Good Friday), with S&P 500 +3.36%, Nasdaq +4.44%, Dow +2.96%, and Russell 2000 +3.28%, snapping a five-week losing streak. The rally was primarily flow- and positioning-driven, rather than a clean fundamental turn, supported by partial geopolitical de-escalation in the Iran conflict, a rapid unwind of hedges, and short covering after an extended period of de-risking. Thinner liquidity and declining volumes into the holiday further amplified the move, with price action reflecting a tactical rebound rather than a confirmed regime shift.
Volume peaked early in the week (~1.28B shares) before fading to ~759M by week’s end, reinforcing the low-liquidity backdrop. At the same time, volatility compressed materially, with the VIX falling from ~30.6 to ~23.9, driving mechanical re-risking across systematic strategies and dealer positioning. ETF turnover remained elevated, highlighting increasingly tactical flows and a market structure sensitive to positioning shifts.
Leadership reverted decisively to high-beta and growth. Mega-cap tech and momentum names drove the rebound, with Meta Platforms +9.3% and Alphabet +7.8% leading within large-cap growth. Semiconductors reaccelerated on AI-related demand and strategic developments, reinforcing the market’s dependence on a narrow leadership cohort.
Sector performance reflected a pro-cyclical rebound. Communication Services +6.39% and Technology +4.61% led, followed by Real Estate +3.76% and Financials +3.57%, while Materials +3.39% tracked strength in metals. In contrast, Energy declined -5.34% despite a sharp rise in crude prices, highlighting positioning fatigue and potential profit-taking after a strong run. Defensive sectors underperformed, with Consumer Staples +0.67% and Utilities +1.60%, while Healthcare +2.42% and Consumer Discretionary +2.73% posted more modest gains.
Cross-asset signals remained mixed. The US Dollar Index weakened slightly, down -0.1%, while gold and silver rebounded 4.2% and 4.5%, respectively, indicating continued demand for hedges. Bitcoin futures +1.4% edged higher. Oil markets remained central, with WTI up 11.9% to its highest level since mid-2022, reflecting ongoing geopolitical risk around supply disruptions.
Single-stock dispersion remained elevated. Boeing +9.3% gained on defence-related developments, while Marvell Technology +12.9% rallied on AI-linked partnership news with Nvidia. Palo Alto Networks +11.0% was supported by insider buying. In contrast, Nike declined -14.0% on weak China demand and cautious guidance, highlighting ongoing pressure in consumer segments.
In a broader context, this rebound follows a ~7% global equity drawdown in March, driven by geopolitical escalation, higher oil prices, and a repricing of inflation expectations. Valuations have compressed, but the market remains fragile. The current move reflects a tactical recovery driven by positioning, volatility compression, and macro relief, with sustainability dependent on earnings confirmation, stabilisation in energy markets, and the trajectory of geopolitical risk.