Macro
The macro backdrop this week was defined by a widening gap between what markets were pricing and what the physical economy was still dealing with. U.S. activity remained resilient enough to support the expansion narrative, with initial jobless claims falling to 207K and bank commentary continuing to describe credit demand and consumer conditions as broadly intact. China’s Q1 GDP printed at 5.0% YoY, above expectations, while the euro area February industrial production rose 0.4% m/m and the euro area current account recorded a €25B surplus in February. These data points argue against a call for recession. But they do not justify an “all clear.” The better framing is that growth remains intact, especially in the U.S., but resilience is conditional and increasingly dependent on the disruption window remaining limited.
The dominant macro event was the de-escalation around the Strait of Hormuz and the violent repricing it triggered across oil and risk assets. Brent settled at $90.38 on April 17, down $9.01 or 9.07% on the day, after settling at $94.93 on April 15 and $99.39 on April 16. WTI fell to $83.85, down about 11.45% on the day. Over the week, Brent declined 5.06% and WTI 13.17%, while WTI’s two-week decline reached 24.83%, the steepest dollar drop at $27.69 since 2008 and the largest percentage decline since April 2020. Brent also finished 23.63% below its March 31 high of $118.35. This was not a routine correction. It was a rapid unwind of a war premium tied to the risk of a sustained Hormuz shutdown.
The reasoning behind that move matters. The U.S. blockade targeted Iranian shipping and export capacity rather than physical energy infrastructure, directly constraining Tehran’s ability to monetise oil flows. That shifted incentives toward de-escalation and negotiations. The reopening signal then collapsed the probability of the worst-case closure scenario, removing a large tail-risk premium from crude. Positioning amplified the move as long oil exposure was unwound aggressively. The decline in oil, therefore, reflects policy pressure, negotiation dynamics, repricing of extreme outcomes, and forced position adjustment, not simply an improvement in fundamentals.
At the same time, the sharp fall in oil does not mean the physical system has normalised. That distinction remains central. Shipping, insurance, routing behaviour and damaged infrastructure do not improve on headline speed. Even in a constructive scenario, oil already stranded in the system may take several weeks to reach end markets, while production normalisation across Gulf producers could take around a month, followed by additional delivery lags. Reopening is not restoration. The current equilibrium looks more like managed instability than full resolution, and the price rebound into the weekend, with Brent reopening closer to the mid-to-high $90s, highlights how quickly the market can reassess the durability of the de-escalation narrative.
The current equilibrium, therefore, carries an asymmetric risk profile. The downside in oil is constrained by incomplete normalisation, while the upside remains open-ended if disruption returns. Markets have removed a large portion of the tail-risk premium in a short period, but the underlying system remains exposed to renewed shocks. In practical terms, the recent decline in crude is more consistent with a compression of risk premia than a transition to a stable equilibrium, leaving the market vulnerable to sharp reversals if negotiations stall or geopolitical tensions re-escalate. Most likely, however, the risk-on mode will continue in the near term.
That is also why inflation remains the key transmission channel. The more complete framework is not a one-variable oil story. It runs from crude into jet fuel, diesel, petrochemicals, fertiliser, food and electricity before broader consumer prices feel the full effect. Even if spot crude retreats, downstream prices can remain elevated for longer. Fed officials have acknowledged this dynamic. Waller noted that rate cuts later this year remain contingent on a swift resolution, while Musalem suggested the oil shock could keep core inflation near 3% and policy on hold. The implication is that the Fed retains room to be patient, but the energy shock has raised the bar for easing. At the same time, the medium-term inflation risk appears more contained if wage growth continues to slow and expectations remain anchored, suggesting a near-term price shock rather than a sustained wage-price spiral.
Despite these risks, easier financial conditions provide a partial offset. The energy shock has so far weighed more on confidence than on realised activity, while easing financial conditions and low-rate volatility have supported risk assets and carry trades. This helps explain market resilience even as macro uncertainty persists, though that support would become vulnerable if oil volatility returns or rate markets reprice higher.
The global distribution of the shock remains uneven. The U.S. enters this episode from a stronger position than Europe or much of Asia due to lower dependence on imported energy and continued support from earnings, AI capex and domestic demand. Europe and energy-importing emerging markets face greater exposure to higher import costs, weaker terms of trade and limited fiscal space. As a result, the key U.S. risk may not be direct energy costs but rather spillovers through global demand, trade, and financial conditions if the external shock persists.
A final consideration is the fiscal backdrop. This shock is landing on top of already weaker fiscal starting points, with higher defence spending, larger deficits and heavier refinancing burdens. While not an immediate market stress point, it limits the scope for policy support in a prolonged shock scenario. IMF analysis reinforces that debt risks and policy constraints are becoming more relevant, and political incentives to contain the energy shock ahead of key events increase the likelihood of tactical de-escalation without guaranteeing a durable resolution.
Overall, the week leaned more bullish than bearish. Early concerns centred on a potential tail event. Midweek, resilience, AI and earnings supported sentiment. By Friday, de-escalation headlines drove an aggressive risk-on repricing. But the underlying macro message has not changed. Growth remains intact but conditional, inflation pressures are shifting through slower transmission channels, and the biggest mistake would be to equate tactical de-escalation with full normalisation. Markets are pricing a cleaner Q2–Q3 path. The real economy is likely to adjust more gradually, but risk-on should continue in the near term.
Rates
Rates rallied on de-escalation in the Middle East and the reopening of the Strait of Hormuz, but the move reflects relief rather than a reset in the rates regime. UST yields declined across the curve, led decisively by the front end: 2Y and 5Y yields fell ~8–9 bps, the 10Y declined ~7.5 bp to ~4.20%, and the 30Y moved lower by ~5 bp. The structure of the move is critical. This was not a duration-led disinflation rally, but a front-end repricing of policy expectations, with long-end inflation and term-premium concerns largely intact.
The market is now operating in a different regime. Volatility has compressed while yields remain elevated, reinforcing a higher-for-longer, range-bound environment. A useful anchor places the 10Y in a 4.25%–4.75% range, with 5% unlikely absent a de-anchoring of inflation expectations, as higher yield levels should attract buyers. The opportunity set has shifted away from directional duration toward carry, curve positioning and relative value.
The repricing of the Fed path remains the dominant driver. Markets have moved from pricing multiple cuts to roughly one cut, with only ~50% of that cut priced by year-end, and further easing pushed into 2027. This leaves the front end with residual easing optionality, while the long end remains anchored by inflation and supply risk. The policy debate itself is increasingly asymmetric. A hawkish interpretation argues rates should not be lowered at all, given still-low real rates, fiscal expansion, war-related spending and AI capex. More broadly, policymakers are now openly acknowledging the risk that repeated price shocks could resemble a pandemic-style inflation sequence, in which energy and trade disruptions interact to create more persistent inflationary pressures.
This risk is not just cyclical but behavioural. The key concern is not the immediate rise in inflation, but the possibility that inflation expectations begin to shift higher and become embedded if energy prices remain elevated. That would materially constrain the Fed’s ability to ease, particularly if inflation remains high while the labour market weakens. In that sense, the policy function is becoming more fragile: a stagflationary mix would limit both easing and tightening flexibility, reinforcing the higher-for-longer regime even if growth slows.
Curve dynamics remain the key expression of this environment. The initial shock phase produced a flattening as front-end yields repriced aggressively. The next phase is a gradual, range-bound steepening, driven by stabilisation or a decline in front-end rates as growth softens, while the long end remains constrained by deficits, issuance, and the term premium. Importantly, the long end is no longer a clean proxy for Fed policy expectations. It is increasingly a function of fiscal dynamics, supply pressure and structural inflation risk. The key catalyst here is the May refunding cycle, when markets will focus on whether the Treasury begins increasing auction sizes.
Positioning reflects this asymmetry clearly. The dominant institutional trade is long front-end and belly duration paired with curve steepeners, with explicit caution on the long end. This aligns with the underlying macro split: labour markets are softening beneath the surface, supporting the case for eventual easing, while fiscal and inflation risks remain concentrated in longer maturities. Valuation also supports this view, with the long end screening relatively cheap and the belly rich, favouring barbelled allocation over outright duration exposure.
Macro transmission remains incomplete and time-dependent. Even with de-escalation, energy markets will not normalise immediately. Physical transmission lags imply that oil supply relief takes 3–4 weeks to reach end markets, delaying any disinflationary impulse. Inflation is therefore likely to remain elevated in the near term, with estimates suggesting a 20–50 bp uplift to core inflation, even as underlying core trends remain broadly stable. This lag structure explains why yields remain elevated despite improving headlines.
Growth dynamics reinforce the front-end bias. The consumer remains K-shaped, with higher-income cohorts absorbing the shock while lower-income segments face increasing pressure. At the same time, labour market strength appears increasingly concentrated, with headline job creation masking underlying softness. This combination supports the case for delayed but eventual easing concentrated in the 2–5Y segment, rather than a broad-based duration rally.
From a strategy perspective, the environment has shifted decisively toward carry optimisation and curve expression. Lower volatility reduces the payoff from directional duration trades and increases the importance of yield pickup and structural positioning. The optimal framework remains a barbell: long front-end and long-end duration versus short the belly, capturing carry and roll while positioning for gradual steepening. Maintaining moderate-duration exposure over a 6–12M horizon remains justified, given the likelihood that the Fed will eventually transition to easing once the inflation impulse fades.
Risks are now more clearly defined. The primary risk is a renewed hawkish repricing driven by persistent inflation or a renewed energy shock. The secondary risk lies in the long end, where deficits, supply expansion and a potential unanchoring of inflation expectations could drive further term premium expansion. In parallel, there are early signs of incremental diversification away from Treasuries into SSA dollar debt, where spreads have compressed to near-zero versus USTs, reflecting demand for high-quality USD exposure with lower perceived idiosyncratic US risk. While not yet systemic, this shift underscores the long end’s sensitivity to confidence and fiscal dynamics.
Credit
Primary markets remain exceptionally strong. U.S. IG issuance reached $58B for the week and >$95B MTD, putting April on track to be the busiest month since 2020, with ~$10B deals led by BofA, JPM and MS HY reopened with ~$5B of weekly supply, among the busiest since September. Borrowers are actively terming out funding into strength, while investor demand remains anchored in elevated all-in yields, allowing markets to absorb supply despite tighter spreads.
Valuations are increasingly stretched relative to fundamentals. Credit spreads have tightened to levels within pre-war ranges despite persistent macro uncertainty and what is described as “permanent scarring”. Forward return expectations are correspondingly weak: IG excess returns are estimated at ~+77bp in a base case, +122bp in a bullish scenario and -152bp in a widening scenario, versus a historical median of ~+216bp. HY shows +249bp (base), +291bp (bull) and -140bp (bear), compared to a historical median of ~+689bp. In both cases, expected returns sit below the 25th percentile of historical outcomes, highlighting poor compensation for risk.
This disconnect is driven by a shift from spread discipline to yield-based allocation, consistent with a transition toward a lower rate-volatility regime. In such an environment, carry becomes the dominant driver of returns, supporting continued inflows into credit even as valuations tighten and forward asymmetry deteriorates. The result is a market where demand remains strong despite weakening risk-reward.
Dispersion is now the defining feature of credit. The post-2020 expansion of private credit has created wide variation in underwriting quality, particularly across 2021–2023 vintages, and outcomes are beginning to diverge materially. As a result, index-level stability is increasingly uninformative, with performance driven more by asset selection than by broad market exposure.
Private credit remains the central pressure point. Banks disclosed ~$180B in exposure but continue to report no realised losses and strong structural protections (BofA, Citi). However, stress is building beneath the surface, driven by rising defaults, increased PIK accruals, and growing liquidity mismatches. The system has effectively prolonged weaker credits post-2020, delaying rather than eliminating defaults, implying a backlog of latent risk now starting to surface as financing conditions tighten.
Liquidity dynamics are gradually tightening. Redemption demand is forcing private credit vehicles to trim positions and rotate collateral, while banks are reassessing financing structures and collateral quality. This marks a shift from abundant to more selective liquidity, even as primary markets remain open and functional.
Sector dispersion is most acute in technology and software, where AI-driven disruption represents a structural rather than cyclical risk. This has become the primary fault line within private credit portfolios, driving valuation pressure in weaker assets while creating selective opportunities in higher-quality credits.
Public and private credit dynamics are increasingly interconnected, with issuers arbitrating between funding channels depending on relative conditions. Spillover into public markets remains limited, but divergence is evident: bank loans and European HY remain wider YTD, reflecting macro sensitivity and sector-specific pressures. Regionally, the divergence is also clear, with U.S. growth (~2.3%) versus Europe (~0.7%), supporting tighter U.S. spreads, while Europe remains more exposed to energy shocks and weaker macro conditions.
From a positioning perspective, the market increasingly favours higher-quality carry. A and Baa-rated IG corporates and USD-denominated EM offer the most attractive risk-adjusted profiles, while HY remains less compelling given weak compensation for risk relative to historical norms. This aligns with a broader preference for carry exposure without excessive credit beta.
Macro conditions remain a constraint. Recession risk is elevated, with leading indicators approaching levels historically associated with downturns, while current spread levels remain consistent with stronger growth environments. This mismatch reinforces asymmetric downside risk across credit.
Equities
U.S. equities extended their rally, with the S&P 500 +4.54%, the Nasdaq Composite +6.84%, the Dow +3.19%, and the Russell 2000 +5.56%. The S&P 500 and Nasdaq both reached fresh record highs, with the Nasdaq posting a 13-session winning streak and ~17.7% cumulative gains, underscoring both the strength and speed of the momentum-driven rebound. Notably, small caps participated early in the move, signalling an initial re-risking impulse rather than a purely defensive rotation into mega-cap growth.
Leadership remained firmly concentrated in large-cap growth and AI-linked exposures. Tesla (+14.8%) and Microsoft (+14%) were standout contributors, while software (IGV +13.9%) and semiconductors (SOX +7.5%) led sector performance alongside strength in memory. At the sector level, technology (+8.09%), consumer discretionary (+6.64%), and communication services (+6.28%) outperformed, while energy (-3.52%) lagged sharply amid the decline in oil prices. Defensive sectors broadly failed to participate, reinforcing the pro-cyclical and growth-led nature of the move.
TSMC beat on Q1 and guided Q2 revenues ahead of consensus, with strength concentrated in advanced nodes tied to AI workloads, reinforcing that hyperscaler and data-centre demand remains the primary driver of the semiconductor cycle. In contrast, Netflix declined on weaker forward guidance despite solid recent growth, highlighting greater sensitivity to expectations than to delivered results. Corporate activity also picked up at the margin, including Amazon’s $11.6B acquisition of Globalstar and continued partnerships across hyperscalers and semiconductor ecosystems, signalling sustained capex commitment despite growing debate around the return profile of AI infrastructure investment. More broadly, AI continues to function not just as a sectoral driver but also as a macro offset, allowing investors to look through near-term uncertainty through a productivity and earnings-growth narrative.
The rally was driven by a combination of an improved geopolitical tone (see Macro) and a positioning unwind. The move was consistent with broader risk appetite, with the dollar weaker and cyclically sensitive assets outperforming. Systematic strategies appear to have been a key driver, with sell-side estimates indicating substantial CTA buying has already been executed and that further demand is likely under stable market conditions. Volatility-sensitive funds also remain underexposed and could re-risk if realised volatility stays contained. More importantly, price action increasingly reflects a market that has chosen to price a contained outcome and is forcing underexposed investors to re-engage, rather than waiting for full macro confirmation.
Fundamentals continue to validate the move, but with clear dispersion beneath the surface. Bank earnings reinforced the resilience narrative. JPMorgan Chase delivered solid profitability despite trimming NII guidance; Citigroup showed stronger NII and fee growth; and Bank of America benefited from strength in investment banking and equity trading. Goldman Sachs highlighted strong equities but softer FICC, while Morgan Stanley posted standout FICC results. Across the sector, management commentary pointed to resilient consumer demand, stable credit conditions, and limited immediate spillover from geopolitical stress. Strong earnings expectations (~13.2% YoY) continue to offset geopolitical uncertainty in investor positioning, reinforcing the market’s willingness to look through the current shock.
From a positioning and valuation perspective, the move reflects a sharp reversal following earlier underperformance in technology and growth factors. Valuation spreads have meaningfully compressed, with the Mag 7 now trading at ~25x forward P/E, a ~34% premium to the broader market, near multi-year lows. At the same time, momentum has reached extreme levels, with Nasdaq RSI above 95, while rising retail participation and elevated call skew point to increasingly crowded upside positioning and growing FOMO-driven re-risking.
In aggregate, equities are being driven by a combination of improved macro tone, systematic flows, and resilient earnings expectations. However, the rally remains narrow and increasingly momentum-driven, with leadership concentrated in mega-cap tech and AI-linked names. The near-term setup remains supportive, but stretched positioning, overbought technicals, and concentration risk leave the market sensitive to any reversal in sentiment or a deterioration in the earnings backdrop.