Macro
The FED maintained its policy rate target at 3.50–3.75% at the March meeting (2026-03-18), but the overall signal shifted marginally more hawkish. The decision passed 11–1, with one dissenter favouring a rate cut, while the broader communication emphasised a continued wait-and-see approach amid rising external uncertainty. Updated projections showed 2026 GDP revised up to 2.4% and PCE inflation marked higher to 2.7% (core 2.7%), with unemployment unchanged at 4.4%, reinforcing the view that the economy can sustain tighter policy for longer. The dot plot continues to imply only one 25bp cut in 2026 and another in 2027, while the longer-run rate was nudged higher to 3.1%, pointing to a higher assumed neutral rate. Powell made clear that policy will remain on hold until there is clearer evidence of disinflation, noting that higher energy prices will likely lift headline inflation in the near term but should be looked through unless they feed into core dynamics or expectations. Markets interpreted the outcome as a hawkish hold, with front-end yields rising and rate-cut expectations pushed further out, effectively removing any meaningful easing priced for 2026.
Against that policy backdrop, incoming U.S. data continue to point to an economy that is cooling at the margin but remains fundamentally resilient, with momentum becoming more uneven rather than decisively weaker. Labour market dynamics are softening gradually, with hiring becoming more selective and forward-looking indicators such as hours worked and job openings easing, but without a broad-based deterioration in employment conditions. Consumption remains split along increasingly clear K-shaped lines, with higher-income households sustaining spending while lower-income cohorts show rising sensitivity to prices and financing conditions. The overall picture remains consistent with late-cycle normalisation rather than an abrupt slowdown, though dispersion across sectors and income groups is becoming more pronounced.
That domestic backdrop is now being complicated by a more structural external shock, as the escalation in the Middle East transmits through energy markets via transport and market functioning rather than spot pricing alone. The Strait of Hormuz sits at the centre of this dynamic, carrying roughly 20.7–20.9M b/d, close to one-fifth of global oil supply, alongside around 20% of global LNG trade. Exposure is highly asymmetric: approximately 83% of flows are directed towards Asia, while the U.S. imports only around 0.5M b/d, equivalent to roughly 8% of crude imports and ~2% of total consumption. Crucially, disruption cannot be easily rerouted, shifting the constraint from “missing barrels” to shipping access, war-risk insurance, vessel availability and refinery timing, all of which amplify the macro transmission.
This is increasingly visible in pricing, where the adjustment is taking place through regional dislocations rather than a uniform move higher in crude. Brent is trading around $112–114 per barrel, while WTI remains closer to $99–101, widening the spread to roughly $12 per barrel, the largest in over a decade. The divergence reflects the repricing of seaborne supply risk, with Europe and Asia more exposed to disruptions in Middle Eastern flows, while the U.S. remains temporarily insulated by domestic inventories and infrastructure. Stress is more acute further along the chain, with Asian gasoline margins rising to around $37 per barrel, near cycle highs, and European cargoes increasingly redirected towards Asia to capture tighter regional balances. The pattern points to a fragmentation of the global energy system, where pricing is increasingly driven by logistics and geography rather than a single global benchmark.
The macro risk becomes highly nonlinear with duration. Flows through Hormuz have already fallen sharply from around ~20M b/d towards minimal levels, with the pace of normalisation dependent on security conditions, insurance costs and vessel willingness to transit. Strategic reserves provide only a partial buffer rather than a full solution. Member countries have agreed to release roughly 400M barrels against a global inventory base of approximately 8.2B barrels, which can smooth near-term disruption but cannot offset a prolonged impairment of flows. As duration extends, the shock broadens into freight, insurance premia and precautionary inventory building, while also feeding back into weaker demand. The transmission remains consistent with the standard oil-shock channel: higher prices lift headline inflation, compress real incomes and weigh on growth, particularly in import-dependent regions.
For central banks, this introduces a more complex and increasingly asymmetric policy trade-off. In Europe, where growth was already softening, higher energy prices risk feeding directly into inflation while weakening demand, reinforcing a stagflationary bias. The United Kingdom faces a similar dynamic, though weaker underlying activity limits second-round effects. In contrast, the Bank of Japan remains the outlier, with policymakers still assessing the case for gradual normalisation despite the external shock, reflecting stronger confidence in domestic inflation dynamics. Across most developed markets, the common response is greater caution, with policymakers likely to look through near-term energy volatility while remaining alert to persistence. At the same time, trade policy remains a source of underlying uncertainty. Recent legal developments suggest that while the administration’s ability to deploy broad, rapid tariffs may be more constrained, the overall direction remains hawkish, implying a shift towards slower, more fragmented and procedurally complex implementation that may ease near-term pressure but prolong the persistence of trade-related inflation dynamics.
The combination of a gradually cooling labour market, uneven consumption dynamics and a more complex energy backdrop suggests that the economy is becoming more sensitive to shocks. Growth remains intact but less uniform, near-term inflation risks are skewed to the upside, and policy responses remain constrained by elevated uncertainty.
Rates
The Fed set the anchor, markets did the rest. The Mar-18 FOMC held rates at 3.50–3.75% (11–1), but delivered a hawkish hold: core PCE revised up to 2.7% (from 2.5%), long-run neutral raised to 3.1%, and cuts effectively pushed out, with the first easing now priced only into late-2026. Powell signalled tolerance for looking through oil-driven inflation in isolation, but made clear that policy will not ease until disinflation resumes, keeping the reaction function firmly data-dependent and biased to hold.
Rates markets responded with a sharp repricing of the front end. Fed expectations flipped from -25 bp cuts to +20 bp hikes by year-end, with futures effectively removing easing and briefly assigning probability to further tightening. USTs sold off for a third consecutive week, led by the front end, with 2Y +17 bp w/w to 3.89% and trading up to 3.99%, while 10Y reached 4.43%, the highest since Jul-25. The move reflects a clean reset in policy expectations rather than positioning alone.
The catalyst is the energy shock. Brent at $113 has reintroduced upside inflation risk, forcing markets to price second-round effects despite central banks signalling willingness to look through supply shocks. The key shift is not realised inflation, but uncertainty about persistence and pass-through, amplified by geopolitical risk around Hormuz. This has pushed the term premium higher and driven a broad repricing across the curve.
The curve dynamic is critical. The move has been front-end led, producing a flattening impulse as short rates re-anchor higher. While the direction is consistent with inflation risk, the magnitude suggests the front end is beginning to price an aggressive policy response that is not yet supported by central bank guidance. Longer maturities have moved higher but only partially reflect the potential growth drag from sustained energy prices.
Europe and the UK followed with similar repricing. Bund 10Y at 3.06% (highest since 2011) and BTP 10Y at 4.04% reflect renewed inflation risk, with markets pricing ~85 bp of ECB hikes and a non-trivial probability of four moves in 2026. In the UK, gilts remain the weakest DM complex, with 10Y at 5.05% and 2Y at 4.65%, as markets fully price four BOE hikes. The scale of repricing highlights sensitivity to both inflation and supply dynamics.
Asia reinforces the global nature of the move. Australia 10Y at 2011 highs, NZ 10Y +13 bp to 4.86%, India 10Y at 6.82% with ~100 bp of hikes priced, and Korea signalling tightening into 2H26 all point to a synchronised shift away from easing assumptions toward renewed inflation-risk pricing.
Implication is a near-term regime reset. The front end has re-anchored higher, easing expectations have been removed, and duration remains vulnerable to further energy-driven shocks. However, with long-run inflation expectations still relatively contained, the current pricing suggests a near-term policy risk premium rather than a sustained tightening cycle, leaving the front end exposed to reversal if inflation momentum fails to broaden beyond energy.
Credit
Credit remains open but increasingly selective, with dispersion widening across sectors, regions, and instruments. Headline spreads remain contained, but underlying conditions are tightening as issuance slows, flows weaken, and risk is repriced beneath the surface. U.S. IG issuance fell 68% w/w to $37.4B, while HY dropped to $1.3B, reflecting a tactical pause in primary issuance, following heavy prior supply, higher UST yields, and softer risk appetite. Despite lower issuance, IG spreads tightened by 5bp while HY spreads widened by 1bp, with both segments posting negative returns (-0.27% IG, -0.31% HY), indicating rate-driven pressure and early credit differentiation rather than impaired market access.
Primary markets are increasingly dominated by AI-driven capex, with hyperscaler funding needs absorbing demand. 2026 issuance expectations have risen to ~$175B, following Amazon’s ~$54B deal and large prior prints from Alphabet. This supply concentration is creating a crowding-out effect, limiting risk capacity for lower-quality issuers and forcing wider concessions or delayed execution. The market remains functional, but access is increasingly conditional on issuer quality, scale, and strategic relevance.
Market stress is building more visibly in credit derivatives and global markets. The iTraxx Europe Crossover index widened to ~335bp, a 10.5-month high, while Asia CDS indices reached ~10-month wides even as IG cash spreads remained tight. The divergence between CDS and cash suggests hedging demand and rising tail-risk pricing, rather than outright cash-market dislocation. At the same time, the rise in long-end yields, alongside a widening in CDS spreads, points to broader tightening in financial conditions rather than isolated credit stress.
Flows and positioning have turned more defensive. U.S. HY funds saw ~$3.3–3.7B of outflows in the latest week, the largest since April and the sixth consecutive week of redemptions, while leveraged loan funds saw ~$793M of outflows, the fourth straight week. HY is on track for its largest monthly loss since 2023, reflecting both spread pressure and rate-driven drawdowns. In contrast, large asset managers are rotating toward securitised products, particularly mortgage-backed securities, which are outperforming corporates in risk-off environments.
Private credit stress is becoming more structural and less narrative-driven. Default expectations in direct lending are rising toward ~8%, with software accounting for ~20–25% of exposure. The pressure reflects high leverage, weak coverage, AI-driven disruption risk, and approaching maturity walls. Redemption pressure is no longer isolated: Stone Ridge capped withdrawals at ~11% of requested redemptions, reinforcing liquidity mismatch concerns across the ~$1.8T private credit market. The shift is from valuation opacity to realised liquidity constraints and fundamental credit deterioration in specific sectors.
Leveraged finance markets are reinforcing this bifurcation. Banks are actively trying to offload previously underwritten LBO debt, including multi-billion-dollar packages, into a weaker demand environment. Loan fund outflows and rising execution risk are forcing more disciplined syndication, with weaker deals requiring pricing adjustments or balance sheet absorption. Market access remains open, but execution risk has increased materially, particularly for lower-quality and software-linked borrowers.
Positioning favours quality and liquidity over broad beta exposure. IG remains supported by yield and demand, but technicals are weakening at the margin, while HY, leveraged loans, and private credit show clear signs of stress through outflows, CDS widening, and liquidity constraints. The opportunity set is increasingly driven by avoiding deteriorating cohorts rather than by capturing spread compression, with software-heavy credit, LBO financing, and illiquid structures representing the highest-risk pockets as dispersion continues to widen beneath stable index levels.
Equities
U.S. equities declined for a fourth consecutive week, with the Dow -2.11%, S&P 500 -1.90%, Nasdaq -2.07%, and Russell 2000 -1.68%. The move reflects a transition into an inflation shock regime with emerging growth fragility, driven by the Iran conflict and its spillover into energy markets. Rates reinforced the shift, with the 10Y UST approaching ~4.4% and the curve flattening, tightening financial conditions. Cross-asset moves confirmed de-risking: USD -0.9%, gold -9.6% (worst since 2011), silver -14.4%, while Brent +8.9% diverged from flat WTI, highlighting supply disruption rather than demand strength. The market is repricing duration and risk premia simultaneously, not yet capitulating but steadily reducing exposure.
Sector performance was consistent with an inflation-led rotation rather than a growth rebound. Energy led (+2.77%), financials were marginally positive (+0.41%), while defensives and duration-sensitive sectors underperformed: utilities -5.02%, materials -4.52%, staples -4.48%, real estate -4.06%, healthcare -3.04%, discretionary -2.74%. Tech (-1.86%) and industrials (-1.85%) declined but held in relatively better. Underneath, leadership remains narrow, concentrated in crude-linked energy, financials, and selective services consumption. This confirms capital is rotating toward pricing power and nominal exposure, not cyclicality or broad risk-on.
The macro impulse is clear. The removal of ~17% of Qatar LNG capacity for 3–5 years materially tightens global energy balances, feeding directly into inflation expectations at a time when labour data is weakening. This combination is destabilising for policy. The Fed remains constrained between inflation persistence and early growth deterioration, reinforcing a higher-for-longer path. Market pricing has shifted accordingly, with cuts pushed out and risk premia rising across both rates and equities. This is not a growth scare in isolation, but a stagflationary skew at the margin, which is a more difficult regime for equities to absorb.
Market internals continue to deteriorate beneath headline indices. Energy remains the only clear outperformer, up >30% YTD, while ex-energy performance reflects steady de-risking with defensives rising in relative terms. This is not a rotation into growth, but a reallocation into resilience and income stability. Financials highlight the stress. Credit-sensitive equities have come under sustained pressure amid concerns around private credit exposure and opacity, reinforcing a sell-first dynamic across leveraged balance sheets. This suggests that tightening financial conditions are beginning to transmit into equity risk.
Positioning remains in transition rather than capitulation. Systematic investors remain modestly long, with elevated gross exposure, but flows have weakened, and retail dip-buying has slowed. Reports of potential $10B+ private credit withdrawals reinforce risk aversion. At the same time, corporate buybacks remain a critical stabiliser. S&P 500 buybacks reached ~$1T in 2025 vs ~$298B issuance, with $364B authorised YTD and activity tracking ~1.2x last year. This corporate bid is absorbing supply and limiting downside, even as marginal buyers step back.
Within equities, dispersion is increasing, and factor relationships are breaking down. The correlation between the Magnificent Seven and the equal-weight S&P 500 has turned negative, signalling a regime shift where mega-cap tech is no longer moving in line with the broader market. More recently, declines in megacaps have been less severe than in the broader index, indicating early signs of relative defensiveness re-emerging. Positioning has reset, with Mag7 forward P/E now <25x and below long-term averages, while earnings growth remains superior at ~16–19% vs ~12–14% for the rest of the index. This creates conditions for leadership to reassert, but only if macro volatility stabilises.
However, structural headwinds remain. Free cash flow for hyperscalers is expected to compress materially as AI capex accelerates, with combined FCF projected near ~$94B vs >$200B previously, raising concerns around capital efficiency and return on invested capital. This explains muted equity reactions to strong AI signals, including Nvidia’s ~$1T data centre opportunity, as markets increasingly discount returns rather than revenue scale. The AI trade remains intact, but is transitioning from momentum-driven to scrutiny-driven.
Structural changes in index construction are emerging as a secondary theme. Index providers are reviewing IPO inclusion rules amid a ~$3T backlog in the private market. Even under revised frameworks, low-float mega IPOs would have limited index weight, implying manageable passive flows. Estimated mechanical selling from a $1T IPO with 5% float would be ~$9B in the S&P 500, <1% of market cap and ~2% of daily volume, easily absorbed by ongoing buybacks. Supply risk is therefore overstated relative to demand.
Single-stock dispersion remains elevated. Tesla (-5.9%) and Nvidia (-4.0%) dragged on megacap performance despite strong AI fundamentals. Micron -3.2% post-earnings reflects elevated expectations. Alibaba (-9.4%) and Super Micro (-33.2%) highlight idiosyncratic and governance risks. On the positive side, FedEx +2.2%, Lululemon +3.2%, and Five Below +8.1% point to resilience in selective consumer and logistics segments. Airlines saw selective strength on guidance revisions, while Boeing -7.0% reflects ongoing execution challenges.
Bottom line: this is a controlled de-risking phase, not capitulation, characterised by narrowing leadership, rising dispersion, and macro-driven repricing. The regime remains driven by oil, rates, and geopolitics.