Over the past few weeks, markets have been driven by higher inflation expectations, shifting central bank outlooks and contrasting news flow, all within a matter of days. This resulted in upward pressure on rates and downward pressure on risk assets in the initial part of the conflict. Most equities, including those in the US, Europe and emerging markets, have now returned close to their pre-war levels.
Efforts at ending the war and a fragile ceasefire have supported risk assets, but gains have been repeatedly tempered by a lack of resolution to the conflict and by the prospect of rates staying higher for longer. Market moves may be summarised by how the narrative has shifted between ceasefire or no ceasefire, risk-on or risk-off, and inflation and growth concerns. Looking ahead, we think:
- The main risk is the pass-through of headline inflation into core. Economies already experiencing high inflation may see convergence to target interrupted, while economies already at target face a non-negligible risk of expectations becoming de-anchored.
- The growth outlook is weaker (not recessionary), depending on the persistence and propagation of this shock to the economy, and the length of time energy prices remain high. The positive momentum expected in early 2026 has given way to more subdued growth, due to the squeeze on real incomes and falling business confidence.
- The developed market fiscal outlook was already strained before this crisis, and as a result we do not expect fiscal support to be broad-based in most parts of the world, including the US, Eurozone (EZ) and UK. It would be targeted, with selective relief for households and strategic sectors. Even in emerging markets (EM), responses will be country-specific.
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