Key Takeaways
- Despite ongoing uncertainty, markets remain sanguine on the impact of events in the Middle East.
- The VIX index – a commonly used measure of volatility – has eased from the elevated position it reached as the conflict began.
- A solid earnings season has helped US shares reach all-time highs and markets in Southeast Asia have been notable for their strong performance.
- Earnings have been positive across geographies, and we are encouraged by signs that corporate performance is broadening beyond technology.
- The overall economic backdrop remains relatively benign, and we hold a slightly constructive view on equities.
- However, ongoing uncertainty around energy supplies means we will continue to monitor data releases, while recent upward moves saw us lock in some equity gains.
This week we are taking stock of various global events and what they mean for financial markets.
Let’s start with the VIX index, which is a gauge of market volatility on the S&P 500. The S&P closed at an all-time high on Friday, and the VIX index is sitting at relatively low levels – 17 at the time of writing, which is below the long-term average. It spiked through March on concerns around the Middle East but recently calm has been restored. We have seen a strong rally in the US as well as gains across other markets – even though the Strait of Hormuz remains closed, energy supplies are under pressure, and a concrete peace deal is some way off.
Resolving this ongoing closure is of key importance for financial markets and the global economy. It seems that equity markets are failing to fully factor in the impact of what the International Energy Agency (IEA) describes as the biggest energy shock in history. Instead, they have trended higher from their lows in March, helped in large part by a positive US earnings season, especially in the ever-important technology space.
Markets in Southeast Asia have also been notable for their impressive gains, not least South Korea, which has generated returns of around 80% year-to-date. Once again apparently discounting any significant long-term issues from the Gulf conflict. Bond moves, however, are suggesting a more challenging backdrop with markets reflecting likely impacts from events.
In terms of geographic dispersion between markets, the current strong performance of the US stands in contrast to the preceding 12-18 months during which it lagged several other regions. Bumper returns from the tech space have been the primary driver, but it is important to remember that US indices have been pulled higher by a relatively narrow cohort of large companies. We are encouraged, however, that solid earnings performance has broadened across the market. Should the conflict end would we see the US outperformance relative to other regions fade? Earnings have been broadly decent across geographies so we will likely have to wait and see.
Looking at UK assets specifically, there remains a lot of political noise with Prime Minister Kier Starmer under continued pressure. With uncertainty around a challenge to his leadership, we will likely see an elevated risk premium in gilts until greater clarity emerges.
Despite the VIX index showing an easing in volatility we still see risks – most notably around energy supply constraints. Asia and Europe look the most impacted given their reliance on energy imports.
On balance, the overall economic backdrop remains relatively benign, and we maintain a slightly constructive view on equities. Positions are constantly under review, however, and we are closely watching for data reflecting the impact of the energy shock. Following recent strong upward moves, for example, we locked in some gains.
