Geopolitical Backdrop and Market Tone

Markets in March were increasingly shaped by a deterioration in the geopolitical backdrop, which introduced a new layer of volatility to an already fragile environment. While underlying growth trends remained broadly consistent with a slowing but still expanding global economy, the escalation of tensions in the Middle East became a dominant driver of market movements.

Equity Market Performance

Equity performance over the month was uneven and negative. Early resilience, supported by stable earnings expectations, gave way to more persistent declines as geopolitical risks intensified and oil prices surged. Major indices came under pressure during the latter part of the month, while volatility rose sharply. Energy stocks were a notable exception, benefiting from higher oil prices. US equities outperformed as emerging markets and European equities came under pressure on energy price concerns.

Bond Markets and Yields

Bond markets were a key focal point. Yields moved higher across major economies, reflecting a combination of rising inflation expectations and ongoing concerns around fiscal sustainability. In the UK, 10-year gilt yields rose above 5%, mirroring broader global trends. While there were brief rallies in fixed income during periods of easing geopolitical tensions, the overall direction pointed to tighter financial conditions and continued volatility.

Energy Markets and Commodities

Energy movements were driving markets. Oil prices rose sharply, significantly exceeding $100 per barrel at times, amid fears of supply disruption and risks to key transport routes. This energy shock fed directly into inflation expectations, complicating the disinflation narrative that had been developing. Precious metals came under pressure following a strong rally in the first two months of the year. Investors naturally looked to take profits from strongly performing areas of their portfolios.

Economic Data and Growth Trends

Economic data released during the month reinforced the picture of slowing but still-positive growth, albeit with rising downside risks. Higher energy costs and borrowing rates began to weigh more visibly on activity, particularly in consumer-facing sectors. Retail spending softened, while manufacturing input costs increased. Labour markets continued to cool gradually, and while inflation had previously been moderating, the recent rise in energy prices raised concerns about a potential stall in progress.

Central Bank Response

Central banks responded with caution. The Federal Reserve held rates steady, balancing moderating core inflation against the risk of renewed price pressures from energy. Markets have subsequently pushed back expectations for rate cuts, and increased probabilities of rate increases if the energy crisis was to deteriorate.

Overall Market Outlook

Overall, March marked a shift in market tone. The combination of geopolitical escalation, rising yields and renewed inflation concerns has reduced the margin for optimism. While the global economy remains resilient for now, risks have become more pronounced, and market direction is likely to remain highly sensitive to developments in energy markets, inflation trends and geopolitical stability.