The US-Israeli war against Iran has entered its fourth week, with no resolution in sight, prompting concerns around inflation and the implications for central bank policy. Indeed, at its March policy meeting, the Federal Reserve left rates unchanged as expected. The dot plots also revealed the median estimate was for one rate cut this year, although by the end of the week data from CME Group indicated that traders were assigning roughly a 30% chance of a rate hike by October.
The Dow Jones Industrial Average and Nasdaq Composite both dropped 2.1% for the week, with the latter now 9.5% down from its October 2025 record. The S&P 500 lost 1.9%, although the energy sector outperformed. The sector was up 2.8% in its 13th consecutive weekly gain, as oil prices fluctuated. Meanwhile Treasury yields crept higher amid the cautious atmosphere, with the 10-year yield ending at 4.39%. In contrast, despite its perceived safe haven status, gold declined by over 8%, in its sharpest fall since 2011.
European stocks saw a third consecutive weekly loss, with the STOXX 600 down 3.8%. Stocks had started off on a positive footing, staging a rebound as oil prices initially eased as well as investors bracing for a central bank heavy week. However, from Wednesday onwards, stocks declined, with the Middle East conflict extending longer than many had initially believed. The European Central Bank left rates unchanged but it warned of elevated inflation should the oil and gas supply continue to be disrupted. Meanwhile the Swiss National Bank, Bank of England and the Riksbank all held their policy rates unchanged.
Japan saw more muted losses during a holiday shortened week, with the Nikkei 225 falling 0.8%. The yen strengthened against the US dollar, but still remains near low levels. The Bank of Japan was another central bank making no change to its policy, while highlighting that it would closely monitor moves in the Middle East. China’s Shanghai Composite lost 3.4% and the Hong Kong Hang Seng fell 0.7%. One equity market bucking the wider downtrend was South Korea’s Kospi. The index was up over 5%, extending its year-to-date outperformance, benefitting from President Lee Jae Myung calling for capital market reform to achieve a “Korea premium”.