Markets are heading into the weekend on a relatively constructive footing, though the path to get here has been anything but smooth, as Daniela Hathorn, Senior Market Analyst at capital.com, reminds us as she summarises what’s been going on this week in her latest market update below.
Investors have spent the week digesting a remarkable combination of central-bank decisions and geopolitical developments, ultimately emerging with a greater sense of clarity than they had just a few days ago.
Geopolitics eases as energy risk recedes
The most important development remains the US-Iran ceasefire agreement and the reopening of the Strait of Hormuz, which has dramatically reduced fears of a prolonged energy shock. Oil prices have continued to fall as a result, helping unwind much of the geopolitical premium that had built up during the conflict and easing concerns about another major inflationary wave.
Central banks strike a more balanced tone
The shift in energy markets has also influenced the central-bank narrative. While the Federal Reserve, ECB and Bank of England all acknowledged that inflation remains above target, the drop in oil prices has reduced some of the urgency around further tightening. The Fed’s first meeting under Chair Kevin Warsh was closely scrutinised, with markets ultimately taking comfort from the absence of any immediate push toward rate hikes. Policymakers remain concerned about inflation, particularly the underlying pressures linked to strong labour markets and AI-driven investment, but the tone was more balanced than some had feared. As a result, markets have become less focused on imminent tightening and more focused on the longer-term path for rates.
Equities rebound as sentiment improves
Equities have responded positively. The Nasdaq and S&P 500 have recovered much of the ground lost during last week’s correction, while European indices such as the STOXX 600 have not only recovered but moved beyond their pre-conflict highs. The improvement in sentiment has been particularly beneficial for Europe, which was more exposed to higher energy costs and therefore stands to gain more from the recent decline in oil prices. At the same time, the AI and earnings narrative remains intact, providing a fundamental underpinning for equity markets even as investors continue to debate the implications of higher-for-longer interest rates. The one notable exception has been the currency market, where the US dollar has remained relatively firm despite the improved risk backdrop. Strong US economic data and the perception that the Fed may still need to keep policy restrictive have continued to support the greenback, weighing on currencies such as sterling and the yen.
Outlook: balanced but data-dependent markets
Looking ahead, markets appear to be entering the weekend with risk appetite restored but not euphoric. The major geopolitical risk has eased, central-bank uncertainty has diminished and earnings expectations remain strong. However, inflation remains above target and questions about the sustainability of the AI-led investment boom have not disappeared. The result is a market that looks more balanced than it did a week ago, but one that is still likely to remain highly sensitive to incoming economic data and geopolitical headlines.
