Key Points
- Oil prices remain elevated, and there is significant uncertainty about when an agreement or ceasefire may be reached*
- Markets are still partially pricing in some form of “TACO,” as Trump is mindful of the upcoming midterm elections
- Fixed income markets are reacting to rising inflation concerns, with rate hikes increasingly priced in across multiple countries
*This text was finalised prior to the announcement of a two-week ceasefire between the US and Iran
Read the full Market Outlook here (PDF)
Oil prices remain elevated
One month after the Iran strikes and continued tensions in the Middle East, oil prices remain elevated at around USD 110 per barrel (Brent) – the highest level since 2022. Price volatility has also been significant, with intra-month levels reaching USD 120 before retracing somewhat. Signals – particularly from the US – have been mixed regarding negotiations, dialogue, and de-escalation. The Strait of Hormuz was effectively closed for a period, with no shipping traffic, but has gradually reopened under Iranian conditions and permissions. Traffic remains well below normal levels, and Iran has in some cases imposed fees for passage. The US and Trump have focused on reopening the strait, not least as part of negotiations to halt hostilities. Deadlines have been repeatedly announced and postponed, and regime change in Iran now appears less likely than previously assumed. While dialogue seems to be ongoing, uncertainty about the timing of a potential agreement or ceasefire remains high.
Stagflationary Forces
Higher oil and energy prices are contributing to stagflationary pressures in the global economy – implying higher inflation and lower growth if elevated price levels persist. Fuel prices have already increased globally. In the US, the average pump price has risen above USD 4 per gallon, the highest level since 2022. This will likely reduce household purchasing power and dampen economic growth if sustained. The positive impulses from Trump’s fiscal policy and the “One Big Beautiful Bill” (OBBB) may therefore be partially offset, although they also act as a buffer preventing a sharp slowdown in US economic activity. At the same time, there is urgency in stabilising the economy ahead of the midterm elections this autumn, where it is widely expected that Trump will do whatever is necessary to secure victory. While approval ratings have declined, they remain far from collapsing. Historically, stagflation has been negative for both equities and bonds and would also negatively impact US voters through wealth effects. Experience suggests that Trump tends to respond to market stress and pivot (“TACO”) when volatility becomes excessive – an expectation that appears to be reflected in markets this time as well.
Rising yields on inflation concerns
Higher inflation expectations have triggered a significant repricing in fixed income markets, with a sharp increase in short-term yields. Although this represents a classic supply-side shock – which typically calls for a different central bank response than demand-driven inflation – it does not imply that central banks should remain passive. This is particularly true in regions where inflation has been persistently elevated and central bank credibility has come under pressure. US rate cut expectations have now been fully priced out. In the Eurozone, three rate hikes are currently priced in, and in the UK, two rate hikes are expected before year-end. A similar trend is observed in Norway and Sweden.
Global equities – Overweight
Global equities, as measured by MSCI World in local currency, declined by nearly 6% in March. Rising oil prices triggered a risk-off sentiment, compounded by a shift from rate cut expectations to anticipated rate hikes in several regions. While stagflation is historically negative for equities, we continue to expect that some form of TACO may materialise, given the political incentives ahead of the US midterm elections. After reducing exposure early in March, we have gradually increased equity holdings in recent weeks and are now returning to an overweight position in global equities.
Norwegian Equities – Neutral
The Oslo Stock Exchange rose by a further 9% in March, reaching another all-time high. Norwegian equities outperformed, supported by rising oil prices. Equinor – representing 15% of the OSEBX – rose by 49% during March, while Kongsberg Gruppen, now the third-largest constituent at 8%, gained 62% in the first quarter. We have taken profits during March and are moving from an overweight to a neutral position in Norwegian equities.
Emerging Markets (EM) – Overweight
Emerging market equities declined in March in local currency terms, underperforming developed markets. However, year-to-date performance remains positive and ahead of developed markets. Many emerging economies – such as China, India, and South Korea – are net oil importers, making them more vulnerable to higher oil prices. India experienced the largest decline. However, several countries hold strategic reserves, which are likely being utilised to buy time. We remain overweight in emerging market equities.
Global Bonds – Neutral
Global government bonds (JPM GBI) declined by 2% in March, marking the steepest monthly drop since 2024. The decline reflects rising inflation concerns following the increase in oil prices. Rate cut expectations have largely been priced out, with rate hikes now anticipated in many regions. Inflation expectations have risen broadly, and central banks are under pressure to restore credibility after a prolonged period of elevated inflation. We are taking profits on our underweight duration position and moving to a neutral stance in global government bonds.
Norwegian Bonds – Neutral
Norwegian government bonds (NOGOVD3) declined by nearly 1% in March. Domestic yields followed global trends higher but were further driven by a more hawkish Norges Bank, which significantly revised its rate path upward. The shift now implies rate hikes ahead rather than rate cuts. Norges Bank has signalled a potential rate hike at one of the upcoming meetings and up to two hikes this year. We remain neutral on duration and Norwegian government bonds.
Swedish Equities – Overweight
Swedish equities (OMXS30G) declined by 8% in March but remain up 4% year-to-date. Performance has closely tracked European markets, which have been particularly impacted by rising oil prices. The Iran conflict, the Strait of Hormuz, and oil price developments continue to dominate the outlook for equity markets and global growth. We have gradually increased exposure following the correction and remain overweight Swedish equities.
Swedish Bonds – Neutral
Swedish government bonds (OMRX) declined by nearly 2% in March, with yields rising in line with global markets. Rate hikes are now priced in for the remainder of the year. While macroeconomic data has received less attention, inflation readings have continued to come in below expectations. However, higher energy prices are expected to exert upward pressure on inflation going forward. A reduction in VAT on food has also been implemented to support purchasing power and consumption. We remain neutral on duration and Swedish government bonds.
Credit – Overweight
Credit spreads, as measured by the Barclays Global Credit Index, widened further in March, reaching their widest levels since June last year. Declining risk appetite, driven by elevated and rising oil prices following the Iran conflict, has increased concerns about stagflation. Markets are expecting some form of de-escalation and “TACO,” but the key uncertainty remains the future of the Strait of Hormuz and its implications for the global economy. We continue to maintain an overall overweight position in credit and corporate bonds.