Global financial market wrap April

Since late February and early March, when hostilities in the Middle East kicked off, the global economic climate has been in turmoil. Global markets are navigating a delicate balance between improving economic data and rising geopolitical risk. While underlying growth trends remained constructive, a sharp escalation in Middle East tensions shifted investor focus toward inflation, energy prices, and global supply chains.

Central banks showing patience
The US Federal Reserve held interest rates steady at 3.50–3.75%, reinforcing a data-dependent approach to future cuts. While inflation has eased significantly from its peak, policymakers remain cautious, with some officials signalling a preference to wait for further confirmation before easing policy.

Inflation continues to moderate
US inflation continued its downward trend, with the Consumer Price Index falling to 2.4% annually, the lowest level since mid-2025. Importantly, the labour market has remained resilient, with unemployment steady at 4.3%, supporting household spending and broader economic stability.

China’s growth is showing resilience
China delivered a series of stronger-than-expected economic data points. Exports surged over 20% year-on-year, well ahead of forecasts, while industrial production and retail sales also exceeded expectations. This reflects both solid global demand and a boost from Lunar New Year activity.

Global growth broadening
Encouragingly, growth is no longer concentrated in just a few regions. Japan’s business activity expanded at its fastest pace in nearly three years, while the UK recorded its strongest growth in almost two years. Across Europe, business confidence is improving, supported in part by increased fiscal spending, particularly in Germany.

Escalation in the Middle East
The most significant development was the escalation of conflict involving Iran following US and Israeli strikes in late February. The situation has already disrupted regional stability, affecting airspace, shipping routes, and energy markets. Of particular concern is the Strait of Hormuz, through which around 20% of global oil supply flows. Any prolonged disruption here has meaningful implications for inflation and global growth.

Australia moves against the trend
In contrast to other major economies, the Reserve Bank of Australia raised interest rates by 0.25% to 3.85%. The decision reflects ongoing strength in consumer spending and a tight labour market, with the RBA aiming to prevent a wage-price spiral from taking hold.

Inflation pressures still persist
While consumer inflation has moderated, upstream pressures remain. US wholesale prices rose sharply in February, suggesting cost pressures are still working their way through the system and could reappear in consumer prices over time.

Mixed signals from the US economy
The US labour market showed signs of softening, with a larger-than-expected decline in jobs. However, this was offset by strength in the services sector, which continues to expand at a solid pace. This mix of data complicates the outlook for interest rates, as resilient demand may keep inflation elevated.

The base case 75% Probability

The global economy entered this period from a position of strength with solid corporate earnings, supportive government spending, and relatively loose financial conditions. While that foundation remains intact, it is now being tested by the rising geopolitical risk.

Higher energy prices are beginning to feed into the broader economy, increasing costs for businesses and consumers. The longer disruptions persist, the greater the potential drag on global growth. As a result, a more cautious positioning is warranted in the near term, including higher cash levels to manage uncertainty.

That said, there are important offsets. Inflation had been trending lower prior to the recent conflict, and while expectations have shifted upward, central banks remain focused on containing inflation rather than aggressively tightening further. Meanwhile, the effects of past interest rate cuts are still flowing through the economy, providing some support to growth.

Liquidity remains a key factor. While higher oil prices can drain liquidity from the system, China continues to provide stimulus, supporting activity across Asia and underpinning demand for commodities.

Looking further ahead, structural drivers such as investment in artificial intelligence, energy infrastructure, and supply chain resilience remain firmly in place. These trends are expected to support corporate earnings and broader market performance over the medium term.
Bear case 13% Probability

The primary downside risk centres on a slowdown in consumer spending, particularly in the United States. If households begin to pull back, company revenues could come under pressure at a time when market valuations remain elevated.

A sustained increase in oil prices would compound this risk, pushing up inflation while simultaneously weighing on growth, a combination known as stagflation. In such an environment, central banks may be limited in their ability to cut interest rates, while high levels of government debt restrict fiscal support.

China also remains a potential risk factor. If the property sector weakens further or stimulus proves insufficient, growth could slow materially, with direct implications for global demand and Australian exports.

Bull case 12% Probability

In a more optimistic scenario, geopolitical tensions ease relatively quickly, allowing energy prices to fall and supply chains to normalise. This would support stronger global growth while keeping inflation contained.

Combined with ongoing technological innovation, particularly in artificial intelligence and supportive fiscal policy, this environment would provide a strong backdrop for corporate earnings and risk assets.

For investors, this would favour a more growth-oriented positioning, with increased exposure to cyclical sectors such as industrials, materials, and financials.

Markets are currently piloting a transition from a period of improving economic fundamentals to one increasingly shaped by geopolitical risk. While volatility is likely to remain elevated in the short term, the broader economic backdrop remains reasonably supportive.

Maintaining a balanced and flexible approach, with an emphasis on quality assets, liquidity, and long-term structural themes, remains key in the months ahead.