CIO market update for April 2026

In this CIO market update, Rob Hogg reviews March’s key market drivers. March was a turbulent month for global markets, dominated by the escalating war in the Middle East and its impact on oil prices. As hopes for a quick resolution faded, investors increasingly priced in a “higher-for-longer” oil scenario, driving equity markets lower, bond yields higher, and growth expectations down. Volatility surged across both equity and fixed income markets, while sentiment among households and businesses weakened globally. Although markets are now reflecting slower growth and rising inflation risks, a full recession scenario is not yet priced in. The outlook remains highly dependent on the trajectory of the conflict and energy prices, with any resolution likely to stabilise markets, while a prolonged war could further heighten economic risks.

Market performances in March were entirely dominated by the war in the Middle East. As the month progressed, and the war proved not to be the short term event that most investors had expected initially, equity markets progressively weakened, market interest rates progressively rose, and growth expectations (as proxied by the copper price) were progressively downgraded.

Measures of market volatility (the VIX index for equities and the MOVE index for bonds) rose to levels not experienced since Trump’s Liberation Day tariff announcements in April last year

For investors, macro-economic data took a back seat to war-related developments during the month. The only guide to the possible impact of the war was a range of household and corporate sentiment measures that all weakened over the month. But we know these measures need to be treated carefully as households and corporates don’t always do what they say they might do in surveys.

US equity markets fell by around 5% over the month while European markets retreated by around 9% – the weaker performances in Europe likely due to the greater dependence of European nations on imported energy. The Australian equity market fell by just over 7% with smaller cap company prices even weaker, falling 11%.

Through the month market interest rates progressively rose as investors cumulatively priced in an expectation that higher oil prices would lead to higher inflation and monetary policy tightening by global central banks.

US 10-year yields rose by around 0.38% while 2-year yields (which are more sensitive to changes in expectations about monetary policy) rose by 0.42%. Moves in Australian yields were similar, with the local 10-year bond yield higher by 0.32% (to 4.98%) and the 3-year bond yield up by 0.44% (to 4.66%).

The Australian Dollar (AUD) depreciated over the month, slipping from USD 0.7120 at end February to around USD 0.6900 by end March as the US dollar regained its role as a “safe haven”.

Key market movements over March were as follows:

• S&P/ASX300 Accumulation Index (i.e., including dividends) fell by 7.3%.
• S&P/ASX Small Ordinaries (Australian Small Companies) Accumulation Index fell by 11.0%.
• US equity market (S&P 500) fell by -5.1%.
• Measures of market volatility rose sharply during the month, albeit with a partial retreat on the last trading day. The MOVE and VIX indexes (measuring expected volatility in bond and equity markets respectively) rise to their highest levels since the “Liberation Day” tariff announcements in April 2025
• Australian 10-year bond yields rose by 0.32% to 4.98% and Australian 3-year bond yields rose by 0.44%, closing at 4.66%. These moves caused the yield curve to “bear-flatten” (shorter-dated yields rising by more than longer-dated yields)
• The US bond market also recorded losses as yields rose, with the US 10 year bond yield rising by around 0.38%, closing at 4.32%, while 2-year yields rose by 0.42% to end the month at 3.80%
• The Australian dollar slipped compared with the USD, with the US currency acting as a “safe haven” during March. The AUD closed the month around USD 0.6900, down from USD 0.7120 at end February

Key market movements over the month

Interestingly, analysis released during the month (by UBS) noted that it is the pace of acceleration in oil prices that is most important in whether an oil price spike then leads to a recession (causation). The current spike has not been as large as prior peaks that have been precursors to recession.

Also worth noting that the energy intensity of global GDP has been declining for some time which would likely, compared with history, make the impact from any oil price related shock today less than in prior episodes (all other things equal).

So far the only evidence we have regarding the potential impact of the war and higher oil prices is confined to measures of market sentiment (equity and bond prices) and household and corporate surveys.

All of these measures have progressively priced a outlook with lower growth, and higher inflation and central bank policy rates, so some of the oil price’s impact is now embedded into market pricing. But a recession is not priced at this stage.

As we noted a month ago, key in determining whether a recession results from the war will be the change in the oil price and the duration of elevated oil prices. Encouragingly the UBS analysis (see later in this note) suggests that a recession is by no means certain – but neither is such an outcome priced by markets at this stage.

Any near-term resolution is likely to lead to a rebound in market pricing and investor sentiment (as exhibited on the last trading day of March). But a continuation of the war and elevated oil prices would likely lead to a continuation of the trends witnessed in March, and an increase in the likelihood of recession.

In this monthly update, we look at:

• The initial market impact of the oil price spike
• Market performance trends since the initial price shock
• What markets have priced regarding the potential impact of the war and higher oil prices
• Trends in growth expectations over the month
• Impact on inflation expectations
• Global growth scenarios – the pace of the acceleration in oil prices is so far less than the pace of acceleration that has caused past recessions
• Have there been any signs of the economic impact of the current oil price spike?
• The outlook

Review of the month’s major developments

Oil price volatility reached a crescendo on Monday, March 9; and the oil price has traded within the range USD90 to USD100 since.

Global investment market volatility reached a recent crescendo on Monday, March 9, (Australian time) as the oil price (West Texas Intermediate – WTI) rose extremely sharply as the war began. The key WTI futures price reached almost USD120 per barrel (up from USD70 at end February) early that day (east coast Australian time) due to fears that oil supply through the key Strait of Hormuz might be halted for an extended period. Since then, as oil supply through the Strait has remained uncertain, the oil price has hovered around USD90 to USD100 per barrel, closing at around USD101 at the end of the month.

Negatively impacting equities, bonds and the Australian dollar

The impact of the oil price spike on March 9 was swift and brutal, causing the Australian share market (ASX 200) to fall by 2.85% on the day, while causing local bond yields to spike higher on inflation fears (10 year yield up around 0.10% and the policy-sensitive 3-year bond up 0.13%).

The Australian Dollar (AUD) has also been impacted by the oil market volatility.

This volatility highlighted that the oil price is the key market and economic risk from the Middle East war, with the war’s duration and its impact on oil supplies key.

Market performance trends since the initial price shock have generally continued in the same direction – equities weaker, market interest rates higher

Market moves since March 9 have generally continued in the same direction over the subsequent three weeks as hopes for a swift resolution to the war, and an accompanying retreat in the oil price, have been confounded.

Global equity markets have continued to fall with performances weakest in continental Europe, likely reflecting that area’s high dependence on imported energy.

Equity market performances – March

Two-year bond yields are most sensitive to changes in expectations regarding inflation and monetary policy. Since March 9, two-year yields have generally continued to move sharply higher, as market participants progressively upwardly revised their inflation expectations and central bank policy (tightening) moves. Again, moves have been greatest in Europe where policy rate expectations have swung from a partly priced rate cut by end year (as at end February), to a series of hikes totalling 0.72% now expected by end 2026. Expectations of Australian monetary policy tightening have moved from the equivalent of  0.36% in total rate hikes expected by end year (1½ rate hikes) to 0.59% (around two rate hikes).

Relative 2-year bond yield moves – March

What are investors currently expecting

The moves in equity prices and bond yields noted above suggest that investors have upwardly revised their interest rate and inflation expectations and downwardly revised their growth expectations progressively through the month.

It is the continuation of higher-for-longer oil prices that is most important in causing investors to revise their inflation and growth expectations.

Investor expectations for the oil price outlook can be observed in the market for oil futures. As shorter-dated May 2026 futures have oscillated around USD90-USD100 over the past three weeks (reflecting the immediate impact of the limited supply through the Strait of Hormuz), longer-dated (December 2026) futures have also moved higher, reflecting the market increasingly coming to price a higher-for-longer oil price spike.

Longer-dated oil futures (December 2026) now show oil trading around USD72.5 – up slightly from USD70 on the initial price spike – and up from around USD 60 where this contract was trading at the start of the year.

Crude Oil – West Texas Intermediate (May 2026 and December 2026 futures contracts)

Source: Bloomberg

Growth expectations have progressively deteriorated through the month – as exhibited by lower equity and copper prices

Observing the copper price is one way to gauge any change in investors’ global growth expectations. With copper having a pivotal role in a range of industrial applications, changes in its price are regarded as a measure of changing investor’ growth sentiment. From the chart below we can see that the copper price has progressively weakened through March as investors have been revising their global growth expectations lower as the oil price has remained higher for longer.

Copper prices (May 2026 futures contract)

Source: Bloomberg

Short term Inflation expectations peaked around mid-month but have begun to ease.

As revealed by US bond market pricing, inflation expectations moved higher until around mid-March but have subsequently begun to ease.

It is possible that this pattern is beginning to reflect a scenario of expected near term rate hikes, (designed to contain any inflation arising from the initial impact of the oil price spike) and a subsequent sharp growth slowdown, which would then be expected to lead to lower inflation within the next two years – in a sense, the oil price spike is increasing the chances of near term rate hikes, followed swiftly by rate cuts as growth and inflation lose momentum.

US 2-year Implied Inflation (“break-even” inflation)

Source: Bloomberg

Global growth scenarios – the pace of the acceleration in oil prices is so far less than the pace of acceleration that has caused past recessions

The pattern of market performances through March suggests that investors have become progressively more concerned about the adverse impact of higher-for-longer oil prices on growth and interest rates.

Changes in the oil price do indeed have a relationship with economic performances – all but one U.S. recession since World War II has been preceded by an oil spike, BUT oil price spikes are not always followed by recessions.

According to UBS analysts, what has been key in determining whether an oil price spike has been followed by a recession has been the pace of acceleration in oil prices, not the level. The chart below shows the close relationship between the pace of oil price acceleration and recessions. The acceleration of the oil price in the current episode seems not yet to be of a magnitude that has, in the past, been followed by a recession.

Six-month accelerations in Brent oil prices (%)

Source: UBS

Also important is assessing the potential impact of the oil price increase on the global economy is the energy intensity of the global economy – this has been in decline for many years now which suggests that the impact of any price shock is likely to be less today than in past (equivalent) episodes.

Global energy intensity (per unit of GDP)

Source: World Bank, GIR, Goldman Sachs

Have there been any signs of the economic impact of the current oil price spike

While the pace of the oil price hike to date does not appear to be consistent with past episodes which have led to a recession, there have nevertheless been a range of indicators suggesting that the oil price hike has begun to impact sentiment.

Global surveys of corporate and household sentiment have recorded falls in their latest reports, with the service sector most negatively impacted. This pattern has occurred in Australia also with the March S&P survey of corporate sentiment in Australia falling even more sharply than in equivalent surveys for Europe and the US, with the RBA’s renewed tightening moves likely only adding to the shock to confidence that has come from the war.

March S&P Global survey of corporate sentiment in Australia

Source: S&P Global

S&P reported that the Australian private sector ended the first quarter of 2026 in contraction, with the decline in output the sharpest recorded since the end of 2023, owing largely to a solid drop in services activity.  As in other areas of the world, March saw a steep rise in input prices faced by Australian private sector firms, with the rate of cost inflation rising to its strongest in over three years.

Australian household sentiment has also fallen. In the week March 23-29, Australian consumer confidence (as measured by ANZ-Roy Morgan Research) fell to its lowest since Roy Morgan records began in 1973. The impacts of the Middle East conflict on oil prices and the economic outlook are likely behind the drop according to the survey, along with the RBA’s decision in early March to increase the cash rate to 4.10%.

ANZ-Roy Morgan Australian Consumer Confidence

Source: ANZ-Roy Morgan

• OUTLOOK •

By observing the market variables noted above, we can get a sense of how investors’ expectations about the impact of the Middle East war are evolving.

Three weeks ago investors were seemingly expecting a relatively short war. However, as March has progressed, these optimistic hopes were progressively dashed as no end seemed in sight.

It was not until the last day of the month that there was any sign that there could be a near-term resolution to the war with the market reacting sharply positively to a report from Iranian state media that claimed that, in a call between European Union President Antonio Costa and Iranian President Masoud Pezeskhian, the Irian President had said that the Islamic Republic has “the necessary will to end this war” but only with guarantees “to prevent the recurrence of aggression”

Ahead of that news, continued elevation of the oil price had led to a progressive downward adjustment to growth expectations, and upward revisions to expectations for official interest rates, with significantly more economic slowing and policy tightening now priced by end month than had been initially.

The analysis by UBS suggests that the rise in the oil price (price “acceleration”) to date is less than has occurred in past episodes when a recession was triggered. However, while a recession could still be avoided, a recession is certainly not priced by markets – a continuation of the war would raise recession risks significantly and this is not a scenario that is currently priced by equity and bond markets.

A near term resolution to the conflict would be very likely to lead to a short term rebound in equity prices and a fall in short term bond yields (not unlike what we saw in the last day of trading in March) as investors recalibrated their outlooks, and we would need to reevaluate market prospects at that time.

As we noted three weeks ago in our initial “Oil price Update”, the key risk continues to be that of a broader and longer lasting conflict. Despite some of the higher-for-longer scenario now priced by markets, the recession risk that an extended conflict could cause has still not been fully priced by equity markets. For bonds, at some stage a rising recession risk would likely lead to a downward revision to rate hike expectations as investors instead turn their focus to anticipation of rate cuts to support weakening economic growth.

Investors were (overly) optimistic before the war concerning the outlook for equity returns and rate cuts in 2026, and equity markets were trading at elevated valuations. While a good deal of that optimism has passed (reflected in lower equity prices and upwardly revised expectations for official interest rates), there are still few signs that recession risk has been priced.

On balance, we continue to remain cautious about the market outlook, but not significantly underweight. We are looking for opportunities to invest in high quality companies that have been “unfairly” treated by the market during the current period of volatility. We are also examining current holdings for any companies that we feel could be at risk of earnings downgrades as a consequence of the oil price spike to date, and other market developments.

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