CIO market update for May 2026

In this CIO market update, Rob Hogg reviews April’s key market drivers. Global markets rebounded in April following a ceasefire announcement in the Middle East, recovering some of March’s losses, although performance varied across regions. While macroeconomic data took a back seat to geopolitical developments, rising oil prices continued to shape market expectations, contributing to higher inflation concerns and slightly increased interest rate expectations. Despite improved sentiment and equity market gains, underlying risks remain, with softer growth expectations, weakening earnings outlooks, and ongoing uncertainty around the duration and impact of the conflict.

As was the case in March, market performances in April were entirely dominated by developments in the Middle East. Following a ceasefire agreement being announced on April 7, most global share markets staged partial recoveries from their March losses, with US markets rebounding most, while European markets staged weaker recoveries (despite having performed relatively worst in March).

Measures of market volatility (the VIX index for equities and the MOVE index for bonds) eased over the month after having risen in March to levels not experienced since Trump’s Liberation Day tariff announcements in April last year

Macro-economic data generally continued to take a “back seat” to war-related developments during the month, with news on inflation the only macro data to impact financial markets. It’s still too early to fully discern the impact of the war on the global economy, with the only guide to the possible impact of the war being a range of sentiment measures, most of which were weaker (especially surveys of household and services sector sentiment). But its not to early to discern the market’s expectations regarding the war’s impact, with equity and commodity markets suggesting a partial recovery from March’s growth slowdown fears, even as oil prices (both short and longer term) rose further over the month.

The various key US equity markets rebounded by 7%-15% over the month but European markets regained only  around 4%-7%, despite having recorded extremely weak performances in March. As we’ve noted previously, this weaker relative performance of continental European markets is likely due to the greater dependence of European nations on imported energy. The Australian equity market recovered by just 2.3% over the month with ongoing inflation and RBA tightening concerns weighing on the rebound. A number of Australian companies released oil-price/inflation- related earnings warnings during the month.

Global market interest rates rose very slightly over the month as investors priced in incrementally higher expected monetary policy rates. This led to a very slight “bear-flattening” in most curves reflecting slightly larger upward moves in yields for shorter dated securities, than was the case for longer term securities.

Over the month US 10-year yields rose by around 0.05% while 2-year yields (which are more sensitive to changes in expectations about monetary policy) rose by 0.075%. Moves in Australian yields were similar, albeit smaller in magnitude with the local 10-year bond yield higher by 0.09% (to 5.07%) and the 3-year bond yield up by 0.11% (to 4.77%).

The Australian Dollar (AUD) appreciated over the month, rising from USD 0.6900 at end March to around USD 0.7200 by end April. This primarily reflected a weakening in the foreign exchange value of the USD.

Key market movements over April were as follows:

• S&P/ASX300 Accumulation Index (i.e., including dividends) rose by 2.3%.
• S&P/ASX Small Ordinaries (Australian Small Companies) Accumulation Index rose by 3.3%.
• US equity market (S&P 500) rose by 10.5%.
• Measures of market volatility eased during the month (the MOVE and VIX indexes – (measuring expected volatility in bond and equity markets respectively) albeit with a partial rebound late in the month.)
• Australian 10-year bond yields rose by 0.09% to 5.07% and Australian 3-year bond yields rose by 0.11%, closing at 4.77%. These moves caused the yield curve to very slightly “bear-flatten” (shorter-dated yields rising by more than longer-dated yields)
• The US bond market exhibited the same pattern as yields rose, with the US 10-year bond yield rising by around 0.055%, closing at 4.37%, while 2-year yields rose by 0.075 to end the month at 3.87%.
• The Australian dollar rose compared with the USD, with the US currency depreciating against a number of currencies. The AUD closed the month around USD 0.7200, up from USD 0.6900 at end March.

Key market movements over the month

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

Compared with the period ahead of the war, all of these measures have priced an 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. A more serious growth slowdown (a recession) is not priced at this stage and would be a major negative surprise, but this does not currently appear to be the most likely outcome.

As we noted a month ago, key in determining whether a recession results from the war will be the magnitude of the change in the oil price, and the duration of elevated oil prices. Encouragingly the magnitude of the increase in the oil price has been less than the price increases that have in the past been followed by recession. But the oil price continued to rise in April, on both a near-term and medium term basis (July and December 2026 futures prices), suggesting that investors are incrementally moving to a “higher-for-longer” scenario.

Any near-term (and sustainable) resolution is likely to lead to a rebound in market pricing and investor sentiment (as exhibited on trading days when news of “ceasefires” has occurred).

In this monthly update, we look at:

• The market’s determination regarding the expected impact of the oil price spike
• Market performance trends in April have reinforced the market’s initial assessment regarding which economies will be most impacted by the oil price spike
• Short term Inflation expectations fell on the cease-fire announcement
• Tone of central bank meetings in late April
• Early impact of the oil price spike
• Global earnings expectations are beginning to wane
• RBA outlook
• Australian company earnings downgrades (and one upgrade) in April
• The outlook – two scenarios

Market has voted on the impact of the oil price spike

Last month we explored market performances during March in an attempt to gauge market participants’ views about the potential impact of the Middle East war on growth, equity earnings and interest rates across the globe. We found that:

• The oil price was expected to remain elevated in the short term, but was expected to fall later this year (albeit falling to a level higher than what had been the price prevailing ahead of the war)
• growth expectations were downgraded slightly (copper prices softened)
• market expectations for official policy rates by December 2026 swung during March:
  • from expected rate cuts to no cuts by end year (US), or
  • from expected rate cuts to expected rate hikes (UK and Europe); or
  • from mild rate hikes to sharper rate hikes (Australia and New Zealand)

Through April, as the market has become more optimistic following the announcement of a cease fire on April 7, investor expectations have evolved further. Generally, rate hike expectations have edged a little higher again (as evidenced by higher short-term bond yields), following their out-sized increase in March, while growth fears have eased somewhat as reflected in higher equity and commodity prices and the higher AUD.

Market performance trends in April have reinforced the market’s initial assessment regarding which economies will be most impacted by the oil price spike

Individual equity market performances in April seemed to reinforce the market’s indication in March that the US is expected to be relatively least impacted by the war with continental Europe still regarded as likely to be relatively most negatively impacted.

Equity market performances – April

In lockstep with the recovery in equity prices over April, the market’s view about the overall impact of the oil price spike on global growth also recovered somewhat (as reflected by the recovering copper price). But compared to expectations ahead of the war, there is still expected to be a net negative growth impulse from the effects of the war.

Copper prices (July 2026 futures contract)

The recovery in copper prices is a bit surprising given that the oil price has moved higher over the month – particularly longer-dated futures (December) – suggesting that investors are now expecting a higher for longer oil price scenario. But we’d note that the slight easing in the copper price toward month-end corresponded with the late month acceleration in the oil price.

Longer-dated oil futures (December 2026) now show oil trading around USD80 – up from USD70 on the initial price spike – and up from around USD 60 where this contract was trading at the start of the year.  This is the “higher-for-longer” scenario.

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

Short term Inflation expectations fell on the cease-fire announcement but began climbing again into month-end

As revealed by US bond market pricing (“break-even inflation”), short-term (two-year) inflation expectations fell sharply on the cease-fire announcement (down 0.4% to 2.58%), but then began climbing again into end month, closing at around 3%.

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

Source: Bloomberg

Tone of late April central bank meetings – a bit more “hawkish” than investors had expected

Key Group of Seven (G7) countries had their central bank meetings in the last week of April. Views vary from central bank to central bank.

Of most importance was the US central bank’s April 29 meeting where the outcome – maintaining the target range for the federal funds rate at 3.5% to 3.75% – was more “hawkish” than investors had expected because three dissenting members of the policy committee, while supporting the continuation of the target range for the federal funds rate, did not support inclusion of an easing bias in the statement at this time. News of this dissent caused market interest rates to rise, especially at the short end of the yield curve as expectations for future rate cuts were wound back slightly following the statement.

Early impact of the oil price spike on Australia sentiment indicators

We have been tracking indicators of the potential impact of the oil price spike through sentiment surveys. With oil prices rising, the RBA tightening policy and an overall uncertain outlook, consumer and business confidence fell sharply in March and April. Companies are noting a sharp increase in costs (both purchase costs and prices), which have jumped.

Household and corporate sentiment

Source: Zenith Investment Partners

Global earnings expectations are beginning to wane

As we noted above, equity markets have rebounded sharply on the basis that the conflict will end shortly and that the worst case (escalation and ongoing closure of the Strait of Hormuz) and associated stagflation risk, is a very low probability. The bullish case suggests that the economy and, more specifically, earnings growth, entered this conflict on a strong and improving trend and that the conflict will have a manageable impact on growth and policy going forward. However, while manufacturing Purchasing Manager Index (activity) readings have remained positive for now although service sector PMIs have softened in March and April. The chart below shows the close relationship between these sentiment indexes and analyst earnings revisions. Clearly, the longer the conflict lasts and the longer oil prices remain higher, the greater the risk to the corporate earnings.

Global earnings per share and the Global Purchasing Managers’ Index

 

Source: Zenith Investment Partners

RBA outlook

The Reserve Bank of Australia (RBA) raised rates for the second consecutive month in March, taking the policy rate to 4.1%,  but there was no meeting in April. The RBA had not had the opportunity to consider the impact of higher oil/petrol prices at the March meeting, and key data releases since then such as the March Consumer Price Index (CPI) suggest that a further hike might occur in May.

The RBA’s favoured CPI measure – the “Trimmed-mean” –  is continuing to rise at an annual pace of 3.3% and remains above the RBA’s target band. A key concern for the RBA is “inflation expectations. There are few if any clearer signs to the public of inflationary pressures than petrol prices, and the RBA will be concerned to maintain the sense that they will continue to react to higher prices if required. Interestingly, the bond market’s view of expected inflation rose during April with five-year inflation expectations increasing from around 2.82% to 2.93% – not a large move to be fair, but suggestive that the RBA will need to be regarded as a credible inflation-fighting central bank or these expectations will rise further.

All groups CPI and Trimmed mean, Australia, annual movement (%)

Australian company earnings downgrades (and one upgrade) in April

Australian companies are beginning to announce negative earnings revisions, generally blaming a combination of the Middle East war (and associated oil price spike), higher costs/inflation, and tighter RBA policy.

Woolworths – A key bellwether is Woolworths which announced a downgrade on the last day of April noting that:

• while sales momentum is good, there are clear signs consumer sentiment has weakened materially since the company’s February result, with consumer anxiety perceived to be at the highest level for years
• signs of supplier price inflation are emerging and have already been seen in fresh and dairy, but this has now spread to grocery and long life with suppliers in the last few weeks seeking price increases.
• “We are seeing early signs that the conflict in the Middle East is impacting our customers and team, many of whom were already experiencing significant cost-of-living pressures”
• “While the impact on the Group to date has been limited, higher fuel costs and secondary effects are likely to have an increasing inflationary impact as we move through the calendar year.”

Cochlear (Healthcare) – profit warning related to weaker developed-market cochlear implant demand, and Middle East order cancellations

Cleanaway Waste Management – Cleanaway warned of higher fuel costs and of a Middle East-related reduction in activity

EBOS Group (Healthcare) – EBOS warned, citing elevated fuel and energy costs impacting healthcare distribution logistics.

Ampol – earnings upgrade – management explicitly cited that “global refining margins have expanded following escalation in the Middle East” so providing a margin-driven earnings uplift.

• OUTLOOK •

We remain cautious about the market outlook.

The US economy seems to have been among the least impacted by the Middle East conflict (so far).  While interest rates have pushed higher it has not derailed earnings (so far). However, at current valuations, the US market needs to navigate a narrow path comprising an economic soft landing and gently easing inflation. There is little room for disappointment from either poorer-than-forecast company earnings or fewer than-expected official policy rate cuts. This makes the up-and-coming US earnings season much anticipated and likely to be closely watched.

With market valuations also extended in Australia, we are cautious. While there is the likelihood that some of the positive momentum built up in the economy in the second half of calendar 2025 could fade due to the significant swing in monetary policy moves (from rate cuts to rate hikes), our expectation is that current rate hike expectations may prove to be too pessimistic and that the RBA could (possibly) remain on hold for an extended period or tighten by less than currently feared.

The critical variable from here is the duration and resolution of the Middle East conflict, which remains highly uncertain.

Outlook scenarios

Near-term resolution: A ceasefire or diplomatic resolution that allows the Strait of Hormuz to return to normal operations would likely trigger a sharp rally in equity markets and a fall in short-term bond yields, as energy prices retreat, inflation fears subside and recession risk is priced out.  In this scenario, equities would be expected to outperform. The last day of March trading provided a foretaste of this dynamic when Iranian signals of a willingness to negotiate drove a sharp positive market move.

Protracted conflict: A continuation of the conflict or protracted ongoing period of disruption to passage through the Strait of Hormuz and dislocation to energy markets would progressively raise recession risk, which is not yet fully priced in equity markets. For bonds, rising recession risk would, at some stage, lead to a downward revision to rate hike expectations as investors likely begin pricing rate cuts in the advent of weakening growth. This scenario would favour fixed income over equities and longer-duration bonds over short duration.

On balance, we continue to be 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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