The US inflation rate jumped to a two-year high in March, while consumer sentiment has plummeted to the lowest in the 74-year history of the University of Michigan survey.<\/p>\n
Here in New Zealand, the Reserve Bank has suggested inflation could hit 4.2% in the June quarter, well above previous expectations.<\/p>\n
The bank is keeping its options open, but if the oil price spike turns into broader inflation it will have little choice but to increase the Official Cash Rate (OCR).<\/p>\n
Financial markets have already moved to expect three hikes this year, starting in July and taking the OCR to 3% by Christmas.<\/p>\n
That\u2019s not a given, but it\u2019s certainly possible.<\/p>\n
With all of that in mind, financial markets haven\u2019t reacted as badly as some might\u2019ve expected.<\/p>\n
If you\u2019d looked at your KiwiSaver balance at the beginning of the year and ignored it until today, you might think we\u2019ve had a fairly dull year.<\/p>\n
Yes, it\u2019s been volatile at times, with the S&P 500 in the US down 9.1% from its peak at its weakest point.<\/p>\n
However, it\u2019s rebounded strongly and is almost back at its all-time high from February.<\/p>\n
World shares overall are up in 2026, while US Treasury bonds and New Zealand corporate bonds are flat.<\/p>\n
Even the VIX index (which is thought of as Wall Street\u2019s \u201cfear gauge\u201d) last week fell back to its pre-conflict levels.<\/p>\n
The point of \u201cpeak fear\u201d looks to be behind us, or maybe investors expect incentives and constraints on both sides to ultimately lead to compromise.<\/p>\n
The US would like a resolution for political and economic reasons, while Iran wants to keep its regime intact.<\/p>\n
China, Iran\u2019s largest trading partner and the purchaser of 90% of its oil exports, is strongly in favour of a de-escalation too.<\/p>\n
Here\u2019s hoping Beijing\u2019s influence could push things in the right direction.<\/p>\n
One positive catalyst for global shares could be the reporting season, which has just kicked off.<\/p>\n
Analysts are expecting year-on-year earnings growth for the S&P 500 of almost 13%.<\/p>\n
Its 30%-plus weighting to technology might also be in its favour.<\/p>\n
The tech sector is down almost 10% from its October highs, while its earnings growth prospects remain healthy and it\u2019s less sensitive to energy costs than others.<\/p>\n
Bond and fixed income markets are at a more interesting juncture.<\/p>\n
Investors have been noticeably cautious about these conservative assets throughout the conflict, unsure if they\u2019ll prove a safe place to be or not.<\/p>\n
While the prospect of higher inflation is bad for bonds, a weaker growth outlook typically means they\u2019ll do well.<\/p>\n
This caution could be because 2022 is still fresh in our minds and we\u2019re worried about a repeat performance.<\/p>\n
That was the worst year in decades for bonds, as high inflation led to central banks cranking up policy interest rates despite sluggish growth.<\/p>\n
It\u2019s true central banks are often fighting the last war, but Jerome Powell\u2019s term as Federal Reserve chairman ends next month.<\/p>\n
We should have Kevin Warsh on board very soon to replace him, and he won\u2019t have the same pandemic-era baggage.<\/p>\n
Warsh might be more attuned to the growth side of the Fed\u2019s mandate and more inclined to reduce interest rates in the face of weakness.<\/p>\n
For those picking this will all blow over soon, bonds and fixed income might look interesting at these levels.<\/p>\n
We could be in for more volatility over the near term, as the standoff continues.<\/p>\n
If tensions ease and oil prices fall, the sharp rebound from early April will be back on and patient share investors will be rewarded.<\/p>\n
If the disruption persists and inflation forces some central banks to tighten into a weaker economy, we\u2019re looking at something much uglier.<\/p>\n
It\u2019s difficult to know which path we\u2019re on, although the lack of panic in financial markets suggests it\u2019s the one we\u2019re all hoping for.<\/p>\n
However, it\u2019s still uncomfortable to be faced with two distinct outcomes with little middle ground on offer.<\/p>\n