If February marked the divergence of global equities from the US, March saw geopolitical events take centre stage. The US/Israeli military action against Iran, beginning 28 February, escalated throughout March. This development affected global financial markets and significantly altered the macroeconomic outlook for the rest of the year.
The immediate and most visible impact was felt in the energy markets. Brent crude, while volatile, rose over the course of the month, to close 41 per cent higher at $103.66 per barrel. This energy shock has reignited concerns regarding a second wave of global inflation. When the cost of the primary input to the global economy rises sharply, it inevitably filters through the entire supply chain, raising the base cost of goods, agricultural products, transport and manufacturing.
Bond markets reacted logically to this inflationary threat, adjusting to price in a ‘higher for longer’ interest-rate reality. The governor of the Bank of England was perhaps the most strident central banker in warning of the perils ahead. Sovereign debt experienced a broad sell-off as investors demanded higher returns for holding long-term government paper. The UK Treasury two-year spot yield moved to 4.4 per cent, and the 10-year yield moved to 4.9 per cent. That was the highest for the latter since September 2008. There were similar upward adjustments internationally, with the German Treasury 10-year spot yield moving to 3 per cent. In the US, the two-year yield moved to 3.8 per cent, and the 10-year yield moved to 4.3 per cent. This repricing of debt fundamentally alters the cost of capital and places immediate downward pressure on the valuation multiples of long-duration assets, particularly growth equities. It also affects the real economy, as the cost of servicing mortgages increases.