Written by Ashwin Gurung
Market sentiment improved over most of last week following reports that the US and Iran were moving closer to agreeing on a 60-day ceasefire extension, one that would reopen the Strait of Hormuz, the narrow channel through which a significant share of the world’s oil and gas passes. The prospect of improved energy flows helped push oil prices lower, easing inflation concerns. This further increased investor confidence that central banks may not need to raise interest rates and could have greater scope to lower rates in the future. As a result, both equity and bond markets, which had faced pressure from rising interest rate expectations for much of the year, moved higher, with global shares rising +1.3% and high-quality global bonds returning +0.8% in hedged sterling terms.
In the US, the broader economic backdrop remains more nuanced. The Federal Reserve’s preferred measure of inflation rose to 3.8% in April, its highest level since mid-2023. Meanwhile, first-quarter economic growth was revised down to an annualised rate of 1.6%, weaker than previously estimated. US shares responded well despite the mixed economic backdrop. The S&P 500, a widely followed measure of the US stock market, gained +1.1%, while the Nasdaq-100, which is heavily weighted towards large technology companies, rose +2.5%, supported by continued enthusiasm surrounding artificial intelligence.
The UK market experienced a more mixed week. The FTSE All-Share Index declined by 0.3%, reflecting its relatively high exposure to energy companies, which came under pressure as oil prices fell. In contrast, the FTSE 250 Index, which contains a larger proportion of domestically focused businesses, rose +1.2%. Lower energy costs may help reduce input costs for UK companies while also strengthening the case for future interest rate cuts from the Bank of England.
China also lagged despite encouraging economic data, with the MSCI China Index falling -1.7%. However, the broader MSCI Emerging Markets Index gained +3.6%, led by the MSCI Taiwan Index, which rose +6.3%. Technology and semiconductor companies led the advance following Nvidia’s announcement that it plans to increase its annual spending in Taiwan to approximately $150 billion, a tenfold increase from five years ago. The divergence between Taiwan and China illustrates how differently individual emerging markets can perform, reinforcing the importance of broad diversification across the region.
Not all asset classes benefited from the improving geopolitical outlook. The same force that supported equities and bonds weighed on commodities and listed infrastructure. Energy-heavy commodities index, as measured by the BCOM Index, fell -2.5%, and the S&P Global Infrastructure Index, a measure of listed infrastructure companies around the world such as utilities, toll roads and airports, fell -1.4%, both in hedged sterling terms.
The week served as a useful reminder that diversification does not necessarily mean all investments rise together. Rather, different asset classes often respond differently to the same economic developments. While this can result in varying short-term performance, it is one of the key mechanisms through which diversification helps manage risk over the long term.
All performance figures are stated in Sterling terms, unless otherwise specified.
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