April – Strait up goes inflation
Two months after the beginning of the offensive against Iran by Israel and the United States and the fallout in the entire Middle East region, no exit strategy or durable peace plan has emerged and as a result, uncertainty remains. At least for now, the truce is holding.
One thing we know for certain is the direct impact on the oil prices and the resulting jump in inflation. And the inflation story is not over, other sectors will certainly be impacted too with a slight delay. Think food costs due to fertilizers being a byproduct of oil/gas, packaging with plastics being derived from oil, the transportation industry, pharmaceuticals, etc…humanity’s bad romance with oil is deep.
As a result, multiple central banks and institutions such as the IMF have reviewed their growth expectations downward. For example, the European Central Bank revised GDP growth for the Euro area downward by 0.3% for 2026. The IMF revised global growth down from 3.3% to 3.1% for 2026 and inflation up to 4.4% from 3.8%. These figures are typically reviewed on a quarterly basis and will inevitably change as the war evolves for better or for worse.
Countries have an opportunity to help mitigate the damage through fiscal measures to households and industries having a hard time absorbing the sudden supply shock. As each country faces a different level of dependence on the Middle East, a coordinated action is unlikely.
More surprisingly, the markets had an outstanding month of April. Japan and the US are up in the teens, while the rest of the world is up in a more measured way (World index up 9.59%). It is incomprehensible that markets have their best month in years in a context where we are just a spark away from an escalation in the conflict. The rally is led, unsurprisingly, by the technology sector, which accounts for over half the performance. Excellent corporate earnings and resilience to oil shocks are also part of the explanation.
In the US, other elements raise concerns. The job market is cooling down on multiple fronts. The immigration policy is impacting the supply side, while demand is reduced by the impact of AI and the prior over-hiring that took place following COVID. Because the Fed has a double mandate to ensure full employment and price stability (inflation target of 2%), the direction it will take interest rates is now unsure. A slowing economy and job market would warrant lowering interest rates, while a rise in inflation would call for a rate hike. To make things more complex, in the middle of all this, Kevin Warsh, the presumptive nominee, should take over the Fed chairmanship in May. In contradiction, despite the growth outlook being reduced, the PMIs are up further in expansion territory in both services and manufacturing.
In Europe, where inflation had been subdued to within target levels, it is now rebounding to 3%. Fortunately, the ECB, being ahead of the US in the interest rate cutting cycle, has more capacity to raise interest rates if needed. European indices being much less tech heavy (mid-teens VS mid-thirties in the US) and much more “old economy” such as financials and industrials, the rebound wasn’t as impressive. Not only was Europe’s GDP growth outlook cut, PMIs are in contraction territory, leaving us feeling pessimistic. At least for now the job market and consumption remain strong.
China kept relatively muted and on the sideline throughout the recent events, but their economy hasn’t. On the contrary, China posted a GDP growth of 5% for Q1 and the IMF revised upward their growth expectations for the year. This is very surprising as we keep hearing that they were so dependent on Venezuelan and Iranian oil, as major input in their economy.
House View
With the uncertainty brought forth by geopolitical conflicts that are far from being resolved (or not, we just don’t know), we remain prudent. Our defensive stance helped a lot of clients sleep well at night in March when, at its worst, clients with a balanced profile had a flat performance. In April, we have not rebounded as much, but we feel that April performance was irrational. We remain therefore rather defensive and ready to seize an opportunity to increase risk or capitalize on volatility.
Chart of the month
The chart of the month shows the performance of the famous US tech index, the Nasdaq. We want to highlight the volatility and irrationality happening at the moment.
From the close of the market prior to the war until the lowest point, the index lost over -8%. From that point until end of April, it rallied over +19%. Should the war resume, it is feasible to see it drop once again to the march lows.
Source: Bloomberg
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