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Equity Markets Rally for a Third Straight Week

For a third consecutive week, equity markets rallied in the face of a conflict that, on the ground, has barely improved. The S&P 500 rose 4.5% to a fresh all-time high, recouping the entirety of its post-war losses, while the Nasdaq surged on the back of strong early earnings and renewed AI enthusiasm. European bourses gained but have yet to reclaim their pre-war peaks - the Euro Stoxx 50 added 2.2% and the DAX 3.8%, though both remain more exposed to the energy shock than their US counterpart. The ASX 300, by contrast, finished the week roughly flat, held back by a sell-off in the major banks after Westpac and NAB both flagged increased provisioning for bad debts in anticipation of a war-driven economic slowdown.

This week David Bassanese at Betashares has captured the prevailing market logic with the phrase: "In TACO we trust." The longer oil stays elevated, the greater the political cost for President Trump heading into November's midterms, and so investors are betting he will ultimately be compelled to cut a deal, regardless of the noise in between. That noise was considerable. The Strait of Hormuz briefly reopened on Friday after Iran's foreign minister tweeted it would be open, only for IRGC-aligned media to rebuke him within minutes. Iran then shut the Strait again, the US seized an Iranian-flagged cargo vessel, and by Sunday JD Vance was heading back to Islamabad, though Tehran signalled it had no plans to attend while the naval blockade remained in place. The ceasefire itself expires on Wednesday 22 April, and a failure to extend it would likely trigger sharp repricing across oil and risk assets.

Oil continued to be the lightning rod for sentiment with Brent crude starting the week above US$100 before collapsing to US$86 on Friday and bouncing back to $95 at the time of writing. November and December contracts are still trading below US$80, indicating that the market still expects a resolution in the second half. Copper, aluminium and nickel all firmed which perhaps indicates confidence that a global recession can be avoided if normal oil supplies resume in the coming weeks.

Bond markets rallied hard. European 10-year yields fell across the board - Italy down 13 basis points, the UK down 10.5, France 10, Germany 7 - while US Treasuries edged lower to 4.27%. Australian 10-years dropped 9 basis points to 4.92%. The move reflected both the easing oil premium and a benign US PPI print, where core measures came in well below expectations and pointed to a softer core PCE reading for March.

Economic data painted a picture of economies holding up but growing uneasy. Australia's unemployment rate held at 4.3% with 18,000 jobs added, but the NAB Business Survey recorded a 29-point plunge in confidence, the sharpest single-month fall outside COVID, and purchase costs more than doubled in quarterly terms. The RBA's Sarah Hunter and Andrew Hauser both stressed that "the starting point matters," a thinly veiled signal that with an economy near full employment, they are inclined to act on inflation rather than wait. OIS pricing now implies a 73% probability of a May rate hike. In the US, the Philly Fed Manufacturing Index surged unexpectedly to 26.7, jobless claims fell to 207,000, and Q1 earnings from JP Morgan, Goldman and Citi showed bumper trading revenues. China's Q1 GDP beat at 5.0%, though March retail sales and employment data softened.

The week ahead hinges on whether the ceasefire is extended, whether Iran attends the Islamabad talks, and closer to home - Australia's March quarter CPI, which will set the tone for the RBA's May decision.