Global Overview
The first quarter of 2026 proved to be a turning point for global markets, defined by surging geopolitical tensions, shifting inflation expectations, and volatile but still resilient equity and bond markets. The catalyst came at the end of February, when the US and Israel launched military operations against Iran, escalating instability in the Middle East and igniting a rally in energy and commodity prices.
The conflict pushed oil and gas prices sharply higher, reinforcing inflation concerns that had been gradually receding by the start of the year. The subsequent rise in energy and freight costs complicated central banks’ disinflationary efforts and delayed expectations of rate cuts, particularly in the United States and Europe. Markets began to reprice inflation expectations upwards, with interest rate expectations also increasing correspondingly impacting yields on bonds.
Despite the shocks, equity markets overall demonstrated solid resilience through the quarter, buoyed by earlier momentum in Japan, Asia ex‑Japan, and emerging markets. Meanwhile, the US market, long the global leader, underperformed as investors rotated away from large‑cap technology stocks toward cyclical and value-oriented exposures overseas.
Inflation and Monetary Policy
At the start of 2026, consensus expectations leaned toward gradual monetary easing across developed markets, with inflation moderating and growth cooling. Indeed, the UK’s consumer price inflation fell to 3.0% in January, the lowest since early 2025, and Eurozone core inflation eased slightly. However, by March, the picture had changed.
The Middle East conflict disrupted supply chains, boosted energy and shipping costs, and reignited inflation worries — especially in energy‑dependent regions such as Europe and parts of Asia. Economists cautioned of the risk of stagflationary pressures, where sustained high energy prices threaten both consumption and growth. While inflation is expected to edge higher in the short term, particularly in the Eurozone, the longer‑term outlook depends on the duration of the geopolitical conflict and its impact on commodity flows.
The US Federal Reserve maintained a cautious stance. Although inflation had receded from its 2025 highs, the Fed pushed back against aggressive rate‑cut expectations, citing the resilience of the labour market and sticky core inflation. Treasury yields drifted higher during March as investors reassessed how soon policy easing might begin. Similarly, the European Central Bank (ECB) and Bank of England (BoE) signalled patience, acknowledging that premature rate cuts could risk destabilising currencies and reigniting price pressures.
United States
US equities were the notable underperformer during Q1. The S&P 500 slipped modestly amid concerns that overenthusiastic valuations in mega‑cap technology names could not be justified by earnings momentum. Investor sentiment was further dampened by President Trump’s reimposition of tariffs, which added uncertainty to global trade and manufacturing sectors.
Meanwhile, AI-linked capital expenditure by both private and public companies continued at full pace, but analysts began questioning the near‑term return on investment from such spending. This rising scepticism around the productivity payoff of AI spending contributed to a rotation out of U.S. growth names.
In fixed income, Treasuries delivered modest positive returns early in the quarter but reversed gains after the energy shock. The yield curve remained inverted, reflecting expectations for slower growth but persistent inflationary stress. Investors favoured high‑quality corporate credit and shorter‑duration bonds amid renewed uncertainty.
Europe and the United Kingdom
European equities rose modestly through February before losing momentum as the energy conflict unfolded. Energy import dependency again emerged as a structural weakness for the region. Eurozone inflation could potentially spike substantially above the ECB’s target in 2026 before falling back, especially if second‑round effects take hold in intermediate goods and insurance costs.
In the UK, growth remained sluggish. The Office for National Statistics reported 0.1% GDP growth in Q4 2025, confirming that the economy had barely expanded ahead of the new year. Early signs of easing inflation offered temporary relief to households, but higher global energy prices threatened to slow further disinflation. Gilts performed respectably through mid‑February before yields rose again. The FTSE 100 managed positive gains overall, supported by its energy and commodities exposure.
For European and UK bonds, returns were mixed. While longer‑dated yields rose on inflation fears, demand for safe assets amid geopolitical risk provided some cushion to overall fixed income performance.
Japan and Asia
Japan was a strong performer among developed markets, benefiting from ongoing corporate reforms, improving shareholder returns, and yen weakness that bolstered export competitiveness. The Japanese market rallied by around 10% in February alone. The decisive election of a new reformist prime minister also boosted investor confidence in structural change, with renewed optimism surrounding governance, wage growth, and capital efficiency. However, the Japanese market gave up almost all its gains in March as the conflict in the Middle East led to fears of energy supply disruptions and potential interest rate hikes adding to Yen volatility.
In Asia ex‑Japan, performance was similarly strong, in January and February before some steep declines in March due to worries regarding the sharp increase in energy prices and lack of supply. Chinese equities showed tentative improvement, supported by targeted fiscal support and monetary easing by the People’s Bank of China. However, overall investor sentiment toward China remained cautious due to ongoing property sector stress and weak consumer confidence.
Asian fixed income delivered stable to positive returns, thanks to softening yields and inflows from global investors seeking diversification. However, the region’s dependence on imported energy left it vulnerable to the Middle East disruptions. Both India and China sought diplomatic “safe passage” agreements with Iran to secure oil supplies, helping to mitigate the risk of energy shortages.
Emerging Markets
Emerging markets outperformed developed peers through much of Q1, helped by their lower starting valuations and strong commodity exposure. Energy exporters such as Brazil and the Gulf states benefited from rising oil prices, while importers such as India faced renewed inflation risk.
Emerging market debt saw a continuation of inflows early in the year, supported by softer US yields and optimism about a global rate-cutting cycle. That sentiment faded in March as the energy shock complicated the inflation picture. Local‑currency debt outperformed hard‑currency issues overall, reflecting domestic monetary flexibility and stronger currencies in some key markets.
Commodities and Currencies
Commodity markets were highly reactive throughout the quarter. Energy prices surged to multi-year highs as a result of the conflict in the Middle East, while precious and base metals suffered sharp corrections due to a change in interest rate expectations from rate cuts to rate rises and investors taking profits to cover losses elsewhere.
The US dollar regained strength after the Middle East escalation, reversing earlier softness. While the dollar’s safe‑haven appeal supports it in the near term, structural headwinds — including U.S. fiscal deficits and diversification of global reserves — continue to argue for gradual longer‑term weakening. Sterling and the euro both weakened slightly by quarter‑end.
Outlook for the Remainder of 2026
Looking ahead, investors face an environment of persistent uncertainty, shaped by the duration of the Middle East conflict and evolving monetary‑policy paths. Two broad scenarios dominate: either a rapid easing of energy markets leading to renewed disinflation and growth stabilisation, or a prolonged period of elevated prices and fragile consumption — a path toward mild stagflation.
Global growth expectations remain positive but muted. The US may see slower consumption as higher energy costs hit lower‑income households. Europe could experience weaker growth if energy prices stay high, though fiscal support may help cushion the blow. Asia and emerging markets are better placed in relative terms, with structural reforms, demographics, and capital inflows offering long‑term opportunities.
Across asset classes, diversification and discipline remain essential. In our view, equity investors should continue to favour rest of the world over US, with a preference for value and cyclical exposures over richly valued growth sectors. In fixed income, yields at current levels offer relatively attractive income potential, although continued inflation volatility and concerns regarding issuance suggest positioning in shorter dated bonds is sensible.
Overall, the first quarter of 2026 underscores a world in which geopolitics has reasserted itself as a dominant force in financial markets. The rest of the year is likely to test investors’ ability to distinguish between short-term shocks and longer-term structural trends. Patience, diversification, and clarity of conviction will be key to navigating an uncertain global situation and benefiting from the recovery in due course.
Please note that the content on this page is based on our understanding and the available information; we cannot be held responsible for any errors, and you should not act on the basis of the information in these articles, nor do they constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch via telephone at 01392 875500 or email at info@SeabrookClark.co.uk.
Investment Commentary and Market Overview Quarter 1 2026: 1 January – 31 March 2026 and Outlook
Matthew Clark
Global Overview
The first quarter of 2026 proved to be a turning point for global markets, defined by surging geopolitical tensions, shifting inflation expectations, and volatile but still resilient equity and bond markets. The catalyst came at the end of February, when the US and Israel launched military operations against Iran, escalating instability in the Middle East and igniting a rally in energy and commodity prices.
The conflict pushed oil and gas prices sharply higher, reinforcing inflation concerns that had been gradually receding by the start of the year. The subsequent rise in energy and freight costs complicated central banks’ disinflationary efforts and delayed expectations of rate cuts, particularly in the United States and Europe. Markets began to reprice inflation expectations upwards, with interest rate expectations also increasing correspondingly impacting yields on bonds.
Despite the shocks, equity markets overall demonstrated solid resilience through the quarter, buoyed by earlier momentum in Japan, Asia ex‑Japan, and emerging markets. Meanwhile, the US market, long the global leader, underperformed as investors rotated away from large‑cap technology stocks toward cyclical and value-oriented exposures overseas.
Inflation and Monetary Policy
At the start of 2026, consensus expectations leaned toward gradual monetary easing across developed markets, with inflation moderating and growth cooling. Indeed, the UK’s consumer price inflation fell to 3.0% in January, the lowest since early 2025, and Eurozone core inflation eased slightly. However, by March, the picture had changed.
The Middle East conflict disrupted supply chains, boosted energy and shipping costs, and reignited inflation worries — especially in energy‑dependent regions such as Europe and parts of Asia. Economists cautioned of the risk of stagflationary pressures, where sustained high energy prices threaten both consumption and growth. While inflation is expected to edge higher in the short term, particularly in the Eurozone, the longer‑term outlook depends on the duration of the geopolitical conflict and its impact on commodity flows.
The US Federal Reserve maintained a cautious stance. Although inflation had receded from its 2025 highs, the Fed pushed back against aggressive rate‑cut expectations, citing the resilience of the labour market and sticky core inflation. Treasury yields drifted higher during March as investors reassessed how soon policy easing might begin. Similarly, the European Central Bank (ECB) and Bank of England (BoE) signalled patience, acknowledging that premature rate cuts could risk destabilising currencies and reigniting price pressures.
United States
US equities were the notable underperformer during Q1. The S&P 500 slipped modestly amid concerns that overenthusiastic valuations in mega‑cap technology names could not be justified by earnings momentum. Investor sentiment was further dampened by President Trump’s reimposition of tariffs, which added uncertainty to global trade and manufacturing sectors.
Meanwhile, AI-linked capital expenditure by both private and public companies continued at full pace, but analysts began questioning the near‑term return on investment from such spending. This rising scepticism around the productivity payoff of AI spending contributed to a rotation out of U.S. growth names.
In fixed income, Treasuries delivered modest positive returns early in the quarter but reversed gains after the energy shock. The yield curve remained inverted, reflecting expectations for slower growth but persistent inflationary stress. Investors favoured high‑quality corporate credit and shorter‑duration bonds amid renewed uncertainty.
Europe and the United Kingdom
European equities rose modestly through February before losing momentum as the energy conflict unfolded. Energy import dependency again emerged as a structural weakness for the region. Eurozone inflation could potentially spike substantially above the ECB’s target in 2026 before falling back, especially if second‑round effects take hold in intermediate goods and insurance costs.
In the UK, growth remained sluggish. The Office for National Statistics reported 0.1% GDP growth in Q4 2025, confirming that the economy had barely expanded ahead of the new year. Early signs of easing inflation offered temporary relief to households, but higher global energy prices threatened to slow further disinflation. Gilts performed respectably through mid‑February before yields rose again. The FTSE 100 managed positive gains overall, supported by its energy and commodities exposure.
For European and UK bonds, returns were mixed. While longer‑dated yields rose on inflation fears, demand for safe assets amid geopolitical risk provided some cushion to overall fixed income performance.
Japan and Asia
Japan was a strong performer among developed markets, benefiting from ongoing corporate reforms, improving shareholder returns, and yen weakness that bolstered export competitiveness. The Japanese market rallied by around 10% in February alone. The decisive election of a new reformist prime minister also boosted investor confidence in structural change, with renewed optimism surrounding governance, wage growth, and capital efficiency. However, the Japanese market gave up almost all its gains in March as the conflict in the Middle East led to fears of energy supply disruptions and potential interest rate hikes adding to Yen volatility.
In Asia ex‑Japan, performance was similarly strong, in January and February before some steep declines in March due to worries regarding the sharp increase in energy prices and lack of supply. Chinese equities showed tentative improvement, supported by targeted fiscal support and monetary easing by the People’s Bank of China. However, overall investor sentiment toward China remained cautious due to ongoing property sector stress and weak consumer confidence.
Asian fixed income delivered stable to positive returns, thanks to softening yields and inflows from global investors seeking diversification. However, the region’s dependence on imported energy left it vulnerable to the Middle East disruptions. Both India and China sought diplomatic “safe passage” agreements with Iran to secure oil supplies, helping to mitigate the risk of energy shortages.
Emerging Markets
Emerging markets outperformed developed peers through much of Q1, helped by their lower starting valuations and strong commodity exposure. Energy exporters such as Brazil and the Gulf states benefited from rising oil prices, while importers such as India faced renewed inflation risk.
Emerging market debt saw a continuation of inflows early in the year, supported by softer US yields and optimism about a global rate-cutting cycle. That sentiment faded in March as the energy shock complicated the inflation picture. Local‑currency debt outperformed hard‑currency issues overall, reflecting domestic monetary flexibility and stronger currencies in some key markets.
Commodities and Currencies
Commodity markets were highly reactive throughout the quarter. Energy prices surged to multi-year highs as a result of the conflict in the Middle East, while precious and base metals suffered sharp corrections due to a change in interest rate expectations from rate cuts to rate rises and investors taking profits to cover losses elsewhere.
The US dollar regained strength after the Middle East escalation, reversing earlier softness. While the dollar’s safe‑haven appeal supports it in the near term, structural headwinds — including U.S. fiscal deficits and diversification of global reserves — continue to argue for gradual longer‑term weakening. Sterling and the euro both weakened slightly by quarter‑end.
Outlook for the Remainder of 2026
Looking ahead, investors face an environment of persistent uncertainty, shaped by the duration of the Middle East conflict and evolving monetary‑policy paths. Two broad scenarios dominate: either a rapid easing of energy markets leading to renewed disinflation and growth stabilisation, or a prolonged period of elevated prices and fragile consumption — a path toward mild stagflation.
Global growth expectations remain positive but muted. The US may see slower consumption as higher energy costs hit lower‑income households. Europe could experience weaker growth if energy prices stay high, though fiscal support may help cushion the blow. Asia and emerging markets are better placed in relative terms, with structural reforms, demographics, and capital inflows offering long‑term opportunities.
Across asset classes, diversification and discipline remain essential. In our view, equity investors should continue to favour rest of the world over US, with a preference for value and cyclical exposures over richly valued growth sectors. In fixed income, yields at current levels offer relatively attractive income potential, although continued inflation volatility and concerns regarding issuance suggest positioning in shorter dated bonds is sensible.
Overall, the first quarter of 2026 underscores a world in which geopolitics has reasserted itself as a dominant force in financial markets. The rest of the year is likely to test investors’ ability to distinguish between short-term shocks and longer-term structural trends. Patience, diversification, and clarity of conviction will be key to navigating an uncertain global situation and benefiting from the recovery in due course.
Please note that the content on this page is based on our understanding and the available information; we cannot be held responsible for any errors, and you should not act on the basis of the information in these articles, nor do they constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch via telephone at 01392 875500 or email at info@SeabrookClark.co.uk.
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