Key highlights:
- The Middle East conflict and resultant energy supply shock have spiked market volatility. Longer-term inflation expectations remain anchored for now, but rising near-term inflation expectations have tightened financial conditions via fears of central banks leaning hawkish.
- US growth remains resilient as the region is energy-independent while deregulation, tax refunds and policy support are also supportive.
- Europe and the UK confront potential labor-market headwinds and are highly exposed to volatile energy prices, but fiscal measures in Germany may help to stabilize the outlook.
- In Asia, China’s recovery remains policy-driven amid structural challenges, while in Japan, expansionary fiscal policy will likely lead to a steeper curve.
- Credit fundamentals across IG and HY remain strong, with issuance elevated by AI-related capex, M&A activity and refinancing needs.
- Securitized sectors—select parts of MBS, CLOs and CMBS—offer relative value despite pressure in consumer and CRE pockets.
- EM continues to benefit from positive fundamentals while relative value varies between the local, corporate and sovereign markets.
- Investor sentiment has stayed constructive, supported by strong fundamentals and appealing yields despite geopolitical and commodity-driven risks.
Overview
In this quarterly report, geopolitical tensions are the defining feature of the macro outlook with energy supply shocks expected to weigh on near-term growth and inflation. Before these pressures the global economic backdrop was gradually improving as fiscal support, easier finan-cial conditions and moderating inflation were helping to strengthen the 2026 outlook. We believe the drastic shift in central bank policy expectations is somewhat overdone and that longer-term growth and inflation targets are still attainable. In the US, policy tail-winds and deregulation will likely support activity despite signs of softer labor conditions. Europe and the UK are more vulnerable to volatile energy prices and face labor-market challenges but German fiscal expansion may offer some stabilization. China’s recovery remains policy-driven while Japan’s expansionary fiscal policy will likely lead to a steeper curve there. Credit markets remain supported by strong fundamentals and healthy de-mand, with issuance elevated by AI-related capex and M&A. Select parts of structured products and emerging markets (EM) also offer attractive relative value. Despite cross-currents from geopolitics and commodities, investor sentiment remains constructive.
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