As was easy to predict, market attention over the past month and recent days has remained focused on the developments of the conflict in the Middle East. With the ceasefire between the United States and Iran mostly respected, investors have witnessed a series of accelerations and slowdowns in negotiations to find a solution to the conflict.
TECHNOLOGY CONTINUES TO RALLY, WHILE RATES MOVE UPWARDS
One of the key themes for the markets remains the impact of the conflict on inflation and growth. The rise in oil and commodity prices (such as fertilizers) is already fueling a reacceleration of inflation: in the United States, consumer inflation rose to 3.8% in April, while in the Eurozone we have returned to levels around 3%. As we will see later, the concern is of an even greater impact as higher production and transportation costs for goods are passed on to consumers.
The bond market seems to clearly reflect the upside risks to inflation. Yields have temporarily hit new highs for the period, with the 10-year Bund rate close to 3.2% – a level not seen since May 2011 – and the US Treasury rate temporarily surpassed 4.6%, not far from the highs of January 2025. Expectations for the Fed have shifted to a more restrictive stance, with the market now pricing in a rate hike by the end of the year.
Turning to the equity market, the trend appears much more resilient compared to the bond world. Despite episodes of volatility linked to negotiation phases and some tactical sell-offs, global indices remain close to recent highs, supported by earnings strength and the contribution of the technology sector, the true protagonist of recent weeks, with double-digit average gains both in the United States and Europe. At the index level, new all-time highs have been recorded in the United States, with the MSCI USA index up more than 10% from pre-war levels (at the end of February the index was practically flat year-to-date). European indices have moved more sideways for much of the period since the last webinar but accelerated in recent days, returning to pre-conflict levels with last Friday’s close, marking a gain of over 7% year-to-date.
To summarize, this apparent disconnect between equities and bonds represents one of the most significant elements of the current market phase. On one hand, bonds price in a less favorable inflation outlook and a more restrictive central bank reaction; on the other, equities continue to price in a resilient macroeconomic environment where the oil shock does not translate into a marked contraction in demand. We can define the current scenario as a “soft stagflation” scenario: growth still positive, although under pressure especially in Europe, and tighter price dynamics. Diplomatic developments aimed at resolving the conflict will have a crucial impact in determining which force (inflation vs growth) will prevail in the coming months.
NEGATIVE MACROECONOMIC SURPRISES IN THE EUROZONE
Let’s now look at the growth figures. As mentioned, macroeconomic surprise indices for the Eurozone have slipped into clearly negative territory, with high energy costs beginning to impact the confidence of households and businesses. Preliminary estimates for the first quarter show a slowdown in real GDP growth to just +0.1% quarter-on-quarter. Zero growth in France, the slowdown in Italy (+0.2% from +0.3%) and Spain (+0.6% from +0.8%), as well as a technical factor related to the very volatile Irish GDP due to US multinational activity, weigh on the figures. Germany is the only major Eurozone country to record an acceleration on a quarterly basis (from +0.2% in Q4 2025 to the current +0.3%), but annual growth for the German giant remains just above zero despite declared fiscal stimuli.
Looking at higher-frequency indicators, growth concerns are confirmed by the weakening of the Services PMI index, which fell to 46.4 from 47.6 in April. This is a territory – well below the 50 threshold – consistent with a contraction in economic activity in the coming months. The manufacturing sector remains more resilient but still shows a decline, with the Manufacturing PMI at 51.4 (down from 52.2). On the positive side, unemployment remains very low (at 6.2%), but consumer confidence is well below pre-conflict levels, suggesting the negative impact of rising prices on household purchasing power.
Looking at the United States, the outlook is certainly rosier. The macroeconomic surprise index has even improved, reaching the highest levels in the last three years. Real GDP data for the first quarter were slightly below expectations (+2.0% annualized vs +2.3%), but the annual growth rate settled at +2.7%, more than triple the growth rates of the Eurozone. Business confidence indices remain more supportive than in Europe. The ISM Manufacturing index remained unchanged at 52.7, while the Services index slightly fell from 54.0 to 53.6, thus remaining at a level consistent with growth around or slightly above potential. Regarding the labor market, we remain in a context of slow job expansion, but data are above expectations (+123,000 jobs created in April versus 75,000 expected). The unemployment rate is at 4.3%, the lowest in the last six months, suggesting that the phase of greater weakness at the end of 2025 is behind us.
Despite this divergence in the most recent data, analyst estimates do not seem to differentiate much between the two areas, both experiencing a slight downward revision in growth forecasts for 2026. For the Eurozone, estimates have moved from +0.9% last month to the current +0.8%; for the United States, from +2.2% to +2.1%. Estimates for 2027 remain unchanged, respectively at +1.3% and +2.0%.
As already mentioned, developments in the Middle East conflict and commodity price dynamics will be important to assess the medium-term growth impact. Oil around current levels in the coming months, once short-term household maneuvers (lower savings, more debt) are exhausted, would likely lead to a slowdown in consumption. Conversely, a rapid and lasting resolution of the conflict would especially help the Eurozone, which is more dependent on energy imports.
HEADLINE INFLATION RISES SHARPLY IN BOTH THE US AND EUROZONE
As anticipated, April saw a clear acceleration in price increases, with overall inflation rising to +3.8% year-on-year in the United States and +3.0% in the Eurozone. This represents an increase of 1.4 and 1.1 percentage points respectively compared to February figures, confirming the significant impact of rising energy goods prices. The core component moved much less. In the United States, it stands at +2.8% (+0.3 percentage points from pre-conflict levels), while in the Eurozone it is +2.2%, even two tenths below February levels.
So far, the acceleration in the headline component is driven by the increase in energy goods, which show year-on-year rises of 17.9% in the US and 10.8% in the Eurozone. Conversely, we have not yet seen – or at least recorded in official numbers – significant increases in food prices, which remain at +3.1% in the US and +2.4% in the Eurozone. This component is probably the next to show an upward movement, as fertilizer prices remain well above pre-crisis levels, as do transportation costs. The rise in the producer price index – which jumped to +6.4% in the US compared to +1.6% in February – should progressively be passed on, at least in part, to consumer prices. It is therefore reasonable to expect a further acceleration in consumer inflation numbers in the coming months.
Regarding core inflation, dynamics are less worrying. Non-volatile services inflation stands at +3.1% in the United States (a couple of tenths up from March) and +3.0% in the Eurozone, the lowest level since March 2022. The latter is an important factor because it suggests a lower risk of so-called “second-round effects,” i.e., the risk of higher wage pressures resulting from the incorporation of temporary increases in exogenous factors such as oil. Monitoring this factor is important because it determines the likelihood and magnitude of future rate hikes by central banks.
Looking at analyst estimates, upward revisions are more significant in the United States. The average inflation forecast for 2026 moves from +3.1% last month to the current +3.5%, while in the Eurozone the increase is from +2.7% to +2.9%. Numbers for 2027 are little changed, respectively from +2.5% to +2.4% in the US and from +2.0% to +2.1% in the Eurozone.
MONETARY POLICIES
Despite the current market volatility, market pricing for the Federal Reserve has become decidedly less accommodative. The rise in inflation – both consumer and producer prices – and the resilience of the US economy have made previously priced-in rate cuts unlikely. Furthermore, within the FOMC itself, several members seem reluctant to indicate the possibility of cuts in this context.
Given these factors, market pricing has shifted from a scenario of slightly lower rates last month to now seeing a possible hike by the end of the year. Last Friday, 24 basis points of hikes were priced in by year-end and 37 basis points by mid-2027. In the short term, however, no movement is expected. It will be interesting to see the indications from the new Fed chair, Kevin Warsh, at the next meeting on June 17.
Looking at the Eurozone, the ECB has also seen an upward adjustment in market pricing, which has moved from +38 basis points priced a month ago to the current +65 basis points. These are equivalent to two and a half rate hikes by the ECB by year-end. Unlike the United States, which hit the highest level since the start of the year, the ECB is slightly below the peak of +80 basis points seen in the weeks immediately following the start of the conflict.
In practice, after the decision to keep rates steady (deposit rate at 2%) at the end of April meeting, the market clearly sees the possibility of a precautionary hike by the ECB at the next meeting on June 11. Any future hikes remain dependent on a concrete risk of second-round effects. We can monitor services inflation in the Eurozone as a key indicator in this context. In case of an acceleration well above the current 3% level, the risk of new hikes would be real.
FINANCIAL MARKETS AND OUTLOOK
We have already mentioned at the start the volatile trend of core rates, with Bunds essentially flat over the period, against a rise of about twenty basis points in US rates. Regarding spreads, we observe a reassuring trend. The 10-year BTP-Bund spread temporarily rose towards 85 basis points driven by the rise in oil but then returned to around 70 basis points, about ten basis points above pre-conflict levels. Credit has proven even more resilient, with an Investment Grade spread of 77 basis points, 5-6 basis points above the year’s lows. The High Yield segment is also tightening decisively.
Equity markets have seen outperformance in the US, Japan, and Emerging Markets compared to Europe, but in recent days the latter has shown signs of greater vitality. In terms of themes, the technology sector, as mentioned, posted monthly double-digit gains again, supported by solid revenue and earnings growth. More challenged are gold stocks, with gold struggling to recover due to high interest rates, and European defense stocks.
Looking ahead, hope for an agreement on de-escalation of the Middle East conflict remains the main driver for the market in the short term. Progress in negotiations suggests a more constructive positioning in those markets and sectors that have suffered the most and lagged in the rebound phase. Consequently, a more constructive stance on the Eurozone appears appropriate, particularly through a further increase in overweight on the banking sector – always supported by strong profitability – and the tactical closure of underweights in the consumer sector – penalized so far by growth fears and the impact of rising oil prices. Obviously, this positioning is tactical in nature and conditional on a progressive normalization of the conflict.
Regarding the outlook for the bond market, a generally neutral stance appears appropriate at these levels, while we are inclined to increase duration exposure during market weakness. European rates are currently at the lower end of the recent trading range and, barring a sharp drop in oil prices that would rule out possible ECB hikes, we do not believe there is room for a material decline from current levels. A neutral positioning still allows exposure to a historically high yield consistent with the Eurozone’s potential growth rates, as well as the carry offered by strategies on BTPs and credit.
Summarizing the portfolio positioning, we can say this:
- On the government side, we remain neutral on duration, both in Europe and the United States. We take advantage of any European rate hikes to tactically increase duration, then take profits around current levels. 2.9% – 3.2% for the 10-year Bund is the range we consider for this type of tactical operation.
- The US segment has underperformed the European one, in line with our expectation of a relatively more constructive approach for the latter in case of rising yields. The transatlantic spread has moved from 130 basis points a month ago to the current 150-155 basis points. The relative entry point for the US has therefore improved, but we do not expect a lasting compression of this spread. In case of a similar rate increase, we continue to prefer the European side to extend portfolio duration.
- Regarding spread instruments, we maintain a neutral approach on both BTPs and European credit. Italy is exposed to downside growth risks stemming from high energy costs, and from the current spread level (70 basis points) we do not see room for significant tightening. Similarly, European credit spreads are very tight, also thanks to good corporate fundamentals. We maintain a focus on medium-short maturities and high-quality issuers, maximizing remuneration per unit of duration risk, while preferring the government curve to extend portfolio duration.
- In the emerging markets segment, real yields offered by local currency bonds from countries such as Brazil, Colombia, and Mexico remain attractive, offering a tactically better entry point than a month ago after market rate increases. The strategy on Hungary has continued to deliver very high performance, with yields falling and currency strengthening. At current levels, we are starting to take profits while evaluating a possible entry into the Polish local currency market.
- Concluding with the equity segment, as mentioned, we assume a more constructive tactical positioning on the European side, particularly the Eurozone, confident of progress in diplomatic negotiations for reopening the Strait of Hormuz. Looking at themes, we maintain a constructive stance on the US technology sector and European banks – both supported by solid revenue and earnings dynamics. On the European defense sector, we maintain an overweight, albeit tactically reduced, using the proceeds from this reduction to finance an increase in positions on European banks and tactically close the underweight in the European consumer sector. On gold stocks, we maintain an overweight, despite the poor recent performance, as we consider gold an important factor in protecting purchasing power in a world with high inflation.
