Last Friday, the S&P closed at record highs, while the VIX index, which measures market volatility on the S&P 500, remains at relatively low levels. In fact, the VIX index is at 17 at the time of writing, a value below the long-term average, after peaking in March due to concerns related to the Middle East. We have also witnessed a strong rally in the United States and other markets, despite the Strait of Hormuz remaining closed, energy supplies being under pressure, and a concrete peace agreement still far off.
THE ENERGY SHOCK SEEN FROM THE MARKETS
Resolving this stalemate is crucial for financial markets and the global economy. It seems that equity markets are not fully accounting for the long-term impact of what the International Energy Agency (IEA) calls the largest energy shock in history.
On the contrary, markets have recorded an upward trend from the lows hit in March, largely supported by a positive earnings season in the United States, particularly in the technology sector.
Southeast Asian markets have also stood out for their impressive gains, not least South Korea, which has generated returns of around 80% year-to-date. Bond market movements, however, suggest a more challenging environment, with markets reflecting the likely impacts of the events.
THE PERFORMANCE OF THE UNITED STATES
Regarding geographic dispersion among markets, the current strong performance of the United States is in sharp contrast to the previous 12-18 months, during which the country lagged behind several other regions. Exceptional returns in the technology sector have been the main driver, but it is important to remember that US indices have been driven higher by a relatively narrow group of large companies.
Looking on the bright side, it should be noted that the strong earnings performance has extended across the entire market. If the conflict were to end, would we see a fading of the US outperformance compared to other regions? Earnings have been generally satisfactory across all geographic areas, so we will probably need to wait and see.
VOLATILITY BETWEEN ASIA AND EUROPE
Looking specifically at UK assets, a strong climate of political instability remains, with Prime Minister Kier Starmer under continuous pressure. Given the uncertainty regarding a possible challenge to his leadership, we will likely see an increase in the risk premium on Gilts until greater clarity emerges.
Despite the VIX index indicating a decrease in volatility, we continue to identify risks, particularly related to constraints in energy supply. Asia and Europe appear to be the most affected regions, given their dependence on energy imports.
All things considered, the overall economic environment remains relatively favorable, and we maintain a slightly positive view on equities. Positions are, however, constantly under review, and we are closely monitoring data reflecting the impact of the energy shock.
