The first quarter of 2026 ended in a notably different market environment from the one investors had expected at the start of the year. What had been a relatively stable backdrop for global assets was disrupted late in February by the escalation of conflict involving Iran, with the resulting closure of the Strait of Hormuz becoming the central issue for markets.
Equity markets weakened over the quarter, although the declines were not uniform. Developed market equities fell in sterling terms, with the US market and technology-heavy indices under particular pressure. Japan delivered a positive headline return, but that masked rising sensitivity to higher imported energy costs. Emerging markets were more mixed, with commodity-linked exposure proving more resilient than countries seen as more vulnerable to an oil shock.
European government bond yields rose sharply as investors adjusted to the possibility that central banks might need to keep policy tighter for longer, or even raise rates, despite a weaker growth outlook. This created a more complicated fixed income environment than had seemed likely only weeks earlier. Higher yields can improve future income potential, but they also reflect stress in the system, particularly where public finances are already under pressure and governments have limited room to cushion households and businesses from higher energy costs.
Central bank expectations were therefore reset. In Europe, the market moved from discussing the possibility of further cuts to contemplating rate increases. In the UK, the path towards lower rates became less clear as policymakers faced the familiar problem of energy-driven inflation colliding with softer demand. In the US, the picture remained more balanced because of the country’s different energy position and the Federal Reserve’s dual mandate, but policy expectations still became less predictable.
Commodities were the clearest expression of the quarter’s new risks. Oil and gas prices rose sharply as supply concerns intensified, turning energy exposure into one of the few areas of strength. Gold and silver, despite their traditional haven status, were more volatile than some investors might have expected. Precious metals initially benefited from the rise in geopolitical tension, but later gave back ground as bond yields rose and investors sought liquidity. Mining shares also came under pressure as higher energy costs raised concerns about margins.
Against that backdrop, the most effective positions were those linked to energy, cash, developed market property and ultra-short fixed income. Areas that struggled included precious metals, mining shares and equity exposure in markets seen as especially sensitive to an oil spike, including parts of Europe, the UK, Japan and selected emerging economies.
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