Energy Shock Drives Hawkish Shift (23-27 March)

Global markets remained under pressure as the conflict in the Middle East entered a more volatile phase, driving Brent crude past $110/barrel, which is its highest level since mid-2022.

Iraq’s declaration of force majeure and drone strikes on Kuwaiti refineries have intensified supply fears, even as the IEA attempts emergency reserve releases. In response to this energy-led inflation, the major central banks, the Federal Reserve, ECB, and BoE, all held interest rates steady this month while adopting a notably hawkish "wait-and-see" posture.

The US Dollar Index climbed to 99.8 as safe-haven demand persisted, though it posted a slight weekly decline of nearly 1% following a volatile Friday session. While the Fed signaled one potential rate cut for 2026, the market is increasingly pricing in a "higher-for-longer" reality, with gold and silver experiencing their sharpest weekly drops in years as investors pivot toward yield-bearing assets.

Market Drivers & Catalysts

• Energy Supply Shocks: Brent crude surged past $110/barrel following refined product disruptions in Kuwait and Iraq’s widespread force majeure. Markets are currently pricing in a significant geopolitical risk premium.
• Central Bank Unity: The Fed, ECB, and BoE all maintained status quo on rates (3.5%–3.75%, 2.15%, and 3.75% respectively), but each raised inflation forecasts for 2026 due to the Iran-related energy crisis.
• Precious Metals Liquidation: Gold fell 2% to $4,570/oz, its largest weekly drop since 1983, while silver tumbled 14% on the week as surging Treasury yields and military escalations dampened the appeal of non-yielding assets.
• Yen Volatility: The Japanese yen rebounded to 158 per dollar after approaching the 160 mark. Hawkish dissent within the BOJ and a meeting between PM Takaichi and President Trump have kept traders alert for a policy shift.
• China's Industrial Resilience: China's industrial production grew a strong 6.3% in the January-February period, led by high-tech manufacturing (+13.1%) and a surge in industrial robot output (+31.1%).

Fixed Income

• US 10-Year Treasury Note Yield: Climbed 10bps to 4.37%, reaching a peak not seen since July 2025. The 2-year yield also rose to 3.9% as markets factor in the potential for a Fed hike by October if energy prices do not stabilize.
• UK 10-Year Bond Yield: Hit 5.0% for the first time since April 2008. Soaring energy costs and a surge in public sector borrowing to £14.3 billion have revived expectations for three UK rate hikes in 2026.
• Japan 10-Year Government Bond Yield: Rose to 2.26%. Despite the rate hold, BOJ board member Hajime Takata’s dissent for a 25bp hike signaled a growing internal push for normalization.
• Germany 10-Year Bond Yield: Reached 3.0%, its highest since 2011. The ECB’s revised 2026 inflation outlook (up to 2.6%) has solidified the market's belief in further tightening.

Commodities

Gold recorded a 2% Friday drop to $4,570/oz. The prospect of "higher-for-longer" rates and the potential for an October Fed hike have triggered heavy profit-taking.

Silver tumbled 5% on Friday to $69.5/oz, ending the week down 14%. The metal has now fallen for three consecutive weeks as it loses its shine to rising real yields.

Currencies

• U.S. Dollar Index (DXY): Recovered to 99.8. While it saw a weekly dip, it remains the primary beneficiary of geopolitical uncertainty and the Fed’s upgraded GDP forecast of 2.4% for 2026.
• Euro: Closed at $1.156. The single currency remains pinned by the ECB’s lowered growth projections (0.9% for 2026) and Europe’s extreme vulnerability to the current oil and gas price spike.
• British Pound: Fell below $1.34. Sterling is caught between the inflationary pressure of energy costs and concerns over the UK's fiscal stability following the latest borrowing data.
• Japanese Yen: Strengthened toward 158. The BOJ's hint at tighter policy and the cooling of regional military tensions late in the week allowed the yen to claw back some of its recent losses.

Economic Data Highlights

• US Fed Funds Rate: Maintained at 3.5%–3.75%. GDP forecasts were raised to 2.4%, while PCE and Core PCE inflation projections were revised higher for the next two years.
• ECB Policy Rate: Held at 2.15%. The bank raised its 2026 inflation forecast to 2.6% (up from December) and cut its growth outlook to 0.9% due to the Middle East conflict.
• BOJ Policy Rate: Kept at 0.75%, its highest since 1995. The 8–1 vote showed clear divisions, with dissenting calls for an immediate move to 1.0%.
• China Industrial Production: Accelerated to 6.3% (Jan-Feb), surpassing the 5.1% forecast. High-tech manufacturing and equipment manufacturing (+9.3%) were the primary growth engines.
• UK Public Sector Borrowing: Surged to £14.3 billion in February, the second-highest on record for that month, complicating the Bank of England’s inflation-fighting mandate.

Macro Calendar Highlights

• US Core PCE Price Index (February)
• China Manufacturing PMI (March)
• Eurozone CPI Flash Estimate
• OPEC+ Ministerial Meeting
• Japan Tankan Large Manufacturing Index