Temporary relief in financial markets conditioned by an unstable geopolitical balance
By Mario Catalá
The announcement of a temporary two-week truce between the United States and Iran has been the main trigger behind the behavior of financial markets during the first sessions of April. The initial reaction was clearly positive, with a strong rebound in risk assets and a significant drop in sovereign bond yields, while expectations of interest rate hikes were revised downward. However, the lack of visibility regarding the solidity of the agreement and the continuation of negotiations has kept volatility at elevated levels, highlighting the fragility of the ceasefire, which could be considered over at any moment.
Regarding economic repercussions, the main focus for the investment community remains the evolution of energy prices: although Brent crude corrected by up to 15% in a single session following the truce, a geopolitical and energy risk premium persists that will hardly allow prices to return to pre-conflict levels, at least in the medium term, with Asia and Europe being the most vulnerable regions due to their dependence on crude oil from the Middle East.
United States
The U.S. economy has not yet shown signs of weakness, one month after the start of the armed conflict. Leading indicators continue to provide a mixed but reasonably solid picture. The manufacturing PMI for March strengthened in expansion territory, rising to 52.3, while the services PMI corrected notably to 49.8, reflecting some slowdown in the tertiary sector. In terms of growth, Q4 2025 GDP was revised downward to 0.7%, affected by the 43-day government shutdown. For Q1 2026, the Atlanta Federal Reserve places its forecast at 1.3%. Consumption continues to show strength: February retail sales grew by 0.6%, exceeding estimates and with a significant improvement in the underlying component. Consumer confidence has also surprised positively according to The Conference Board, rebounding in March to 91.8, in clear contrast to the University of Michigan survey, which shows a sharper correction (from 56.6 down to 53.3). In the labor market, nonfarm payrolls for March significantly exceeded expectations with 178,000 jobs created, although with downward revisions to the previous figure. The unemployment rate improved to 4.3%, maintaining its downward trend.
Regarding inflation, the market is pricing in a rebound in March CPI to 3.4%, with an increase also expected in core inflation. The Federal Reserve kept rates unchanged in March, and the market has drastically shifted its expectations, moving from anticipating cuts in 2026 to pricing in prolonged stability and even the possibility of additional hikes. However, these rate expectations are changing drastically week by week, in a context driven by developments in the war and sharp movements in oil prices.
Europe
The European economy has shown weaker signs in March, undoubtedly influenced by Brent crude prices above 100 USD/b, with a direct and significant impact on inflation. PMIs reflect a divergent evolution: the manufacturing PMI surprised positively, rising to 51.4, while the services PMI corrected to 50.2. Q4 2025 GDP stood at 1.2%, below expectations, although within the estimated range for the year as a whole. February retail sales fell by 0.2%, and the ZEW investor confidence index suffered a significant collapse to -8.5 (previous reading: +39.4), clearly reflecting pessimistic sentiment among investors stemming from the Middle East conflict.
The labor market remains one of the most resilient elements, with an unemployment rate of 6.2%, close to historical lows, although with a slight increase in the number of unemployed. Rising bond yields and higher energy costs are clearly negative factors for investment and future growth. On the price front, preliminary March CPI rose sharply to 2.5%, while core inflation, which excludes fuel price fluctuations, edged slightly lower to 2.3%. The European Central Bank, for its part, kept rates unchanged in March, leaving the deposit facility at 2%, although the market has begun to price in possible additional hikes to counter inflationary pressures stemming from the energy shock.
China
China has taken a back seat in the news flow since the start of the war, although available macroeconomic data for March has been positive. PMIs improved slightly and moved into expansion territory, with the manufacturing PMI at 50.4 and the services PMI at 50.1 (both above market expectations). After closing 2025 with 5% growth, the Chinese government has set a 2026 growth target in the range of 4.5% to 5%. Particularly noteworthy are February trade data, with strong growth in exports (+21.8%) and imports (+19.8%), well above expectations.
Inflation has also rebounded significantly: February CPI rose to 1.3%, driven by seasonal factors, higher commodity prices, and reduced industrial deflation, with PPI at -0.9%.