Global equities (-2.5%) fell in the first quarter of 2026, as the US-Israel military actions against Iran triggered a global energy shock, driving oil prices sharply higher and shifting the focus back to inflation and macroeconomic risks. This shock unfolded alongside a more protectionist global trade backdrop, highlighted by the US implementation of a 10% global tariff following the Supreme Court’s rejection of earlier tariff measures — further complicating the global trade outlook. At the same time, divergence in monetary policy across major economies reinforced an increasingly fragmented macroeconomic environment, with the central banks of inflation- and energy-sensitive countries maintaining tighter policy stances while others moved more cautiously toward easing. Although corporate fundamentals remained broadly resilient, equity markets sold off as valuation multiples compressed under the weight of higher risk premia. These crosscurrents increasingly fed into broader macro dynamics, including renewed inflation sensitivity and reduced scope for monetary easing. As a result, the global economy faces a more challenging path forward, marked by potentially tighter financial conditions and heightened downside risks.

Global fixed income markets faced a more challenging backdrop in the first quarter of 2026, as persistent inflation pressures, shifting expectations for central bank policy, and a range of global macro developments pushed yields higher and increased volatility. Commodities (+40.0%) rallied in the first quarter, primarily driven by a jump in energy, with precious metals, industrial metals, and agriculture & livestock also adding to gains.

Equities

United States
US equities (-4.3%) ended lower in a volatile quarter, as shifting market sentiment between fears of a prolonged war in Iran and hopes for a quick resolution spurred considerable uncertainty about the path of inflation and economic growth. The US Federal Reserve (Fed) held interest rates unchanged during the quarter, with the Fed’s quarterly “dot plot” in March showing only one projected interest-rate cut in 2026. However, Fed Chair Jerome Powell stated that the bank’s outlook for interest rates, inflation, and the labor market was highly uncertain, as policymakers grapple with the economic implications of the war in Iran and the inflationary effect of spiking crude oil prices. Growth stocks significantly underperformed their value counterparts over the quarter, as investors rotated toward cyclicals and more defensive areas of the market amid anxiety about the disruptive influence of AI on the technology sector, particularly software and data services companies. Fears spread to private equity firms and lenders with significant exposure to the software industry, with several funds seeing redemption pressures and limiting withdrawals. The Supreme Court struck down US President Donald Trump’s global tariffs, undercutting his key economic policy and setting the stage for a prolonged legal battle for as much as US$170 billion in tariff refunds for importers. President Trump immediately responded with 10% tariffs on most foreign imports to the US for a period of 150 days.

Economic data released during the quarter was mixed, but the economy appeared to be on a firm footing. In February, a rise in the unemployment rate to 4.4% and a surprisingly large 92,000 decline in nonfarm payrolls cast doubt on views that the labor market has stabilized, although the sharp drop in jobs was partially due to a series of temporary disruptions. Subdued continuing and initial jobless claims during the quarter still suggested a “low hire, low fire” labor market environment. After three consecutive monthly declines, retail sales rose at a solid 0.6% pace in February. Economists anticipate that larger tax refunds in 2026 and tax cuts will boost consumer finances and provide a tailwind to purchasing; however, soaring gasoline prices and the broader financial impacts of the Iran conflict threaten to undercut spending. Volatility in the Conference Board’s Consumer Confidence Index reflected ongoing concerns about the labor market and the prospect of higher inflation over the next 12 months due to tariffs and surging oil prices. A swift rise in mortgage rates in March was a blow to the sluggish housing market, reducing affordability and refinancing activity ahead of the critical spring homebuying season. The Institute of Supply Management manufacturing and services indices rose to their highest levels since August 2022.

Within the S&P 500 Index (-4.3%), five of the 11 sectors posted negative results for the quarter. Financials (-9.4%) was the worst-performing sector, led lower by financial services (-10.27%) and capital markets (-10.0%). Consumer discretionary (-9.2%) and information technology (-9.1%) also underperformed. By contrast, energy (+38.3%) was the best-performing sector followed by materials (+9.7%) and utilities (+8.3%), which also outperformed.

Europe
European equities (-0.9%) ended lower in the first quarter. Macroeconomic indicators released during the quarter bolstered optimism about a gradual economic recovery in Europe and the UK. However, damage to energy infrastructure in the Middle East and the near closure of the Strait of Hormuz in March delivered simultaneous energy and inflation shocks to Europe, heightening market volatility and significantly altering the economic and policy outlooks for financial markets and the region’s central banks. Eurozone business activity almost stalled in March as inflation expectations surged and supplier delivery times soared. The S&P Global Flash Eurozone Purchasing Managers’ Index (PMI) fell to a 10-month low of 50.5, driven by near stagnation in services sector activity. Notably, German output slowed but continued to expand, while French business activity contracted further. The European Central Bank (ECB) lowered its GDP growth forecast for 2026 to 0.9%, from 1.2%, and significantly lifted its headline inflation forecast to 2.6%, from 1.9%, while leaving interest rates unchanged for the sixth consecutive time. ECB President Christine Lagarde warned that the bank could increase rates as early as April if the inflation shock spirals out of control. The central banks of Norway, Sweden, Switzerland, and the UK kept interest rates steady. Annual eurozone headline inflation jumped to 2.5% in March, from 1.9% in February, as soaring energy prices pushed inflation to its highest level since January 2025. Core inflation surprisingly eased to 2.3%. According to LSEG, fourth-quarter earnings for companies in the STOXX 600 Index are forecast to decrease 2.0% from a year earlier.

In March, the S&P Global Eurozone Manufacturing PMI continued to expand, hitting a 45-month high of 51.6 amid modest growth in production and new orders. However, the Middle East conflict upset the recent positive momentum in the sector, as input prices accelerated to their highest level since October 2022, while output prices rose at a faster pace. The S&P Global Flash Eurozone Composite PMI revealed that services sector activity continued to expand in March for the tenth consecutive month, yet activity slowed to near stagnation. Both input costs and output price inflation increased at a faster pace. The European Commission’s Economic Sentiment Indicator decreased to 96.6 in March; industry confidence remained broadly stable, while consumer confidence fell drastically.

Germany’s (-6.6%) manufacturing sector showed encouraging signs of recovery, as activity in March expanded at its quickest pace since May 2022. Higher rates of output and new-order growth lifted the headline S&P Global German Manufacturing PMI to 52.2, despite signs of increasing stress on supply chains. However, the ZEW Indicator of Economic Sentiment plummeted by 58.8 points to -0.5 in March, far below market expectations of 39, reflecting concerns about energy prices and inflation pressures. The UK’s (+4.0%) economy unexpectedly flatlined in January, as the dominant services sector struggled. Furthermore, the S&P Global Flash UK PMI Composite Output Index indicated a marked slowdown in business activity during March, as input prices and supply chains were heavily impacted by the war in the Middle East. Annual headline inflation was steady at 3.0% in February, but the combination of weak economic growth and rising inflation pressures posed challenges to the Bank of England. France (-3.5%) finally adopted a 2026 budget after Prime Minister Sébastien Lecornu survived a series of no-confidence votes after invoking Article 49.3 of the Constitution to push through a budget without a vote in the National Assembly.

Pacific Basin
Pacific Basin equities (+2.6%) ended the quarter higher despite a sharp decline in March spurred by war in the Middle East. Japan (+3.0%) entered 2026 with major political and policy shifts. Prime Minister Sanae Takaichi dissolved parliament and called a snap election in February in a bid to secure a larger majority to advance major policy changes. She also announced a two-year suspension of the sales tax on food, igniting a rout in Japan’s long-term bonds and underscoring fiscal sustainability concerns. Takaichi’s Liberal Democratic Party secured more than a two-thirds majority in the 465 seat lower house, giving her greater latitude to pursue a conservative agenda. The landslide result sparked a rally in equities, while yields fell as political uncertainty eased and markets gained confidence in the government’s fiscal plans. Japan’s economy showed encouraging signs of recovery. Fourth-quarter GDP growth was revised significantly higher to 1.3% annualized, supported by resilient consumption and business spending. Annual real wage growth of 1.4% in January was larger than expected and the highest in decades, offering a rare boost to household purchasing power. The Bank of Japan held interest rates stable at 0.75% during the quarter. However, it struck a hawkish tone in March amid solid underlying inflation and the threats to price stability from the energy shock, bolstering expectations for a rate hike in April.

In Australia (+0.6%), the Reserve Bank of Australia (RBA) delivered two consecutive 25‑basis‑point (bps) rate hikes during the quarter. The second rate hike in March was a narrow five-to-four split decision among policymakers, lifting the cash rate to 4.1%. These hikes reflected increasing concerns about mounting inflation pressures amid surging housing costs, resilient domestic demand, and persistent labor market tightness against a backdrop of solid economic growth. Australia’s fourth‑quarter GDP grew 0.8% from the prior quarter and accelerated to 2.6% annually, the fastest pace in almost three years. Inflation remained elevated in February, further reinforcing concerns about persistent underlying price pressures, even before the Iran conflict pushed energy costs sharply higher. RBA Governor Michele Bullock warned that turmoil in the Middle East could entrench inflation, prompting markets to anticipate additional tightening this year.

Singapore’s (-0.6%) economy ended 2025 on a strong footing as robust pharmaceutical and AI chip manufacturing helped to drive fourth-quarter GDP up by a robust 6.9% year over year, lifting GDP growth to 5.0% in 2025. In response, the Monetary Authority of Singapore (MAS) left interest rates unchanged for a third consecutive meeting, while the Ministry of Trade and Industry raised its 2026 GDP forecast to 2% – 4%, from 1% – 3%. However, the tone shifted considerably in March, as escalating conflict in the Middle East caused global energy prices to surge. The government warned that its economic forecast could be revised, and the MAS announced that it may adjust policy to safeguard medium-term price stability.

Emerging markets

Emerging markets (EM) equities (+2.2%) rose in the first quarter, with Latin America leading the gains, followed by Europe, the Middle East, and Africa (EMEA), and Asia.

In Latin America (+12.2%), Brazil’s (+14.5%) central bank modestly cut the benchmark Selic rate by 25 bps, to 14.75%, but lifted its 2026 inflation forecast from 3.4% to 3.9%, due to rising energy prices. The average tariff rate on US exports plunged 13.6% on a trade-weighted basis after the US Supreme Court invalidated US tariffs imposed under the International Emergency Economic Powers Act. Mexico’s (+8.1%) annual inflation increased more than expected to 4.02% in February, surpassing the central bank’s 3.0% target and increasing the likelihood that further interest-rate cuts would be delayed. The bank also raised its 2026 GDP growth forecast from 1.1% to 1.6% following stronger-than-expected economic growth in the fourth quarter.

In EMEA (+1.8%), Saudi Arabia (+9.3%) surged higher as Brent crude eclipsed US$100 per barrel, offsetting a 50% decline in oil exports in March due to Iran’s blockade on shipments through the Strait of Hormuz. To alleviate global oil shortages, Saudi Arabia began diverting over four million barrels per day (bpd) of oil to its Yanbu port in the Red Sea, a huge increase from previous levels, but still well below the roughly 20 million bpd that previously flowed through the Strait of Hormuz. South Africa’s (0.0%) central bank kept its policy rate at 6.75% as annual consumer inflation eased to 3% ⁠in February, but policymakers were cautious about the inflationary impact of rising energy costs. The government signed a framework agreement for a new trade deal with China, seeking new avenues for trade after the US imposed 30% tariffs on South African exports in August.

In Asia (+1.3%), China (-8.5%) set its 2026 GDP growth target at 4.5% – 5%, the lowest since the early 1990s. Lackluster consumer spending, weak inflation, property market strains, and trade tensions with the US continued to weigh on the economy, while the war in Iran constricted China’s oil supply and posed an additional headwind to growth. Factory activity remained the key impetus for the economy; industrial production expanded 6.3% year over year in the first two months of 2026, accelerating from 5.2% in December, while the manufacturing PMI modestly expanded in March after two months of contraction. Exports surged nearly 22% year over year in the first two months of 2026, supported by strong shipments of computer chips, autos, and electronics. However, the prolonged property slump dampened consumer confidence and spending, with a 3.2% year-over-year drop in new-home prices in February marking the steepest decline in eight months. Taiwan (+11.1%) signed a trade deal with the US in February that lowered tariffs on Taiwanese exports to 15% in exchange for an agreement to reduce 99% of tariff barriers on US goods, and a commitment to purchase over US$84 billion in US goods from 2025 to 2029. The central bank raised its GDP growth forecast for 2026 to 7.28% thanks to booming tech exports, but also raised its inflation forecast from 1.63% to 1.80%. South Korea’s (+24.1%) exports in March surged at their fastest pace in four decades on the AI-driven chip boom, rising 48.3% from a year earlier to US$86.13 billion. Stocks fell sharply in March amid concerns about the economy’s vulnerability to a prolonged disruption in energy flows. India (-13.9%) ended sharply lower as surging oil prices intensified foreign outflows, stoked inflation fears, and darkened the economic outlook for the world's third-largest crude oil importer.

Fixed income

Economic data remained generally resilient — particularly in the US — complicating the outlook for monetary policy and reinforcing higher‑for‑longer rate expectations. While inflation showed signs of gradual moderation, progress was uneven, and real yields moved higher as investors reassessed the timing and magnitude of potential policy easing. Heightened geopolitical tensions in the Middle East, and continued investment tied to the global AI‑driven infrastructure buildout further contributed to uncertainty around the growth and inflation outlook. Against this backdrop, global sovereign yields rose, yield curves flattened, and risk sentiment weakened as the quarter progressed.

Market performance reflected these evolving conditions, with early‑quarter stability giving way to greater volatility and dispersion across sectors. Rising yields weighed on duration‑sensitive assets, while spread sectors faced increasing pressure as risk premiums widened later in the quarter. Agency mortgage‑backed securities outperformed despite heightened rate volatility and reduced demand from traditional buyers. Corporate credit's performance was mixed, with investment‑grade spreads initially supported by resilient issuer fundamentals before weakening as rates rose and volatility increased. High yield underperformed as lower‑quality and more economically sensitive issuers came under pressure in a more cautious risk environment, though hopes for a ceasefire limited the extent of the spread widening.

Within securitized markets, performance was more differentiated. Non‑agency residential mortgage-backed securities demonstrated relative resilience, supported by strong collateral fundamentals, structural protections, and attractive carry that helped offset broader market volatility. Commercial mortgage-backed securities also held up relatively well, benefiting from generally stable underlying fundamentals, while asset-backed securities and collateralized loan obligation markets were broadly steady amid mixed technical and macro conditions. Inflation‑linked securities lagged as rising real yields and shifting inflation expectations outweighed support from episodic energy price volatility.

Currencies

Currency markets reflected divergent growth dynamics, shifting interest-rate differentials, and elevated geopolitical risk. The US dollar strengthened over the quarter, supported by resilient US economic data, firmer real-rate differentials, and renewed safe-haven demand amid geopolitical uncertainty. EM currencies were mixed, shaped by country‑specific fundamentals, commodity price exposure, and sensitivity to global risk sentiment. Periodic bouts of geopolitical and energy‑related uncertainty favored safe‑haven currencies and contributed to higher foreign exchange volatility, reinforcing broader cross‑asset trends during the quarter.

Commodities

Energy (+82.8%) surged during the period. Gas oil (+125.9%), heating oil (+116.8%), crude oil (+83.3%), and gasoline (+69.4%) surged sharply as escalating conflict in the Middle East triggered one of the largest supply disruptions in recent history, with oil flows through the Strait of Hormuz severely disrupted. The effective loss of millions of barrels per day, combined with attacks on energy infrastructure, drove a sharp rise in geopolitical risk premiums across crude and refined products. Emergency reserve releases helped to limit further upside, but prices still recorded their strongest monthly gains on record due to ongoing uncertainty over supply restoration. Natural gas (-3.0%) declined as warmer late‑winter weather cut heating demand, while record production and limited liquified natural gas export capacity left excess supply in the US, lifting storage and pressuring prices.

Industrial metals (+6.0%) ended higher. Aluminum (+18.5%) rallied as Middle East disruptions, Chinese production curbs, and reduced Russian supply tightened global availability, with high energy costs, low inventories, and strong end‑use demand adding support. Zinc (+4.3%) rose as supplies remained tight and London Metal Exchange inventories were low in western markets, which was due to smelter disruptions and a surplus of metal held up in China. Nickel (+2.3%) advanced on concerns over insufficient nickel ore supply from Indonesia relative to expected industrial demand. Copper (-0.7%) slipped on worries about global growth, weak demand in China, high inventories, and risk-off sentiment from Middle East tensions. Lead (-7.2%) was dragged down by weak battery-sector demand, particularly in automotive replacement, while ample primary and secondary supply, rising recycling volumes, and sufficient inventories further pressured prices.

Precious metals (+7.0%) ended higher. Gold (+7.1%) and silver (+6.3%) advanced as geopolitical tensions intensified, including frictions between the US and Europe over Greenland and conflict in the Middle East. Trade war concerns, questions around US policy credibility and Fed independence, and a weaker dollar supported safe‑haven demand, while tariff‑driven inflation risks, high global debt, and elevated volatility pushed both metals to record highs.

Agriculture & livestock (+4.9%) increased. Wheat (+21.0%) rallied as farmers withheld sales due to low prices, tightening near‑term supply. Weather risks in the US Plains, higher exports, shifting China‑related trade flows, and ongoing Black Sea disruptions added additional support. Soybeans (+11.4%) were bolstered by a tighter global supply outlook and rising geopolitical uncertainty, while higher crude oil prices boosted soybean oil values and biofuel demand. Feeder cattle (+9.2%) gained as packers competed for limited supplies, with expectations for even fewer feeders amid historically low cattle numbers and slow herd rebuilding. Lean hogs (+0.4%) increased on reduced slaughter and disease concerns. Coffee (-12.5%) declined as improved rainfall in Brazil lifted supply expectations, while strong Vietnamese robusta exports and Conab’s forecast for a record 2026 Brazilian harvest added further pressure. Cocoa (-46.3%) plunged as abundant West African output and favorable weather lifted surplus expectations, while weakened demand after a prolonged period of high prices curtailed consumption.