Ongoing conflict lifts inflation expectations
With the Middle East conflict now entering its second month, high energy prices have produced knock-on effects across global financial markets. The US and European breakeven curves surged as markets repriced inflation expectations and the likelihood of central-bank rate cuts. Nominal yields, particularly at the short end, also rose sharply in countries including the UK. At this stage, some of this reaction seems excessive to us. We think the length of time that energy prices remain high will determine the second‑round inflationary effects.
On the growth front, markets do not appear overly concerned at present. We believe persistently high energy prices would weigh on consumption and growth. Overall, this crisis is generating stagflationary pressures across the global economy.
Our main convictions are outlined below:
• The impact on inflation will vary across regions, with the eurozone (EZ) likely to be more affected than the US.
• US-dollar strength is back in focus — Although the dollar may be resilient in the near term because of its safe‑haven characteristics, we expect the longer‑term secular weakening to continue.
• European and emerging-market countries reliant on energy imports from the Gulf are seeking to stay out of the conflict — EU and UK leaders have declined calls from US President Trump to participate in the fighting.
• Overall, we believe EM growth will remain robust and see no secular reason for this to change. Fiscal and macroeconomic metrics in emerging markets are improving — macroeconomic orthodoxy has returned to many EMs.
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Date of first use: 2 April 2026
Doc ID: 5343571