Dear Investor

General Market Overview

Despite the positive stock market performance, the quarter was shaped by the outbreak of full-scale military conflict in the Middle East, which rapidly transformed an already uncertain inflation environment. On 28 February 2026, the United States (US) and Israel launched coordinated airstrikes on Iran, Operation Epic Fury, targeting military facilities, nuclear infrastructure, and senior leadership, resulting in the death of Supreme Leader Ayatollah Ali Khamenei. Iran’s swift retaliation of missile strikes on US military bases across Bahrain, Kuwait, Qatar, and the United Arab Emirates (UAE), and retaliatory attacks on Israel marked the most significant escalation in the Middle East in decades.

On 4 March 2026, Iran declared the Strait of Hormuz closed to commercial shipping, resulting in an immediate and acute disruption to global energy supply. Approximately 20% of all globally traded oil, along with substantial volumes of liquefied natural gas (LNG), passes through the Strait every day. The major exporters that depend on it include Saudi Arabia, Iraq, Kuwait, the UAE, and Qatar. Of the crude and LNG that typically flows through the Strait, around 84% is destined for Asian markets, with China, India, Japan, and South Korea the primary recipients. Europe, meanwhile, depends on Qatar for approximately 12–14% of its LNG needs. With traffic dropping to near zero, the International Energy Agency (IEA) described the closure as the “greatest global energy security challenge in history.”

Energy markets responded accordingly to the closure. Brent crude, which had been trading around $72 a barrel at the end of February, surged more than 55% to a peak of nearly $120 per barrel — its highest level since mid-2022, and one of the largest one-month increases in crude prices on record. Dubai crude briefly exceeded $166. Jet fuel in North America spiked nearly 95%, with major airlines imposing fuel surcharges on passengers. Shipping insurers began cancelling policies or materially raising premiums for vessels operating in the Persian Gulf. The IEA’s 31 member states unanimously agreed to release 400 million barrels of emergency reserves, roughly four days of global consumption, in an effort to stabilise markets.

On 8 April, a two-week ceasefire was announced, and Iran’s foreign minister briefly declared the Strait open to commercial traffic on 17 April, which sent crude prices down more than 10% in a single session. Those gains were unwound within hours after the US Navy seized an Iranian-flagged vessel, prompting Iran to re-impose restrictions. The Strait currently remains only partially functional, and the pattern of advance and reversal on ceasefire headlines made this an extremely volatile period for energy markets.

Some comparisons to the oil price environment of the 1970s have been made. There were two distinct shocks, in 1973 and again in 1978/79. In 1973, Organisation of the Petroleum Exporting Countries (OPEC) imposed an embargo on the US and Western Allies in retaliation for supporting Israel in the Yom Kippur War. The embargo led to crude prices quadrupling within months. The second 70s shock followed the Iranian Revolution and the Iraq-Iran War, which removed Iranian supply from the market. The economic consequences were severe: stagflation, a deep recession, and the US hiking interest rates to 20% to crush inflation. 

A key difference today is that the US is a net energy exporter and thus more protected from energy price spikes than in the 1970s. Also, in the 1970s, the inflation rate was already high before the OPEC embargo, and a loose monetary policy allowed oil prices to become fully “embedded” in wages and inflation expectations, producing a decade-long inflationary spiral. 

The price spike evident in 2008 was demand-driven and due to massive speculative flows into commodity markets, rather than to geopolitical supply disruption. 

At the time of writing, the fragile ceasefire continues to hold with a 60-day “memorandum of understanding” (MOU) reached on 25 May. The Strait remains closed to commercial traffic, and while the MOU makes it clear that Iran will not be able to impose tolls on the Strait and must remove all mines, that process has not yet begun. The oil price has fallen significantly over the month, closing below $90 per barrel, but is likely to remain highly volatile despite some diplomatic forward progress. 

The energy shock has had an immediate and significant impact on inflation globally. US Consumer Price Index (CPI) for March surged to 3.3% year-over-year (y/y), a full percentage point above the February reading, driven by a 21% monthly spike in gasoline prices. By April, CPI had accelerated further to 3.8% y/y, its highest level since May 2023, with energy prices up 17.9% over the past twelve months and gasoline up 28.4%. For the first time in three years, real average hourly wages fell, meaning that, in real terms, workers are taking home less pay. 

Importantly, inflationary pressures have not remained confined to energy. Core CPI, which excludes food and energy and is the Federal Reserve’s (the Fed) preferred indicator of underlying price trends, rose to 2.8% in April. Airfares are up 21% y/y, a direct pass-through of the jet fuel spike, and food prices are also rising, with beef up nearly 15% over twelve months. Food price increases are partly driven by higher fertiliser costs as the Persian Gulf region supplies a significant proportion of global urea and ammonia exports. The inflationary effect of a conflict of this scale and duration is broad-based, and many analysts have pushed out their timelines for any return to the Fed’s 2% inflation target.

The Fed has been holding rates steady at 3.50%–3.75%, despite inflation above its target. However, the Iran shock has added additional rate-path complexity. Monetary policy tools cannot increase oil supply, but allowing inflation expectations to become unanchored, as happened in the 1970s after successive oil shocks, is a risk for all central banks. 

The April Federal Open Market Committee (FOMC) meeting, which was very likely Jerome Powell’s last as Chair, was notable for the level of internal dissent. The committee voted to hold rates steady, but with four dissents, which is the most since October 1992 and reflects genuine disagreement about the path forward. This level of dissent means the near-term economic outlook remains very uncertain. 

Kevin Warsh was confirmed as the 17th Chair of the Fed by the Senate on 13 May 2026, in another divisive vote (54–45). Warsh, who served on the Fed’s Board of Governors during the 2008 financial crisis, has long advocated for tighter inflation discipline, a leaner central bank, and streamlined communication. His first FOMC meeting is scheduled for 16–17 June. Interestingly, Powell has chosen to remain on the Board of Governors, meaning the June meeting will feature both a new Chair and his predecessor. The rate path that unfolds at that meeting will likely depend heavily on how quickly energy-driven inflation begins to unwind, which is more a function of Middle East diplomacy than of economic data.

A structurally significant development of the quarter was the behaviour of the US Dollar amid acute geopolitical stress. Historically, the Dollar strengthens during global crises. When uncertainty rises, capital flows to US assets as a flight to safety, and the Dollar appreciates. This flight to safety has been a consistent pattern for decades. However, this quarter, despite the outbreak of active military conflict, an energy crisis, and elevated financial market volatility, the Dollar did not sustain the safe-haven bid that historical precedent would have suggested. 

The explanation appears to lie in a combination of structural and cyclical factors. On the structural side, concerns about US fiscal credibility, given that federal debt now exceeds $37 trillion, or more than 130% of Gross Domestic Product (GDP), have led global central banks to reduce their Dollar reserve allocations. The Dollar’s share of global reserves has fallen to 56.9%, a new low since 1995. BRICS (Brazil, Russia, India, China, South Africa) nations have accelerated their push to settle bilateral trade in local currencies. On the cyclical side, the tariff-driven policy uncertainty and the Iran war’s impact on US inflation expectations have made the Dollar itself a source of risk in some portfolio models, rather than a hedge against it. 

General Conclusion

Equity markets absorbed the shock of this quarter with surprising resilience, and a fragile ceasefire has allowed oil prices to pull back from their peak. However, the underlying geopolitical conditions that made this quarter so volatile have not been resolved.

The Strait of Hormuz remains functionally closed to commercial traffic, and the 60-day MOU is a diplomatic placeholder, not a settlement. Energy markets, in particular, will remain driven by news headlines and sentiment. 

What will define market performance over the remainder of 2026 is likely less about whether peace holds in the Middle East than about whether the global economy can sustain growth while absorbing permanently higher energy costs, a more hawkish Fed, a weakening Dollar, and a changing inflationary backdrop.