By Daniela Hathorn, senior market analyst at Capital.com
Markets are broadly maintaining a risk-on tone, although the pace of the rally has slowed. The tension between strong growth and persistent inflation remains a key driver. Recent US inflation data has been mixed, with PCE coming in slightly softer than expected while still pointing to inflation that remains above target. Markets have shifted away from debating rate cuts and are now focused on how long central banks will need to keep policy restrictive. Expectations for further tightening remain elevated in Europe, where the ECB is expected to adjust its policy next week to address inflationary pressures from energy markets.
On the geopolitical front, markets continue to price a gradual move toward a US-Iran agreement, although negotiations remain complex. Progress in negotiations has reduced some of the geopolitical risk priced into oil, though challenges persist and continue to cause fluctuations. The Strait of Hormuz remains constrained, and energy markets are still operating with a degree of disruption, leaving crude prices elevated relative to pre-conflict levels.
Looking ahead, attention will increasingly turn toward incoming economic data, particularly US labour market figures, as investors assess whether the current combination of strong earnings, resilient growth, and elevated inflation can continue. For now, risk appetite remains supported, but with stretched valuations and shifting monetary policy expectations, markets appear increasingly sensitive to any signs that the earnings and growth story may begin to soften.
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