Week of 9 March

The US-Israel attack on Iran dominated the markets last week despite a fairly active economic calendar that included US NFP and global PMI figures. Brent opened the week above $82 per barrel and was on track to end at over $87 by Friday. The dollar gained almost 1.5% in the week, shy of 100.00.

The week ahead has a fairly light economic calendar, with US inflation figures and UK GDP data coming, but markets could be more affected by developments out of the Middle East.

Week in Review

The week started with the reaction to the US-Israeli war on Iran over the weekend, which saw the deaths of many of the leaders in Tehran and the closure of the Strait of Hormuz. Traders tried to anticipate the impact of a prolonged war, with rising energy prices pressuring inflation as a main theme. European stocks posted their worst two-day drop since last April, while markets moved to price out an ECB rate cut this year (previously at around 50% odds). The Far East experienced even greater turmoil due to its heavy reliance on fuel imports from the Middle East. Some Asian oil refiners reportedly considered run cuts amid difficulties in obtaining crude. Japan and South Korean indices tanked, with the latter posting the worst performance on record after multiple circuit breakers were triggered. Asian stocks had the worst weekly performance in six years.

Markets recovered in the latter half of the week after the US said it would offer risk insurance and naval escorts for the Strait of Hormuz. The US Treasury announced it would provide waivers to allow the purchase of Russian oil amid the crisis, and Trump said further measures to alleviate oil supply would be announced. Depreciation in the yen caused Japanese officials to intervene verbally, reminding traders of agreements with the US to prevent the currency from falling, and some companies cancelled bond sales amid high volatility.

The dollar strengthened through the week amid strong safe-haven flows as investors sold equities and dived into money markets. The euro retreated as investors worried that higher energy prices could slow the already sluggish economy. The shared economy could face increased inflation as shipping companies cancelled sailings through the Suez Canal. Spain refused to allow the US military to use its bases, prompting Trump to threaten to cut off trade, widening investor concern.

In a speech on Monday, RBA Governor Michelle Bullock said that every meeting was "live", opening the possibility of an interest rate hike at the next meeting. The odds of a March back-to-back tightening jumped from 0% to 27%.

Broadcom posted strong earnings on Wednesday but was unable to revive the tech trade, as the war in Iran has accelerated the rotation into more defensive positions and industries.

At the start of the National People's Congress, the Chinese government set a lower 4.5-5.0% GDP growth target for this year, the lowest since 1991, and suggested that further monetary easing could help support the economy.

Biggest Market Movers

• The dollar posted its largest weekly gain in a year amid safe-haven flows and investors cutting exposure to the Middle East.
• The euro was the worst-performing major currency amid concerns about exposure to the Iran conflict.
• Brent jumped at the start of the conflict and continued to rise through the week for the best performance in four years.
• Gold initially jumped to $5,400 but trended lower through the week as equities came under pressure, boosting liquidity demand.
• The Stoxx600 is set for the worst weekly performance since April of last year, losing 4.7% over the last five days as investors worry about the impact of the Middle East war.

Top Events in the Week Ahead

The evolution of the war in the Middle East is likely to be the dominant factor for the markets, potentially overshadowing even the economic data. Traders will focus on indications of how long it could last and updates on measures to mitigate crude oil supply concerns. China's National People's Congress will continue through the week, but the key developments from the event have already come out. On the data front, the theme of the week will likely be inflation, with US CPI and delayed PCE figures being published ahead of the March FOMC meeting. The Fed will be in its pre-rate decision blackout period, leaving the market to react to the data without commentary from officials.

US Inflation Could Be Old News

The US February CPI comes out on Wednesday and is expected to show headline inflation stayed unchanged at 2.4%. The core rate is also anticipated to match the prior month's 2.5%. With inflation above target, hopes for an FOMC rate cut have been pinned on the jobs market, which means this data figure might already have a smaller impact on the market. On top of that, the focus might now turn to the effects of higher energy prices resulting from the war in the Middle East, which could leave markets indifferent unless there is a major deviation from expectations. On Friday, the Fed's preferred inflation metric, core PCE, is released, but it's from January and was delayed by the government shutdown. It, too, is expected to be unchanged at 3.0%. It is going to be an interesting week for gold, given its recent drop to the $5k handle. The conflict and US data will determine whether the yellow metal revisits $4860 or $5340.

UK Economy to Struggle On

The UK's monthly January GDP growth is out on Friday and is expected at 0.1%, the same as in December. The annual rate is anticipated to rise to 1.2% from 0.7%, mostly due to comparables. Sluggish growth is expected to keep the door open for rate cuts, but inflation concerns over higher energy prices could force the BOE's hand. As it comes out at the end of the week, cable is more likely to be affected by the greenback. Losing 1.3300 and the swing low of 1.3250 will expose the 1.3200 psychological support, while firmness at the former level would suggest a bounce back towards 1.3430.

China Trade Remains Solid

On Tuesday, China will release its February trade data, with its surplus expected to jump to $165 billion from $114 billion in January. However, that could be due to the Lunar New Year and slower imports. As geopolitical tensions heat up, traders may seek reassurance that international trade is recovering from the effects of tariffs. Markets will also be paying attention to ongoing discussions between China and the US ahead of a much-anticipated meeting between Trump and Xi later in the month. With AUDUSD back below 0.7000, the week might determine whether the pair revisits 0.7150 or declines further towards 0.6900.

Other Events and Earnings

Monday has Chinese inflation figures. Tuesday includes Australia's Westpac survey on consumer confidence and NAB business confidence. Japanese PPI comes out on Wednesday. For Thursday, US housing starts are expected. Friday sees Canadian jobs data.

Notable names expected to report earnings this week include Oracle, Adobe, Lennar, Robert Waters and Balfour Beatty.