A seasonal central bank pivot

Posted 2 April 2026

We start April, and the new quarter, still very much dealing with the consequences of March. Both equity and bond indices’ prices are better since last Friday’s close as we write but the narrative is as febrile as at any point since the conflict began.

Part of this is because time is not on our side. With less than 10% of the usual shipping flow through the Straits of Hormuz, each day that passes means oil and gas reserves coming under more pressure. This is particularly acute for the usual oil and gas buyers from Asia. Europe’s flow of liquefied natural gas appears to be relatively steady, but the flow of refined oil products like diesel is under stress. European diesel prices topped €150 per barrel equivalent for both the current and next delivery months, double February’s levels and approaching the 2022 peak.

Beyond the immediacy of the war, there has been some “good” news from our central bankers this week, even if it didn’t necessarily sound that way at the time. The Bank of England (BoE) has been perceived to be one of, if not the most hawkish of rate setters in this cost shock environment. Since the war broke out, traders had moved from believing that rates would be cut this year by 0.5% to 3.25%, to believing that rates would be raised by 0.5% to 4.25%. On Wednesday, Andrew Bailey told Reuters that businesses currently have less ability to raise prices and that the Bank of England has to act in a way that doesn’t harm the economy or jobs. Regarding the pricing of rate hikes, he said “I would still ​say that is a ​judgment markets have ⁠to make but I think they’re getting ahead of themselves”(!!).

Interestingly, the Decision Maker Panel survey, which questioned businesses throughout the UK in March, said firms wanted to raise prices by 3.7% over the next year, up from 3.4% the month before and the highest figure since October. They also expected overall consumer prices to rise 3.5% compared with an expected 3% in February. Governor of the BoE, Andrew Bailey, must have had known the results beforehand so it seems odd that he should say they won’t be able to raise prices now.

The answer is probably that the survey showed wage expectations eased by 0.1 points to 3.4%, the lowest since the BoE started collected the data in 2022, while employment plans deteriorated further. The Monetary Policy Committee (MPC) will at some point have to make a call on actual inflationary behaviour as opposed to surveyed inflation expectations. Some of the MPC members are noted experts on inflation behaviour and expectations, so Bailey is probably right when he says firms will have less pricing power than they think.

Moreover, the noises coming from western central bankers have generally been less hawkish. Of course, this is because they are telling us they are becoming more worried about growth, which sounds like a reason to be more worried rather than less. However, markets were most under pressure when funding liquidity was particularly tight at the start of last week (before the central bank statements) as hedge funds appeared to be offloading risk positions. The situation seems to have eased a little, with US and European high yield credit spreads some 30 basis points (0.30%) lower than the March peak, and relatively stable at the moment.

Another aspect of the current situation is that the majority of financial market commentators appear to be bearish.

Geopolitics dominates our news, and many tell us that forces are unstoppable in driving us towards yet greater conflict. With that view in mind, one can make a very bearish case for investments in the current environment. As we say in the review of the March’s asset class performance, global equities were the bottom decile of monthly outturns since 1970 but only just. Bears say that this is complacency, an unwillingness to accept the inevitable path towards an energy crunch and stagflation.

At Tatton, we do not pretend to be geopolitical experts. Such experts need to have superhuman foresight, insider-links to the most important people (and currently have the ability to know how those people may change their mind in the days ahead). And then, even when armed with high probability scenarios, linking these to market performance is really difficult.

Despite our tendency to personify markets (and we have an article which touches on an aspect of this below), economic or financial system outcomes tend to be structural, especially in free market economies. For example, the financial crisis of 2008-9 came about because of leverage in the system built up over at least a five-year period, and as a consequence of the diffuse decisions of many people and institutions. We would see politics as much more human. Political outcomes derive from a relatively small number of decisions, and those decisions can change quickly. While our leaders can be self-serving and deliberately make damaging decisions, most will be good public servants and try to effect change which is ultimately beneficial, if only to further their chances of re-election.

The “narrative” is a way of us putting forward potential outcomes. These tend to be problems, or bad outcomes. Faced with bad potential outcomes, we work hard to prevent them. Thus, the narrative will tend to be a set of “worse-and-worser” cases and only realised when our problem-solving fails.

Investors have had to face a number of big problems in the past twenty years – the Financial Crisis, the Euro Crisis, the Pandemic, the Russia-Ukraine war, the Tariff imposition and now the US-Israel-Iran conflict. Perhaps investors have not become complacent, they might be less likely to be scared, more realistic about the inherent positive skew in the longer-term scenario paths.

Heightened geopolitics tends to provide a particularly difficult near-term investment environment. The risks are all the more evident, risk premia will rise and yet the decisions made can swing markets from optimism to pessimism and back again, in a few days –  and even a few seconds. We applaud those that can judge the probabilities well enough to know when to get out and when to get back in again. However, we also know from decades of experience, that there is very little consistency of any one individual or process in achieving this aim, while the long-term return path has been quite consistent, even if volatile over the shorter term.

Using the MSCI Developed World Index data since 1970, we can see that a fall of 5% in one month has happened 61 times in Sterling terms. The following periods have been generally quite volatile but not negatively so. In the following six months, 42 periods have averaged a return of about +11.5% while 19 of the six-month periods have fallen, again with an average of -11.5%. The total return for all occasions is an average of +4.3%.

Looking ahead, markets are generally closed tomorrow on Good Friday. The US will be open on Easter Monday but the UK & Europe will be hopefully enjoying some sunshine. We wish you all a happy and undisturbed long weekend.