Global stock markets climbed to new highs this week after reports of a possible peace agreement between the United States and Iran helped break what Barclays described as “market paralysis.”
However, the bank warned that broader equity gains remain vulnerable while the Strait of Hormuz remains closed.
Semiconductor stocks continue to dominate market gains
According to Barclays, semiconductor shares have significantly outperformed the broader market since January, rallying strongly against the MSCI World Index while the benchmark excluding semiconductor stocks has shown little overall progress.
The brokerage warned that the semiconductor rally is “starting to look extended,” although it added that the move remains “backed by strong earnings,” following first-quarter results that comfortably exceeded expectations, largely driven by artificial intelligence and technology companies.
“Wider market breadth and a continued melt-up in equities are contingent on tangible progress regarding the reopening of the Strait of Hormuz,” Barclays said.
Barclays warns energy buffers are shrinking
Barclays said the impact of the energy shock has so far been managed through the use of existing inventories, but cautioned that “these buffers are eroding fast, with the risk of demand destruction rising incrementally.”
The bank noted that European markets have been among the hardest hit by the current environment.
Since the conflict began, consumer-facing and interest-rate-sensitive sectors within the MSCI Europe Index have posted the steepest declines, while only the Technology and Energy sectors have generated positive returns, according to Barclays Research.
The brokerage also cited EPFR data showing that Europe ex-UK equity funds have experienced outflows in seven of the last eight weeks.
U.S., Japan and emerging markets remain preferred regions
Barclays said it continues to favour U.S., Japanese and emerging market equities over European stocks.
The bank said it prefers sectors connected to long-term investment and technology trends, as well as banking stocks, over consumer-focused sectors.
If the Strait of Hormuz reopens, Barclays believes European equities could outperform on a relative basis because of their “sharp underperformance since the war started.”
The bank added that consumer and rate-sensitive sectors would likely benefit the most from any resulting short-covering rally.
Equity inflows remain subdued
EPFR data referenced by Barclays showed that weekly equity inflows totalled $2.6 billion, well below the year-to-date weekly average of roughly $20 billion.
U.S. equity funds attracted $9.3 billion during the week, while emerging market funds recorded $11.6 billion in outflows, marking a fourth consecutive week of withdrawals.
Money market funds posted their second weekly inflow above $100 billion this year following three weeks of substantial outflows.
So far this year, equity funds have attracted $338.2 billion, compared with $272.7 billion for fixed income and $238.8 billion for money market funds.
UK markets pressured by higher gilt yields
In the United Kingdom, Barclays noted that 30-year gilt yields climbed earlier this week to their highest level since 1998 before partially easing.
The bank added that homebuilder shares have fallen more than 20% since the conflict began as tighter financial conditions weighed on the sector.
Barclays also noted expectations that Labour could lose a substantial number of local election seats.
However, the bank’s economists said any change in party leadership would likely not result in major policy changes before autumn, with potential alternatives expected to remain “sensitive to market concerns around maintaining the fiscal rules.”
Markets await key economic data and U.S.-China summit
Looking ahead, investors are preparing for several major economic releases next week.
The U.S. consumer price index report for April is due on May 12, with Bloomberg consensus forecasts pointing to monthly inflation of 0.7% compared with 0.9% previously.
U.S. retail sales figures are scheduled for May 14 and are expected to show growth of 0.4%, down from the prior reading of 1.7%.
The United Kingdom will also release first-quarter GDP figures on May 14.
Meanwhile, a summit between the United States and China is scheduled to take place in Beijing on May 14.
Leave a Reply