Market Update - March 5, 2026
By Kathleen Brooks, Research Director UK
Key Takeaways
- The dollar remains the haven of choice amidst ongoing geopolitical tensions.
- For a sustained stock market rally, the US must signal an impending end to the conflict.
- The bond market has shown little reaction to recent statements from Iran.
- UK stocks are proving to be more resilient compared to Gilts or the pound.
Market Sentiment Shift
European stock markets experienced a positive shift this morning, with oil and gas prices moderating following comments from Iran's deputy minister regarding potential pre-conflict talks with the US. The minister indicated that Iran is prepared to eliminate its uranium stockpile, which the market interpreted as a sign of possible de-escalation in hostilities. However, these statements do not fundamentally alter the current situation, highlighting the market's sensitivity to news headlines.
Dollar's Dominance
Despite the uptick in European stocks, the dollar continues to be favored as a safe haven amid the ongoing conflict in the Middle East. The Eurostoxx 50 has seen a decline of over 5% this week, while the FTSE 100 has dropped by 3%. The dollar's strength is further supported by a significant decline in both the euro and the pound against the USD, with the euro down 1.5% and the pound down 2.3% this week.
US Market Outlook
For a meaningful recovery in stock prices and a decrease in energy costs, positive signals from the US government are essential. Recent hawkish remarks from the US Secretary of War, asserting that Iran is 'toast' and that military actions will continue, have dampened optimism. Consequently, US stock futures indicate a lower opening, reflecting ongoing uncertainty.
Bond Market Reactions
The bond market has remained largely unaffected by the latest developments regarding Iran. Yields across Europe have risen, with UK 10-year Gilt yields increasing by 20 basis points this week, and similar trends observed in France and Italy. This suggests a growing concern over inflation driven by potential spikes in energy prices.
UK Market Resilience
Interestingly, UK stocks have shown more resilience compared to UK bonds, which are experiencing a more significant selloff. This is attributed to the international focus of UK stock indices, which derive most of their revenues from outside the UK. However, concerns about inflation in the UK due to rising energy prices are reflected in the bond market and interest rate futures, which now predict only one rate cut for the year. The pound has also suffered, being the second worst-performing currency in the G10 this week, with recovery unlikely until safe passage for commodities through the Strait of Hormuz is assured.