The week that was supposed to deliver clarity on the Gulf crisis instead delivered its starkest divergence yet between US and European assets. With Brent crude surging 13% to US$108 — its highest since the conflict began — and the Strait of Hormuz still effectively closed, the transatlantic split in equity markets told a revealing story. The Nasdaq added 1.6% and the S&P 500 edged up 0.7%, buoyed by better-than-expected earnings and a remarkably resilient US consumer. In contrast, the Euro Stoxx 50 fell 2.0%, the FTSE 100 dropped 2.7%, and the ASX shed 2.1%. Japan was the week's standout, with the Nikkei rallying 2.9% on yen weakness and export optimism.

The geopolitical backdrop deteriorated rather than improved. Iran attacked three vessels in the Strait and escorted two into Iranian waters, while the US seized an Iranian-flagged supertanker carrying two million litres of crude in the Indian Ocean. Peace talks, supposedly imminent at mid-week, never materialised, Iran refused to attend while the US naval blockade remained in place, and JD Vance's trip to Islamabad was postponed indefinitely. By Thursday, the IRGC had reportedly assumed control of Iran's negotiating position, pushing the hardline camp to the fore. The ceasefire was eventually extended, but without a firm end date, and President Trump faces a War Powers Resolution deadline on 1 May that could force him to seek Congressional approval to continue military operations. A Washington Post report that mine clearance in the Strait could take six months, even after hostilities cease, underlined the lasting economic damage already locked in.

Oil's extraordinary volatility continued. Brent swung from a low near US$86 the prior week to above US$107, with daily moves of 5% becoming routine. Gold, having rallied sharply in prior weeks, gave back 3% as the dollar firmed and risk appetite proved more durable than expected.

Bond yields rose universally. UK gilts bore the heaviest burden, climbing 14 basis points to 4.97% after March CPI printed at 3.3% year-on-year, with PPI input prices surging 4.4% in a single month, the clearest sign yet that the war's energy shock is flowing into broader costs. US 10-year Treasuries added 8 basis points to 4.33%, pushed higher by a US retail sales print that was the strongest in a year: headline up 1.7% month-on-month, with the control group — the measure that feeds into GDP estimates — rising 0.7% against expectations of just 0.2%. Australian 10-years touched 4.97%, within a whisker of the psychologically important 5% level.

The most telling data release was the April flash PMIs. US manufacturing printed at a surprisingly robust 54.0, well above the 51.3 consensus, while the UK also beat expectations. Europe was the casualty: both French and German composites slipped into contraction, with services hardest hit as consumers recoiled from rising energy bills. Eurozone consumer confidence fell to its lowest since December 2022. Meanwhile, Microsoft and Meta both announced layoffs of roughly 10% of their global workforces, framed partly as AI-driven efficiency, but also an implicit hedge against a weakening economic outlook.

How, then, have risk assets remained so sanguine? Part of the answer lies in an exceptionally strong US earnings season; 84% of the 28% of S&P 500 companies that have reported have beaten consensus, lifting blended year-on-year earnings growth to 15.1%, well above the 12.5% pre-season estimate. Industrials have been the standout, with an aggregate earnings surprise of 33%, while IT is tracking around 45% growth on the back of cloud and AI-related capex. But earnings alone do not explain the resilience. In this week’s What We Are Working On Video Andrew Hunt of Hunt Economics argues that an estimated US$300–400 billion per month is being injected into the global financial system through a combination of Fed purchases, US Treasury cash drawdowns, and aggressive PBOC intervention, a stealth QE programme of historic proportions that is keeping risk appetite alive even as the real economy deteriorates. Hunt's warning is that this liquidity tide will eventually collide with an inflation wall: Asian export price inflation has surged from zero to 10% in weeks, US household inflation expectations are pushing 5%, and if the Strait remains closed much longer, the seasonal ramp in northern hemisphere industrial production from June will expose the full extent of the supply shock.

The week ahead brings Australia's critical Q1 CPI on Wednesday, which will set the tone for the RBA's May meeting, and the 1 May War Powers Resolution deadline. With oil above US$100, European consumers retreating, and the Strait still choked, the economic cost of stalemate is compounding by the day.