Quarterly market update - March quarter 2026

Global wrap

March quarter saw increased volatility with interest rates rising and growth assets undergoing a moderate correction. There were actually a few events that led to the increased volatility including: 1) a derating in software stocks (related to AI); 2) a run on private equity and credit funds (related to the software derating); and 3) US/Israeli strikes on Iran that led to retaliatory strikes in the region and restrictions on shipping flows through the Strait of Hormuz.

With up to 20% of global oil and gas flows restricted, oil and gas prices soared along with related commodities such as fertiliser and plastics. The Iran war threatens to trigger a global slowdown and an inflation spike as each week goes by. But markets remain relatively calm and seem to be assuming President Trump will seek a quick exit to the war. Indeed, by early April there seemed to be a breakthrough in ceasefire talks, although any agreement seems tenuous thus far.

The expectation that inflation will rise has led to rising bond yields across the developed world and pressure on central banks to tighten interest rates to head off any rise in inflationary expectations. Thus far the US Federal Reserve (the Fed) has remained in ‘wait and see’ mode although markets have removed any chance of rate cuts and now expect the US cash rate to remain on hold at 3.50-3.75% for the remainder of the year. The Fed Chair, Jereme Powell, is due to retire in May, with Wall Street veteran and ex-Fed Board member, Kevin Warsh, nominated by Trump to succeed him.

While the US has its own oil and gas supply, local gasoline and diesel prices have still been affected by the spike in global oil and gas prices. Europe is much more exposed on gas supply, given it has transitioned from Russian gas to LNG imports from Qatar and the US. China is in a relatively strong position given it has built a large stockpile of oil and maintains supply from Russia.

Australian wrap

Australia has been caught out by events in the Middle East with 90% of fuel supply imported and only 30 days of supply in reserve. Australia has maintained two oil refineries, but these can only supply 20% of daily demand and both largely rely on imported crude oil rather than Australian crude oil (Australia has plenty of gas but not much oil).

The Government is busy trying to secure supply from Asian refiners and should be able to leverage Australia’s supply of iron ore, coal and LNG to Asia. But it will likely come at a high cost as Asian refiners will soon be short on supply themselves, the longer the Strait of Hormuz is restricted. The government has cut the fuel excise for three months which has reduced petrol costs by 33c per litre, although diesel is still elevated due to supply issues.

Unfortunately, Australia already had an inflation issue before the spike in fuel prices. Headline (3.6%) and core inflation (3.4%) were both running ahead of target (2.0-3.0%) forcing the RBA to increase the cash rate by 0.25% in February and March, taking the cash rate to 4.10%. Moving forward, markets are currently pricing in another 0.50% in tightening by the end of the year. The Australian 10-year bond yield has risen to 5.0%, which negatively impacts the cost of debt and asset valuations in Australia.

The May budget approaches and the government was considering tax changes and productivity measures before the fuel crisis. Already, cuts to fuel excise will cost it $2.5bn over the next three months. The economy seems unable to grow much above 2.0% without hitting inflation hurdles. It seems some hard decision will have to be made in the near term.

Commodities were mixed over the quarter with gold and copper hitting some profit taking, while oil and LNG prices soared and iron ore remained resilient. An inflationary environment is generally positive for commodities and the resources sector, assuming that diesel supply continues at a reasonable cost.

The Australian share market was down 7.1% in March but a more modest 1.6% over the quarter. Market heavyweight sectors, Banks and Resources (including Energy) continue to dominate returns, while most other sectors are underperforming. Banks may well benefit from rising interest rates but will likely experience lower credit growth moving forward. The outlook generally remains positive for Resources, assuming a global recession is avoided. Other sectors are mixed and stock picking is likely to become more important moving forward.

Overall, the Australian economy is experiencing moderate growth, but inflation issues and rising interest rates threaten a slowdown ahead.

Outlook

The outlook has become clouded by events in the Persian Gulf, which has led to a global energy shock. The longer oil and gas flows are restricted through the Strait of Hormuz, the more severe the shock to global growth and inflation is likely to be. That said, it is clear the US is looking for an exit to the war and ceasefire talks are a positive step in the right direction.

However, we think it is best to assume that flows through the Strait of Hormuz will remain lower than in the past and that oil and gas prices are likely to remain elevated in the short term, as it will take some time to replace the lost volumes. Longer term, each region will need to review its energy security, and we think that Australia is highly likely to embrace a major increase in the electrification of its transport network.

We currently expect a ‘muddle through’ scenario of low growth, moderate inflation and interest rates but the risks are to the downside in that flows through the Strait of Hormuz could remain restricted for longer than expected. We expect global growth to slow and for market conditions to become more challenging. Strategic asset allocation and defensive strategies (quality, value, yield) will become more important.

Key known risks

1. Persian Gulf oil and gas flows remain restricted;

2. Inflation remains above target;

3. Rising interest rates in response to rising inflation and budget deficits;

4. The AI investment boom fails to earn a decent return on investment;

5. Leverage in the private equity/debt space comes undone; and

6. Geopolitics and/or climate change events impact financial markets.

Next key events

• Fed meeting – 28/29 April 2026

• RBA meeting – 4/5 May 2026

• Australian Federal budget – May 2026

Bill Keenan

Principal, Portfolio Manager

Bill Keenan is the founder of Sunbird Portfolios. Sunbird provides independent advice to leading financial advisers across Australia.

Bill has 30 years’ experience in financial markets and holds a Bachelor of Business in Accounting and a Graduate Diploma in Finance and Investment.

Warnings

General Product Advice - any advice provided in this document, is general in nature only and does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, the reader must consider whether it is personally appropriate considering his or her financial circumstances or should seek independent financial advice on its appropriateness.

Past performance is not a reliable indicator of future performance.