Global equity indices pushed to fresh highs this week as reports of a possible U.S.-Iran peace accord helped break what Barclays described as "market paralysis." Despite that rally, Barclays warned investors that the wider advance remains limited while the Strait of Hormuz stays shut.
Technology and semiconductors at the forefront
Since January, semiconductors have led the market surge, outperforming the MSCI World, while the MSCI World ex-semiconductors has largely been flat, Barclays noted. The broker cautioned that the sector-led trade is "starting to look extended," even as it is "backed by strong earnings." First-quarter results have comfortably beaten estimates, with AI and other technology names the main drivers.
Energy shock and the Strait of Hormuz
Barclays highlighted that broader market breadth and a sustained melt-up in equities depend on "tangible progress regarding the reopening of the Strait of Hormuz." The current energy shock has been mitigated to date by inventory drawdowns, but Barclays warned that "these buffers are eroding fast, with the risk of demand destruction rising incrementally." The implication is that without relief in supply routes, the cushioning effect of inventories may not last.
Europe particularly constrained
European markets have borne the heaviest restraint from the energy-driven shock. Barclays Research shows that since the war began, the steepest losses on the MSCI Europe index have come from consumer-exposed and rate-sensitive sectors, while only Technology and Energy have recorded gains. Net investor flows reflect that pressure: Europe ex-UK equity funds have seen outflows in seven of the past eight weeks, according to EPFR data cited by Barclays.
Reflecting this divergence, Barclays remains strategically overweight the U.S., Japan and emerging markets relative to Europe. The bank favors sectors tied to the investment and technology supercycle and prefers banks over consumer segments. Barclays added that, if the Strait of Hormuz reopens, EU equities would likely outperform on a relative basis given their "sharp underperformance since the war started," with consumer and rate-sensitive stocks the probable beneficiaries of any short squeeze.
Fund flows and liquidity trends
Weekly equity flows totaled $2.6 billion, well below the year-to-date weekly average of roughly $20 billion, per EPFR data cited by Barclays. U.S. funds recorded inflows of $9.3 billion for the week, while emerging market funds faced $11.6 billion in outflows - marking a fourth straight week of EM redemptions. Money market funds saw their second week this year with inflows exceeding $100 billion, following three prior weeks of sizable withdrawals.
On a year-to-date basis, investor allocations show equities leading at $338.2 billion, followed by fixed income at $272.7 billion and money market funds at $238.8 billion.
UK market specifics and political backdrop
In the U.K., 30-year gilt yields climbed to their highest levels since 1998 earlier in the week before pulling back somewhat, Barclays reported. Housing-related stocks have struggled: homebuilders have fallen by more than 20% since the conflict began, in line with tighter financial conditions.
Barclays economists expect the Labour Party to lose a significant number of local election seats, but they said any change of leadership would probably not deliver material policy shifts before the autumn. Alternative candidates, the economists argued, are likely to remain "sensitive to market concerns around maintaining the fiscal rules."
Upcoming data and events
Investors will face several data releases and events in the coming week that could influence market direction. U.S. consumer price index data for April is due on May 12, with Bloomberg consensus at 0.7% month-on-month compared with 0.9% previously. U.S. retail sales for April are scheduled for May 14 and are expected to show a 0.4% monthly rise versus 1.7% previously. The U.K. will report first-quarter GDP on May 14. A U.S.-China summit in Beijing is also set for May 14.
Note: This article compiles Barclays' market assessment and EPFR flow data as presented by the brokerage and cited sources. It does not introduce additional data or analysis beyond those reported.