Key insights
- Barclays highlights that while AI-driven tech has fueled market highs, a closed Strait of Hormuz caps broader gains, especially in Europe. US equities are preferred over Europe due to the energy shock impact. Reopening the Strait could trigger a short squeeze in European consumer and rate-sensitive stocks. Weak equity flows suggest caution. The energy shock poses a risk of demand destruction, incrementally impacting US equities.
Investing.com -- Global equity markets rallied to fresh highs this week as headlines around a potential U.S.-Iran peace deal broke what Barclays described as "market paralysis," but the brokerage warned that broader gains remain hostage to the still-closed Strait of Hormuz.
Semiconductors have led the advance, rising sharply against the MSCI World since January while the index ex-semis has largely flatlined, according to Barclays.
The brokerage cautioned the trade is "starting to look extended," even as it is "backed by strong earnings," with Q1 results comfortably beating estimates, driven largely by AI and technology names.
"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.
The energy shock has so far been absorbed through inventory drawdowns, but Barclays warned "these buffers are eroding fast, with the risk of demand destruction rising incrementally."
European equities have borne the brunt of the cap. Since the war began, consumer-exposed and rate-sensitive sectors have posted the steepest losses on the MSCI Europe, while only Technology and Energy have recorded gains, per Barclays Research.
Europe ex-UK equity funds have seen outflows in seven of the past eight weeks, according to EPFR data cited by Barclays.
Barclays maintains a strategic preference for the U.S., Japan and emerging markets over Europe, favoring sectors tied to the investment and technology supercycle and banks over consumer segments.
If the Strait reopens, Barclays said EU equities would benefit more on a relative basis given their "sharp underperformance since the war started," with consumer and rate-sensitive stocks the likely primary beneficiaries of any short squeeze.
Weekly equity flows of $2.6 billion came in well below the year-to-date average of approximately $20 billion, per EPFR data.
U.S. funds took in $9.3 billion on the week while EM funds saw $11.6 billion in outflows, a fourth consecutive week of redemptions.
Money market funds recorded their second week of more than $100 billion in inflows this year, after three weeks of sharp outflows.
Year-to-date, equities lead at $338.2 billion, followed by fixed income at $272.7 billion and money market funds at $238.8 billion.
In the U.K., 30-year gilt yields hit their highest level since 1998 earlier this week before partially retracing, Barclays said. Homebuilders have fallen more than 20% since the conflict began, tracking tighter financial conditions.
Labour is set to lose a significant number of local election seats, though Barclays economists said any leadership change would be unlikely to produce material policy shifts before autumn, with alternative candidates expected to remain "sensitive to market concerns around maintaining the fiscal rules."
The coming week brings U.S. CPI for April on May 12, with Bloomberg consensus at 0.7% month-on-month versus 0.9% previously, U.S. retail sales on May 14 at an expected 0.4% versus 1.7% prior, and UK first-quarter GDP also on May 14. A U.S.-China summit in Beijing is scheduled for May 14.