Global Fixed Income Strategy - April 2026

Global macro strategy

Dollar weakness and opportunities in EM 

Executive summary
 

• The Iran war hits European energy costs especially hard – worsening its terms of trade, intensifying inflationary pressures and weakening growth prospects.

• Surging oil and gas prices elevate headline inflation, and risk second-round effects, such as higher longer-dated forward gas prices.

• Central banks are prioritizing inflation risks amid this uncertainty, monitoring labor-market sensitivity and guarding against persistent second-order inflation pressures.

• Markets have priced aggressive ECB tightening, but are potentially misjudging policy timing and potential fiscal pressures.

The Iran war has delivered an immediate shock to global energy markets, hitting Europe—already highly dependent on imported energy—especially hard. While parts of Southeast Asia are structurally more exposed to Middle East disruption due to their energy import dependence, liquefied natural gas (LNG) spot exposure and thinner buffers, Europe represents the dominant channel through which the Middle East conflict translates into global market volatility, credit stress and portfolio-relevant outcomes. Europe remains the clearing market for global LNG and marginal gas pricing (TTF). Any disruption in Middle East supply, shipping routes, such as the Strait of Hormuz and the Red Sea, or risk premia is first expressed through European gas and power prices, which then cascade globally. We look at the impact of the current disruption on the European economy and, in the Credit section that follows, look at its impact on energy issuers.

Impact on European growth

An energy shock weakens growth in Europe through several channels. First, as a major net importer of energy, Europe faces an income transfer from domestic consumers and firms to foreign energy producers. This deterioration in the terms of trade reduces national income. Second, higher energy prices raise operating costs across the economy. Firms either pass these costs to consumers—adding to inflation—or absorb them, eroding profit margins and reducing capacity for investment and hiring. Both responses dampen economic growth. Third, higher inflation squeezes real household incomes. Because energy demand is relatively inelastic, households have little choice but to pay higher prices for heating, electricity, and transportation, reducing discretionary spending elsewhere.

Rule-of-thumb estimates help illustrate the potential magnitude of the shock. A 10% rise in oil prices typically subtracts about 0.1–0.2 percentage points from GDP over the subsequent year. With Brent crude up roughly 40% since the war began—albeit with substantial day-to-day volatility—the implied drag on European growth is approximately 0.4–0.8% of GDP. This effect will likely vary across economies depending on their energy mix and reliance on gas. The UK, Italy, and Germany appear among the most exposed, with the UK particularly vulnerable given its dependence on gas for heating and the fact that gas often sets the marginal price of electricity.