Central bank policy on hold as markets weigh energy risks

Hello everyone and welcome to market weekend review for the week of March 20th, 2026. My name is Bay Chan Linn. I'm a director and head of Canadian investment strategy here at Russell Investments. Today we'll be discussing three major topics. First, the situation in the Middle East. Next, central bank decisions. And finally, we'll wrap up with a look at investor sentiment. So, let's get started. The situation in the Middle East continues to remain fluid. As of Thursday, March 19th, there were reports of energy infrastructure in the region being targeted. This led to significant volatility in energy prices. At one point during the trading day, we saw Brent crude oil prices rise to $119 a barrel before later retracing some of those gains. Meanwhile, natural gas prices also rose substantially compared to the prior trading day. As a reminder, one of the main channels of transmission to monitor from this geopolitical development is going to be the energy price level. Our base case continues to be that the conflict in the Middle East will be relatively short-lived and this should mean that the energy price shock will likely also be relatively short-lived. However, if the energy price shock were to persist for a bit longer, then it would likely have adverse consequences for the US and global growth backdrop. The US today, as a reminder, is a net energy exporter. And so, as a result, we expect that the US would be more insulated than non- US regions from a sustained energy shock. This however complicates portfolio positioning because there's also another factor to consider which is starting conditions. Remember going into this year generally speaking we thought that there were a little bit more tailwinds for non- US equities over US equities in part because non US equities were trading at substantial discounts to US equities and in addition we noted that there were positive structural reforms taking place in certain emerging market countries and so how do these two factors net each other out if a conflict in the Middle East is relatively short-lived? D, then we could go back to a situation where you might see some more tailwinds for non- US equities over US equities. However, if the conflict were to persist for an extended time period, then you might see that balance tip in favor of US equities instead. And so given the heightened uncertainty, we continue to believe that investors would benefit from sticking close to their strategic asset allocations rather than making big tactical geographic tilts. Another factor to consider is if the energy price shock were to be sustained for an additional time period, then at some point we might consider raising our US recession probability estimate from the current estimate of 20%. Next, let's talk about central bank developments. This week we had many central banks make their interest rate decisions and generally speaking there were a lot of central banks that left their key policy rate unchanged as they weighed the uncertainty around the potential growth and inflation implications of what's going on in the Middle East. One exception to that, however, was the Reserve Bank of Australia, which in a split five to four decision raised its benchmark interest rate by another 25 basis points. When we look at market pricing, markets are expecting that the Reserve Bank of Australia might hike interest rates another two to three times later this year. However, from our perspective, that market pricing might be a little bit aggressive given that the head of the Reserve Bank of Australia, Governor Michelle Bullock, already noted that some of the inflation factors that they've been seeing are likely to be temporary speed bumps rather than something more structural. Meanwhile, we saw the Federal Reserve, the Bank of Canada, the European Central Bank, the Bank of England, and the Bank of Japan leave their policy rate unchanged. In terms of how we're viewing opportunities in fixed income, generally speaking, we continue to see better valuation in non- US government bonds as it compares to US treasuries. For example, when we look at what's being priced into the forward curve in Canada, markets are expecting potentially more than two rate hikes by the end of this year by the Bank of Canada. However, given that the Canadian economy and labor market continues to remain fragile, we think that pricing, similar to the pricing in Australia, also remains very aggressive, especially considering that Canada's labor market is even weaker than the labor market in Australia. Finally, let's talk about investor sentiment. Our internal measures of investor sentiment are showing signs that other investors have become somewhat more cautious. We're seeing survey based measures of sentiment both on the retail investor side and on the professional investor side tip a little bit more toward the cautious end of the spectrum. That being said, investor sentiment overall is still not yet at panic levels. If investor sentiment does eventually reach a panic level, then that could be a threshold at which we might consider adding additional risk into the portfolios. But for now, we continue to maintain a portfolio positioning that is closer to the strategic asset allocation. This concludes market week review. >> Hi, I'm Sophie Antaly, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.