Risk sentiment improved modestly as markets priced some chance of Middle East de‑escalation. Equities are higher and global bond markets retraced part of the recent sell‑off. Brent crude prices oscillated near US$100/bbl. FX moves were subdued

Financial markets have maintained the cautiously positive tone on hopes that the conflict in the Middle East may be getting closer to a resolution. Investors are largely looking through the lack of a clear response from Tehran for now, betting instead that President Trump is searching for a diplomatic offramp. The gains seen in US equity futures in Asia yesterday have been maintained with the S&P currently 0.6% higher in a largely directionless US session. European and Asia indices closed higher. Brent crude prices oscillated near US$100 per barrel, global sovereign bond yields are lower, and the US dollar is broadly firmer against G10 currencies.

Diplomatic efforts continue, with mediators pushing for a potential US–Iran meeting, though the two sides remain far apart. A senior Iranian official indicated Tehran has rejected a US proposal to end the conflict, which would require dismantling key nuclear facilities and fully reopening the Strait of Hormuz. Iran has instead outlined its own conditions, including demands for reparations. Meanwhile, Gulf states are lobbying President Trump to maintain a firm military stance.

Global bond markets continued to recover from the recent sell‑off, supported by an improvement in risk sentiment as oil prices eased. The US diplomatic push to de‑escalate the conflict has trimmed some of the geopolitical risk premium embedded in crude prices, although the broader backdrop remains fluid. Treasury yields held at lower levels, with 10‑year notes at 4.32%, only marginally below the local close but a meaningful retracement from the 4.44% peak earlier in the week. Yields across European sovereign markets also declined.

The US dollar is modestly firmer in offshore trade, though moves across G10 currencies have been contained. NZD/USD has traded in a narrow range around 0.5820, with only limited movement across the NZD crosses.

UK CPI came in as expected at 3.0% y/y in February, but services inflation (a better gauge of domestic price pressure) was a touch firmer than forecast. Either way, the release predates the onset of the war, leaving the prospective energy-driven inflation shock as the key focus for the Bank of England. Markets continue to price around a 60% chance of a rate hike at next month’s meeting. Gilts yields declined, tracking the improved tone across global fixed income.

Australia’s February CPI printed a touch softer than expected but remained uncomfortably firm, with trimmed-mean inflation at 3.3% y/y. The data suggest that underlying inflation was on track to come in marginally cooler than the RBA feared in their February SoMP before the Iran shock. Short end yields extended lower immediately after the release before retracing but still closed sharply lower on the day. OIS contracts were little changed - pricing a slightly better than 50% chance for another RBA hike in May.

NZ rates rallied sharply in the local session yesterday, led by the belly of the curve. Swap rates beyond 1-year fell around 11–12bp, with the 2–5y sector outperforming at the margin. The moves were driven by the improved tone across global fixed income markets with limited domestic catalysts. NZ government bonds closely tracked swaps, delivering a largely parallel rally of ~11bp with some underperformance at the long end.

NZ Debt Management will auction May-31 ($200m), Apr-33 ($200m) and May-51 ($50m) lines in the weekly tender alongside a small parcel of Sep-35 linkers. It is the first time the May-51s have been auctioned since late January.

Economic data is light today, leaving geopolitics firmly in the driver’s seat. There are no domestic releases and only second-tier prints offshore; US initial jobless claims are expected to be little changed, consistent with limited layoff signals. Still, other high-frequency indicators (including job postings) have continued to soften, suggesting the Iran conflict is adding to hiring caution.

Stuart Ritson is a Markets Strategist at BNZ Markets.