Overview  

The February 2026 market update reflects a month of stronger share market performance that was abruptly overshadowed by escalating conflict in the Middle East at the very end of the period. Markets became increasingly driven by geopolitical headlines, with the safety of shipping through the Strait of Hormuz emerging as the key determinant of investor sentiment and risk appetite.  

 

Market Performance in February  

Equity markets delivered positive returns through most of February. Australian shares performed strongly, supported by a robust corporate reporting season, while global shares posted more modest gains. Bond yields initially declined as markets anticipated eventual monetary easing, but this trend reversed sharply in early March as energy prices surged and the geopolitical situation deteriorated. Rising yields quickly pressured interest‑rate‑sensitive assets such as property and infrastructure.  

 

Energy Prices and Inflation Risks  

Oil and gas prices moved materially higher, pushing Brent crude back above USD 100 per barrel. This shift significantly increased the risk of higher inflation and a global economic slowdown. Higher energy costs reduce real household incomes and limit central banks’ ability to cut interest rates. While modest increases in oil prices can be absorbed by economies, large and sudden shocks raise the risk of recession, particularly now that labour markets are no longer as tight as they were in 2022.  

 

United States Economic Conditions  

US inflation in February came in broadly as expected, with headline inflation at 2.4% and core inflation at 2.5%, prior to the energy price shock. Bond markets had been pricing weaker growth and future rate cuts due to a softening labour market. However, the jump in energy prices has increased the likelihood that inflation will reaccelerate, reversing expectations of near‑term monetary easing and lifting downside risks to growth.  

 

China and Global Growth Concerns  

China’s economic slowdown has become more concerning as it coincides with a global energy shock. Growth targets have been lowered under the government’s longer‑term policy framework, and fiscal support has been scaled back. Elevated oil prices raise the risk of stagflation, with slower growth alongside rising prices. While stimulus may be introduced later in 2026 if growth weakens substantially, the near‑term policy stance disappointed investors.  

 

Europe’s Vulnerability to Energy Shocks  

Europe remains highly exposed to rising energy prices due to its reliance on imported liquefied natural gas. Gas prices spiked sharply in early March as global competition for LNG intensified. This leaves Europe particularly vulnerable to sustained inflation pressure if energy supply disruptions persist, increasing financial and economic strain across the region.  

 

Australian Economic and Market Conditions  

In Australia, business conditions in February remained stable, but forward expectations weakened ahead of the energy shock. Cost pressures and labour expenses began to reaccelerate, suggesting inflation risks were already present before oil prices rose. While Australia benefits from higher commodity prices as a net energy exporter, its reliance on refined petroleum imports exposes the economy to higher global energy costs, increasing domestic inflation risks. Markets rapidly repriced interest rate expectations, shifting from pricing one further rate hike to more than three in 2026.  

 

Equity Market Themes and Sector Performance  

Australian equities were supported by one of the strongest reporting seasons in decades, with widespread profit upgrades, dividend increases and record share buybacks. Commodity producers outperformed, benefiting from rising prices and stronger operating leverage. Financial stocks led market gains, while healthcare underperformed. Globally, AI‑related disruption triggered a sharp sell‑off in software stocks, highlighting growing investor caution toward technology valuations.  

 

Outlook and Key Risks  

The outlook deteriorates rapidly if the Strait of Hormuz remains disrupted. Even a temporary closure could drive oil prices significantly higher, risking a global recession and a resurgence of 1970s‑style stagflation. While a swift resolution would reduce some downside risks, prolonged disruption would likely result in slower growth, higher inflation and more restrictive financial conditions worldwide.