Weekly Markets Review

This week in summary

• In the UK, all eyes are on 10 Downing Street after Keir Starmer’s resignation as Prime Minister this morning
• Elsewhere… central banks US Federal Reserve (Fed) and the Bank of England (BoE) held rates; the Bank of Japan (BoJ) hiked the base rate to 1.0% (highest since 1995), with markets largely steady
• Geopolitics remain fragile but oil price eased (Brent crude around US$80), reducing near-term inflation pressure
• Fed Chair Kevin Warsh stamped authority early: stripped back guidance, simplified communication and re anchored the Fed to price stability (aiming to keep inflation low ad predictable)
• Policy shift is philosophical and pragmatic rather than outright hawkish (keeping higher interest rates to control inflation): more sceptical of forecasts, less reliance on forward guidance and a clearer institutional reset underway
• Back to basics monetary policy: Fed liquidity policy is likely to be used more cautiously
• BoE remains in easy ‘wait and see’ mode amid weak growth and political noise; focus this week shifts to US PCE (measure of inflation), expected to reinforce a firmer Fed stance and political developments in the UK
• UK Prime Minister Keir Stamer’s resignation is adding uncertainty to the domestic outlook and vulnerability to the gilt market (UK government bonds) heading into this week.

Market review

Change at the top

Keir Starmer has announced his resignation this morning as Prime Minister and leader of The Labour Party. Last week’s byelection win for Andy Burnham suggested that the markets had already priced in the resignation of Starmer with ‘The King of The North’ expected to enter number 10 unopposed.

Interest rate week: markets steady as BoE and Fed Hold

The focus last week was on three central bank meetings, with the Fed and the BoE both holding rates steady while the BoJ hiked to 1.0%, the highest level since 1995. 

Markets were steady with little change across equity and bond indices. The Iran-US pact remains intact, though on shaky ground as military action between Israel and Hezbollah continued throughout the week. The US has pressured Israel toward a ceasefire with Hezbollah, and oil prices continued to ease, with Brent closing near US$80 a barrel - the lowest since the start of the conflict.

Wash: a price stability pragmatist

As we anticipated, new Fed Chair Kevin Warsh has washed away any remaining fears over his independence, asserting himself decisively at his first Federal Open Market Committee meeting. Not only did the committee remove the language hinting at future rate cuts, but it also stripped the policy statement down almost entirely. The statement fell from around 300 words to 130, narrowly outlining present economic conditions - solid growth and energy-driven inflation - while forgoing forward guidance altogether. The stripped-down document delivered a blunt commitment to inflation control: “this committee will deliver price stability”.

Chair Warsh is not, however, ‘a hawk in dove's clothing’ as some are suggesting. His actions are entirely consistent with his long track record as a price stability pragmatist with a strong institutional reform agenda. Warsh brings genuine introspection to the Fed, announcing the appointment of five task forces covering the broad conduct of monetary policy: communications, balance sheet management, data sources, productivity and jobs in an era of transformation and the Fed's inflation framework.

On balance sheet management, Warsh resigned from the Fed in 2011 in disagreement with the Fed's use of quantitative easing (the bank buying bonds to help the economy), which he viewed as excessive and an overreach of its mandate. In this regard, the so-called ‘Fed put’ - the central bank's willingness to backstop the economy through large-scale liquidity provision - may be softer under his leadership. In Warsh's view, such intervention creates socialism for investors and capitalism for everyone else. He wants to reduce the size and influence of the Fed's balance sheet, which has ballooned since the Global Financial Crisis. While his earlier criticisms of excessive liquidity policy were well-founded, meaningfully reversing course in practice may prove impossible and the benefit of doing so is far from clear. Like reversing over something you have already hit, it will not undo the damage. At the very least, expect a more restrained use of liquidity policy and perhaps a reduced willingness to backstop the financial system to the same extent as recent predecessors in a crisis. Warsh is a ‘back to basics’ policymaker.

The removal of forward guidance is equally consistent with Warsh's long-held view that the Fed overcommunicates, providing markets with too detailed a roadmap of its intentions - a rod for its own back when circumstances change. It also risks a circular feedback loop in which markets read the Fed's guidance while the Fed interprets market pricing. Warsh notably abstained from submitting his own dot to the dot plot - the quarterly chart showing FOMC participants' interest rate expectations - and suggested the projections should be read "in pencil" given the fluidity of the current backdrop. The dramatic shift in the dot plot since March validates his point: the median projection for the federal funds rate at end-2026 has risen from 3.4% to 3.75%, while the 2027 projection has moved from 3.125% to 3.625%.

The Fed's review of data sources and methodology could also deliver improvements. Official inflation and labour market data have drawn criticism for their accuracy and timeliness, with large revisions and methodological inconsistencies wrongfooting both market participants and policymakers. When government releases lag reality by 30 to 60 days it can lead to “long and variable lags in the conduct of monetary policy”.

What, then, should we expect from the Fed going forward? The June dot plot signals a significant hawkish shift, and Warsh has acknowledged both the resilience of the US economy and the persistence of above-target inflation. His comments reflect a genuine nuance; the current policy rate is unevenly restrictive, with the burden of high interest rates falling disproportionately on certain parts of the economy and feeding a K-shaped dynamic. Warsh also sees disinflation as a potential product of technological innovation - should AI-driven productivity gains reduce inflationary pressure, the Warsh Fed would respond by cutting rates. The direction of travel under Warsh is therefore neither hawkish or dovish, but it is anchored to price stability, sceptical of its own forecasts and attentive to it asymmetric impact on the economy. How this pragmatic framework navigates an increasingly bifurcated economic landscape will be one of the defining questions of his tenure.

BoE easy 'wait and see'

As we anticipated, new Fed Chair Kevin Warsh has washed away any remaining fears over his independence, asserting himself decisively at his first Federal Open Market Committee meeting. Not only did the committee remove the language hinting at future rate cuts, but it also stripped the policy statement down almost entirely. The statement fell from around 300 words to 130, narrowly outlining present economic conditions - solid growth and energy-driven inflation - while forgoing forward guidance altogether. The stripped-down document delivered a blunt commitment to inflation control: “this committee will deliver price stability”.

The week ahead

US PCE inflation

PCE and core PCE inflation is expected to rise in May, affirming the Fed’s more hawkish stance. Bloomberg estimate the PCE price index increased 0.48% in May, raising the annual inflation reading to 4.1% from 3.8%. Core PCE inflation is expected to come in hot too at 0.35% for the month, boosting the core reading to 3.4%. Airfares, healthcare costs and portfolio management fees account for much of the monthly rise in core inflation. 

Markets for the week 

 

This week in summary

• SpaceX’s record US$75bn stock market listing, known as an IPO, highlights strong risk appetite and the premium attached to frontier technology companies, reinforcing public markets as a viable destination for large-scale capital
• Equities recovered into the weekend after a softer start to June, with retail participation signalling a continued willingness to pay up for innovation-led growth
• Hopes of an Iran deal supported cyclicals and pushed oil lower, while bonds rallied, particularly in the UK, as inflation concerns eased - reports emerged on Sunday evening that a peace agreement had been reached
• The European Central Bank (ECB) has begun tightening into a weak growth backdrop, raising rates while signalling concern over energy-driven inflation but limited evidence of second-round effects
• The US Federal Reserve (Fed) is expected to hold rates, but a more hawkish (favouring higher interest rates) tone is likely as inflation remains sticky, with Chair Warsh potentially signalling a shift away from prior easing bias
• The Bank of England (BoE) is likely to remain on hold, balancing weak domestic growth against persistent inflation
• The Bank of Japan (BoJ) is expected to continue gradual normalisation with a modest rate hike, supporting yen stability and avoiding disruption to crowded carry trades.

Market review

Escape velocity: markets react to the biggest IPO in history

SpaceX blasted off on Friday, raising US$75bn at a valuation of c.US$1.8tn. This commentary can only address matters at a macro level and, in that context, what matters is what this tells us about risk appetite, the health of public equity markets as a destination for capital, and the extraordinary premium investors are willing to assign to businesses at the forefront of technological innovation.

Equity markets have so far lost ground in June following an incredible spring rally. Last week followed a similar pattern, before sentiment turned sharply into the weekend as the largest IPO in history coincided with a notable rebound. Technology-related stocks supported the bounce. The deal went off without a hitch supported by strong retail participation. That retail enthusiasm speaks to a broader willingness to pay-up for exposure to transformative assets even in a month where broader indices have struggled. From this angle risk appetite remains firmly open.

For much of the past decade companies have chosen to stay private for longer including many consequential technology companies. Last week was a reminder of what public markets can offer that private capital cannot: price discovery, liquidity, and broad participation. This deal marks the beginning of a handful of high-profile listings for large technology businesses and sets an encouraging tone for the markets ability to absorb such events.

The IPO also provides a fresh insight into how markets are pricing frontier technology and are assigning substantial premiums to businesses operating at the edge of what is technically possible. While this is fine in a rising market and where the economic backdrop remains supportive it leaves little margin of safety in a downturn.

Markets buoyed by hopes of Iran deal

There were renewed hopes for an imminent peace agreement after President Trump indicated that a deal would be signed by the end of the week and stipulated that the Strait of Hormuz would instantly reopen. This added rocket fuel to equities with cyclical sectors such as materials, real estate and industrials driving the market higher. Oil prices fell by a little over 6% across the week, with Brent closing at US$87/bbl. Bonds ended the week on strong footing too particularly in the UK with short-dated yields falling sharply as inflation fears ebbed. The 2-year gilt yield fell 0.14% to close at 4.23%.

On Sunday evening, on President Trump’s 80th birthday, a memorandum of understanding indeed appears to have been signed. It is still early stages, and the deal is likely fragile, but both parties have reportedly agreed to lift their blockades this Friday. Oil is lower again this morning with equities and bonds extending gains.

ECB hikes into slowdown

In the eurozone, the ECB raised rates by 25bps to 2.25% as expected, while revising inflation forecasts higher and growth lower. The decision reflects the inflationary impulse from higher energy prices, but the growth backdrop is undisputedly weak.

There is little evidence of second-round inflation effects; wage growth remains contained and medium-term inflation expectations are well anchored, suggesting that underlying inflationary pressures are not accelerating in a way that would justify a sustained tightening cycle.

Further hikes would weigh on European assets and could end up ultimately proving supportive of bonds. A pause after this initial move would allow risk assets time to adjust, while still anchoring inflation expectations. The market currently sees the ECB hiking once more this year with another likely in 2027. If the ECB hikes too quickly we would expect cuts next year, this seems unlikely now given the peace deal.

The week ahead

Fed rate decision

This Wednesday’s decision will be the first test for Chairman Kevin Warsh, who watches over an economy facing clear upward price pressures while the President continues to push for lower interest rates. While we think it is unlikely that the Fed will raise rates this week, the discussion within the Federal Open Market Committee (FOMC) will have shifted more hawkish. Warsh could look to assert his independence by abandoning Powell’s easing bias.

US CPI (a measure of inflation that tracks the changes in the average prices paid by consumers for a basket of goods and services over time) rose 4.2% year-on-year in May, in line with expectations at the headline level, with core inflation slightly softer at 2.9%. Much of the persistence in core inflation continues to be driven by shelter, and in particular the owners’ equivalent rent (OER) component, which is a lagging and somewhat imputed measure of housing costs rather than a real-time reflection of market rents. Strip this out and underlying inflation looks materially closer to target (with core CPI ex-shelter nearer 2.4%), but even so it remains above pre-pandemic levels, and underlying price pressures have not fully normalised.

BoE rate decision

The BoE is not expected to hike this Thursday with the swap market pricing in only a 4% probability of a move. Like the ECB, the BoE must weigh a weak growth environment against stubborn price pressures, but unlike the ECB it faces a more fragile domestic fiscal setting and a gilt (UK government bonds) market that remains sensitive to policy credibility. Recent weak data and the Iran deal gives Governor Bailey grounds to ‘wait and see’.

BoJ rate decision

The Bank of Japan is likely to raise its policy rate to 1.0% from 0.75%, continuing its glacial journey to normalise policy. The BoJ will likely tighten this week given their tightening labour market in combination with the global inflationary backdrop; higher energy prices and rising rates across other major central banks.

That gradual normalisation supports a steady appreciation of the Japanese yen, which remains heavily shorted by investors using it to fund carry trades (borrowing in a low-yielding currency such as the yen to invest in higher-yielding markets such as Brazil). When global rates are simultaneously rising, the yield gap is not materially lower when the BoJ hikes.

Given how crowded the yen carry trade is, any sharper or unexpected shift in policy or yield differentials could trigger a disorderly move in the currency - we saw this in the Autumn of 2024 when the Fed cut by 0.5% on the back of softening labour market data caused the yen to surge. We do not expect any surprises from the BoJ this week. 

Markets for the week 

 

This week in summary

• US equities paused after a strong run, as stronger economic data and renewed inflation concerns led investors to question whether interest rates may need to stay higher for longer
• A stronger-than-expected US payrolls report reinforced the picture of labour market resilience, but markets treated the news negatively as it added to fears that policy could remain restrictive
• Oil prices moved higher and price pressures continued to build, adding to evidence that the disinflation trend (a sustained period where the rate of inflation slows down) is becoming more complicated
• US Federal Reserve (Fed) officials have continued to strike a more hawkish or forceful tone, with markets now shifting away from expected rate cuts and beginning to price in the possibility of further tightening
• In Europe, the European Central Bank (ECB) is expected to raise rates, while the Bank of England (BoE) faces a more difficult backdrop of weak growth, persistent inflation and ongoing gilt market pressure
• This week’s focus is on the ECB rate decision, US Consumer Price Index (CPI) inflation and the market impact of the record-breaking SpaceX Initial Public Offering (IPO).

Market review

Hawks, payrolls and price pressures

Equities took a breather last week following nine consecutive weeks of gains in the US and a remarkably strong recovery globally since March. The tone has become more cautious as evidence of renewed price pressures continues to build.

Friday’s US payrolls report was particularly strong, with 172k jobs added in May, well above the 88k expected, while previous months were also revised higher. US equities fell 2.75% on the news, leaving the market down 2.6% over the week as inflation concerns outweighed the positive growth signal from labour market resilience. The strong payrolls added to other recent signs of renewed momentum in the US economy, including manufacturing output at a four-year high, strong equity market performance and resilient consumer spending. President Trump pushed back against the market reaction on Truth Social, writing: “With a great Jobs Report, like just announced, stocks should go up, not down. That’s the way it was for 200 years. Growth does not mean inflation! How else can a Country attain GREATNESS???”.

It is a dynamic investors have become familiar with in recent years: when inflation risks are elevated, good economic news can quickly become bad news for markets. Stronger growth raises the prospect that central banks may need to keep policy (interest rates) tighter for longer.

Oil prices also moved higher over the week, with WTI crude back above $90 per barrel, adding to inflation concerns as conflict in the Middle East continued to rumble on. Ahead of the June Federal Open Market Committee (FOMC) blackout period, Lorie Logan and Beth Hammack both argued for a tightening bias, aligning with our view that the Fed appears to be recalibrating in a more hawkish direction.

It is an interesting start to Fed Chair Kevin Warsh’s term, as he is already under pressure to move against the President’s view that interest rates should be lower. Warsh’s main argument for lower rates had been that productivity gains from Artificial Intelligence (AI) should help reduce inflation for now, however, the AI build-out appears to be having an indisputable upward impact on prices. Warsh may look to assert his independence at the June meeting by abandoning Powell’s easing bias in favour of a tightening one (cutting to raising interest rates).

The bond market is already pricing in a tightening bias with the market now predicting one hike this year and another likely in 2027. Before the Iran conflict the market was pricing in three cuts by the end of next year. The 10-year treasury yield rose 9 basis points last week to close at 4.53%, up from 3.94% at the end of February. 

The week ahead

ECB rate decision (and thoughts on the BoE)

Hawks are circling on the other side of the Atlantic too, with the ECB looking certain to hike on Thursday. The market is currently pricing a 99.9% probability of a move. While the ECB is more likely to raise rates because it is starting from a more neutral stance than either the Fed or the BoE, it will still be wary of sounding too hawkish against a weak growth backdrop. President Christine Lagarde will likely leave the door open for a second hike.

This is similar to the BoE, although relative to European bond markets the gilt market remains under more strain from multiple directions. Growth looks more exposed to economic shocks than in either the US or eurozone, and inflation is simultaneously less well anchored. With gilt yields elevated and growth soft, any renewed inflation pressure risks worsening an already difficult fiscal backdrop. Like the ECB, the BoE must weigh a weak growth environment against stubborn price pressures, but unlike the ECB it also faces a more fragile domestic fiscal setting and a gilt market that remains sensitive to policy credibility. 

SpaceX IPO

SpaceX is listing about 555.6m shares at $135 each ($75bn) on Friday; a deal that could value the company at about $1.8tn. The rocket and satellite company is set to deliver the largest ever IPO, over double the size of Saudi Aramco’s $29.4bn listing in 2019. The company has already received orders for more than the shares available and index providers, like NASDAQ and FTSE, have changed their eligibility requirements to accelerate the firm’s inclusion in their benchmarks which will fuel buying from passive investors. 

US CPI inflation

Economists see inflation rising to 4.2% in May, the highest since April 2023, driven largely by higher gasoline prices and unfavourable base effects. While the year-on-year reading is expected to move higher, the monthly increase may prove more benign and closer to a pace consistent with the Fed’s target, as firmer energy and commodity prices are partly offset by softer goods demand. Even so, with inflation still elevated and growth momentum holding up, the release is unlikely to materially alter the Fed’s increasingly hawkish tone. May may prove to be the high point for this cycle, but not one that offers immediate reassurance to policymakers that inflation is heading back towards target. Indeed, May will mark the 63rd consecutive month in which CPI inflation has exceeded the Fed’s 2% target.

Markets for the week 

 

This week in summary

• US equities rose to another record high last week, with technology once again leading the market higher
• The backdrop also improved as oil prices fell, hopes of a US-Iran ceasefire increased and global bond yields moved lower
• The rally continues to look earnings-led rather than purely valuation-driven, with record forward earnings extending beyond mega-cap technology companies
• Although technology remains expensive, current valuations are still well below the extremes seen during the late-1990s technology bubble
• Stronger inflation and AI-driven investment demand are complicating the disinflation story and forcing the US Federal Reserve (Fed) to recalibrate their easing bias
• This week’s focus is on US manufacturing data, the US employment report and eurozone inflation, all of which should help clarify how restrictive central banks may need to remain.

Market review

Equities extend gains as AI enthusiasm remains the dominant market theme

US equities gained 1.6% last week, reaching another record high, with technology again leading the advance. Ongoing optimism around innovation and investment in technology continues to support markets.

The wider backdrop was also supportive. Hopes of a US-Iran peace agreement increased after reports of a ceasefire deal awaiting US President Trump’s approval. Oil fell to US$92 per barrel, its lowest level since mid-April, while market-implied odds of a lifting of the US blockade of the Strait of Hormuz by the end of June rose to 68%. Global bond yields moved lower, with the US 10-year Treasury yield ending the week at 4.44%.

While markets have rallied strongly in recent months, the move continues to be supported by earnings rather than pure enthusiasm. Forward earnings reached another record high last week, with technology at the centre of that strength. Technology earnings are forecast to grow 47.2% this year and a further 32.7% in 2027, after expanding 24.7% in 2025. So long as those forecasts are broadly realised, higher valuations can be justified. An earnings-led melt-up (a rapid surge in asset prices) is far more sustainable than one driven purely by multiple expansion and a fear of missing out.

Importantly, this is not just a mega-cap technology story. While the largest names continue to dominate headlines, earnings momentum is visible across a much broader swathe of the US market, with forward earnings for mid and small-cap companies also reaching record highs last week.

Although the information technology and communication services sectors continue to lead the market, their combined forward price/earnings ratio (how much investors are willing to pay per the companies expected earnings) of 23.2x is not an especially dramatic premium to the broader market at 21.2x. During the technology bubble of the late 1990s, the equivalent multiple rose above 40x. If market performance were being driven primarily by multiple expansion rather than earnings growth, that would be a clearer sign of excess. For now, that is not the case.

The AI investment and infrastructure build-out is also supporting other parts of the market, notably clean energy, which is up 43.6% year to date. Commodity markets continue to reflect the scale of that demand, with copper hitting record highs in mid-May.

With the US economy strong and financial conditions relatively loose, inflation risks are becoming harder to dismiss. Last week PCE inflation rose to 3.8%, its highest level since March 2023. Some policymakers, including Chair of the Fed Kevin Warsh, have argued that productivity gains driven by innovation and AI support the case for lower interest rates. Yet, in the near term, heavy investment in AI infrastructure, alongside rising energy demand from data centres, is contributing to shortages and adding to price pressures.

Higher productivity should, over time, be disinflationary. But it is equally true that interest rates should remain restrictive during periods of solid growth and the Fed has little reason to cut without a clear deterioration in the economic backdrop. While the bar for further rate hikes remains high, the case for easing fades if AI is proving inflationary in the short run. In that sense, the Fed seems to already be recalibrating their easing bias.

The week ahead

Manufacturing PMIs

In the US, the ISM and S&P Global manufacturing PMIs are released this week. Manufacturing has now been in expansion for four consecutive months, while services activity has eased but remains in expansion. Forward earnings growth has historically led the manufacturing PMI and on that basis the signal points to further strength in US manufacturing. Economists expect a reading of 55.3 from S&P Global and 53.0 from ISM, both firmly in expansion.

US employment report

The labour market in the US bounced in March and April and economists forecast another strong month for job growth in May. The unemployment rate is anticipated to remain at 4.3%.

Eurozone inflation

Euroarea inflation is expected to rise to 3.2% increasing the probability of a rate hike from the European Central Bank at their meeting on 11 June. The market places the probability of a June rate hike at 95%. 

Markets for the week 

 

This week in summary

• US launches new ‘self-defence’ strikes in southern Iran despite apparent progress in peace talks between the two nations
• Key sticking points remain unresolved, including control of both the enriched uranium and the Strait of Hormuz
• Last week, US Treasury market yields initially rose before retracing, while UK gilts outperformed amid falling oil prices and weaker UK data
• Equities remained resilient, with US indices extending gains for an eighth consecutive week and trading around record highs
• The US Federal Reserve (Fed) minutes struck a more aggressive tone, signalling policymakers remain willing to tighten further if inflation persists and pushing back expectations for rate cuts
• Kevin Warsh was sworn in as Fed Chair, with markets expecting pressure from him to a somewhat looser rate policy, a reduced balance sheet and less reliance on forward guidance

Market review

Volatility continues in the Middle East

Tensions in the Middle East remain elevated, with US strikes on Iranian targets overnight. In response, the Iranian leadership has warned the US will no longer have a ‘safe haven’ in the region. Despite this, peace negotiations continue in Qatar with President Trump saying talks are going ‘nicely’. The uncertainty is feeding through to energy markets; Brent crude opened up around 3% amid concerns over supply disruption and the timing of any deal to reopen flows through the Strait of Hormuz.

Rates divergence

The uncertainty is causing persistent volatility across the markets. US borrowing costs spiked last week: 30-year US treasury yields hit at a 19-year-high with the 10-year at its highest yield in over a year. Both then fell on Friday as positive signals emerged in US-Iran peace talks.

UK gilt yields, which had increased in recent weeks due to persistent inflation concerns and expectations of further interest rate rises, moved lower. This reflected falling oil prices and softer UK economic data, which led markets to scale back expectations for any further increases in interest rates by the Bank of England. The biggest change happened in short-term bonds, which are more sensitive to interest rate expectations, with yields falling as markets reduced the likelihood of further rate rises.

Subsequently, the gap between US and UK 10-year yields narrowed to around 35 basis points, reducing the relative income advantage previously offered by gilts.

Meanwhile, the Fed signalled that it is prepared to keep interest rates higher for longer if inflation remains persistent. However, incoming Fed Chair Kevin Warsh, a President Trump appointee, is expected to show a bias towards rate cuts, despite committing to lead the central bank independently. At the swearing-in ceremony, President Trump told guests: ‘I want Kevin to be totally independent. Don’t look at me. Don’t look at anybody.’

A tale of two economies

US data was resilient last week, with initial jobless claims holding near multi-year lows. The flash manufacturing Purchasing Managers’ Index (PMI) surged to a four-year high of 55.3, likely driven by pre-emptive stockpiling ahead of anticipated price uncertainty.

The UK picture was notably weaker. Unemployment rose unexpectedly to 5%, while payrolls fell by 100k in April, the largest decrease since the start of COVID-19. Inflation also came in below expectations, with headline Consumer Price Index at 2.8% versus 3.0% forecast.

Activity indicators softened: The services PMI fell into contraction at 47.9, and retail sales declined by 1.3% month-on-month, worse than expected.

This comes against a more uncertain political backdrop. Keir Starmer faces growing pressure ahead of the 18 June Makerfield by-election, which some see as a potential trigger for a leadership challenge.

This shift in UK data is important for policy expectations. A services sector moving into contraction materially weakens the case for further interest rate rises and raises the probability that the Bank of England remains on hold. This has supported shorter-dated UK gilts and suggests scope for further gains should growth concerns persist.

Equities resilience and earnings

Equity markets remained robust last week. US stocks traded weakly in the early part of the week, weighed down by a pullback in some technology names, before recovering from Wednesday onwards, supported by growing hopes of a resolution to the Middle East tensions. US small caps outperformed large caps, rising around three times as much as the broader market although still underperforming over the month.

Nvidia was the standout earnings story, reporting its latest quarterly revenues to end-Apri of $81.6bn, up 85% year-on-year and ahead of the $79.2bn consensus. The company also announced an additional $80bn share buyback and raised its quarterly dividend. Despite the numbers, the stock fell in a classic sell-the-news reaction following a significant pre-earnings run-up, ending the week down around 4.4%.

UK and European equities had a strong week, with the latter posting their best weekly gain in over a month. 

The week ahead

Economically, this week is dominated by US data releases on Thursday, when Personal Consumption Expenditures (PCE), the second estimate of Q1 Gross Domestic Product (GDP), durable goods orders and initial jobless claims are all released. Core PCE is expected to tick up to 3.3% year-on year (YoY) from 3.2%, Q1 GDP second estimate is expected to be unrevised at 2.0% annualised and durable goods orders are forecast to jump sharply to +3.9% MoM from +0.8% as firms continue to manage inventories against cost uncertainty.

Overarching all of this is the Iran situation. A US-Iran deal, if announced, would be the single most significant macro event of the week, materially affecting the oil price backdrop against which PCE and bond markets are interpreted. However, with the overnight strikes it seems that uncertainty is prevailing.

UK data is light, with the May British Retail Consortium shop price index, already released at 1.2%, the underwhelming highlight. This Friday, flash German CPI for May is expected to hold at 2.9% YoY although a higher-than-expected print may reinforce the case for a European Central Bank June hike which is currently 90% priced in.

 

This week in summary

• UK gilts (UK government bonds) have come under pressure from a confluence of factors, including rising political uncertainty following Labour’s election losses, a deteriorating fiscal outlook, sensitivity to higher global energy prices amid the conflict in the Middle East and persistent inflation against a backdrop of weak growth
• Shorter-dated gilts have been more resilient, with current yields offering a cushion and markets arguably overpricing future rate hikes given the fragile economic outlook
• While downside scenarios highlight the risk of stagnation or recession from sustained yield increases, they underplay stabilising forces including demand destruction and potential policy support
• The Bank of England (BoE) is likely to remain on hold, with any near-term rate hike risking a policy mistake; a sustained further rise in yields appears unlikely without renewed inflation pressure
• In the US, stronger-than-expected inflation and AI-driven investment demand are complicating the disinflation narrative, likely keeping the US Federal Reserve (Fed) on hold for longer than markets anticipate
• This week’s focus is on Federal Open Market Committee (FOMC) minutes, expected to signal a more hawkish and less easing-biased Fed, alongside UK labour and inflation data which should show moderating employment but still-sticky inflation with a likely summer reacceleration.

Market review

The UK’s political risk premia

Job security at No. 10 Downing Street is at a low following the election rout for Labour earlier in the month. The Prime Minister is under pressure to step down after his party lost nearly 1,500 council seats across the country. Wes Streeting, Andy Burnham and Angela Rayner are seen as the front runners to challenge Starmer.

The timing for the political turmoil has not been good for the UK’s bond market as global bond yields have coincidentally surged due to the conflict in the Middle East and rising inflation. UK gilts are under pressure on multiple fronts; a rising political risk premium, a deteriorating fiscal backdrop, heightened sensitivity to this global energy shock accompanied by stagnating economic growth and finally a wave of inflation that has seen UK consumers lose a third of their purchasing power since 2021. Gilt yields have risen to their highest levels since 1998 with the 10-year yield closing the week at 5.17%. The pound fell 2.2% against the US dollar last week.

Shorter maturity gilts have been more resilient. The Bloomberg UK 1-5 Year Gilt Index has fallen only -0.5% year-to-date. With yields as high as they are it is hard to envisage a negative return from here on a one-year view. The market is already pricing around three rate hikes by March 2027 which appears pessimistic given the negative growth outlook in the UK. High yields provide a cushion against further losses, while the current pricing leaves scope for a rally should the outlook shift or inflation concerns ease.

The question from here is how high can yields go and what is the impact on the UK economy. Economist Stephen Jen outlines three potential downside scenarios over the next three years, based on both the magnitude and persistence of higher yields. While such frameworks are useful, the transmission of yields into the broader economy is complex and uncertain.

Crucially, these scenarios are deliberately bearish and do not fully account for stabilising forces. They ignore the old adage that the cure to high prices is high prices; high prices destroy demand which in-turn reduces the inflationary impulse facilitating lower bond yields. Policymakers retain tools to support the market if necessary, for one the BoE could halt active Quantitative Tightening – they are already effectively the last central bank still reducing their balance sheet. The Debt Management Office will likely focus on shorter-dated issuance, reducing the government’s borrowing costs and limiting the risks at the most vulnerable point on the yield curve (the long-end).

Our base case is for the BoE to remain on hold for the time being, they may hike rates in Q2 or Q3 once, but this is likely to be a policy error. While the bond market may be vulnerable, we do not believe that a further rise in yields will be particularly persistent given the implications for the economy. Nonetheless it is important to understand the potential economic implications for a further and persistent deterioration in the UK bond market:

Scenario 1: Stagnation

A persistent 1% increase in yields (this is approximately what we have seen since the end of February) results in a prolonged period of stagnant growth. Mortgage rates rise by around 0.75% and remain elevated gradually weighing on the housing market, leading to an approximate 7% decline by 2029. Sterling weakens, with GBP depreciating by around 4%.

Scenario 2: Recession

A persistent 2% yield shock (another >1% rise from here) pushes the economy into recession, shrinking by 3.2% over the three years. Mortgage rates rise by around 1.5%. Housing market weakness becomes more pronounced declining more than 13%. GBP depreciates by 7–8% vs the USD. This scenario would also create significant fiscal stress for the UK Government.

Scenario 3: Deep recession

Under a persistent 3% yield shock, the economy enters a severe recession contracting by more than 5% over three years. Mortgage rates rise by approximately 2.3%, remaining structurally higher throughout the period, while house prices fall close to 20% by the end of 2029. GBP/USD declines toward 1.20 (currently at 1.33). This scenario would also present a major fiscal crisis for the UK Government.

A note on US Input prices, AI and inflation

US Producer Price Index (PPI) inflation jumped from 4% to 6% in April far exceeding economists’ expectations – this surprise cannot be entirely explained by energy prices. Consumer Price Index (CPI) inflation has now been above the Fed’s 2% target for 60 consecutive months. The CPI print also reported higher than expected goods and services (core) inflation.

With the US economy as strong as it has been and financial conditions relatively loose, inflation risks becoming more deeply embedded. Some at the Fed, including its new chairman Kevin Warsh have argued that productivity gains driven by innovation and AI support the case for lowering interest rates; but it is notable today that the surge in investment to build out the infrastructure for AI and the insatiable energy demand for data centres is creating shortages and putting upward pressure on prices.

While it’s true that higher productivity reduces inflation it is also true that interest rates should be more restrictive during periods of economic expansion and that the Fed should not be cutting interest rates without the economic need to do so. While the bar for interest rate hikes remains very high, the Fed may be less inclined to cut interest rates when their main argument for doing so (AI) is having the opposite effect on price trajectory than their models imply – in short – the Fed is on hold for the foreseeable, at least until an obvious price trend emerges.

The week ahead

FOMC minutes

The FOMC minutes, due Wednesday, will provide further detail on the April meeting - also Jerome Powell’s final meeting as Chair. We expect the minutes to reflect a somewhat more hawkish tone, with several participants leaning toward a more neutral policy stance. As a result, any explicit easing bias in the guidance will likely be scaled back going forward.

The focus will also be on corporate earnings, with results from a major technology company closely tied to AI infrastructure likely to be a key market driver.

UK employment and inflation

UK labour market data, due Tuesday, is expected to show a moderation in job growth in March. Forward-looking indicators suggest labour demand may soften further in the wake of rising energy prices. The unemployment rate is expected to remain stable at 4.9%.

April inflation data is released on Wednesday. Headline CPI is expected to ease to 3%, largely driven by favourable base effects and previous government policy measures. However, inflation is expected to pick up over the summer, potentially rising toward 3.5% by year-end.

 

This week in summary

• US equities rose as earnings continued to impress, with technology leading on AI-driven demand and improving sentiment helped by signs of easing US‑Iran tensions
• The US labour backdrop stayed resilient, with payroll growth beating expectations and continuing claims falling, although labour force participation weakened
• Hard data was firmer than expected, with construction spending and factory orders both surprising on the upside, helped in part by continued electronics and infrastructure demand
• Outside the US, market returns were broadly constructive, with Japan particularly strong, while Europe was more mixed despite modest gains in some major indices
• Consumer sentiment weakened sharply, with survey data pointing to a record-low reading even as realised activity remained firmer than feared
• In Europe, firmer eurozone producer prices and hawkish European Central Bank commentary reinforced the risk that rate relief may be delayed if inflation does not ease sufficiently.

Market review

Earnings strength offsets softer sentiment

Markets moved higher over the week, underpinned by a strong earnings season. In the US, equities were up by over 2%, led again by technology on the back of AI-related demand. The wider message is that investors continue to favour companies with visible growth and resilient fundamentals.

Elsewhere, returns were more mixed but still broadly constructive: German equities rose 0.2%, Italian equities were up over 2%, China and Japan both gained c.3% and Emerging Market equities surged over 6%. The UK market was an outlier, with a modest decline on the week. Risk appetite was also helped by some easing in immediate concerns around Middle East tensions, although developments in Iran and the associated impact on energy prices remain an important macro risk to watch.

The macro backdrop remains supportive, if somewhat less clean than the headline market move suggests. US payroll growth in April beat expectations and continuing claims fell, indicating that the labour market is still holding up. Construction spending and factory orders also came in ahead of expectations, reinforcing the idea that activity has not softened as sharply as many had feared. However, weaker labour force participation, softer productivity and a record low reading in consumer sentiment suggest resilience is becoming narrower beneath the surface.

From a market perspective, leadership has remained relatively concentrated. The technology sector has continued to set the pace, supported by AI-related spending and demand expectations, while more cyclical and rate-sensitive areas have been less consistent. That pattern fits a market still willing to pay for structural growth and earnings visibility, but less willing to give the benefit of the doubt where the macro outlook is more exposed. For now, stronger hard data are carrying more weight than weaker survey evidence, although the divergence between the two is worth monitoring.

Thematics – not all exposure is equal

A consistent theme in recent earnings seasons has been the strength of infrastructure-related investment supporting the build-out of AI capabilities. Infrastructure has historically been viewed as a relatively defensive sector, offering some protection when wider markets fall, yet elements of the space, notably utilities, were among the strongest performers within wider markets in 2025.

Similarly popular in 2025 were positions in precious metals, with gold, silver and others surging to new highs. Mining equities were also very strong, with some returns running to several hundreds of percentage points during the year. Elements of this strength were fundamentally driven, with precious metals serving as important industrial inputs, but geopolitical uncertainty, central bank purchases and falling interest rates also played an important role.

The behaviour of these two thematics has been notably different thus far in 2026, demonstrating the importance of active selection and monitoring within portfolios. Both gold and silver saw significant drawdowns following the emergence of the Iran-US conflict, with miners responding accordingly. This reaction stands in contrast with what might typically have been expected, as a significant escalation in geopolitical tension would often prompt a flight to safety, including into precious metals. In this instance, however, rising inflation concerns appear to have offset that relationship, with traditional safe haven assets offering less protection than investors might normally have anticipated.

The gold price and related equities are now broadly flat year-to-date despite the very strong start to the year. This sits in contrast to infrastructure-related equities, which have delivered double-digit returns year-to-date and provided, for the most part, reasonable downside protection during wider equity market sell-offs.

Infrastructure-related investments suffered heavily as interest rates rose in 2022, so one might have expected similar concerns given the inflationary expectations emerging from the conflict. However, underlying fundamentals within the space have thus far proven resilient, with the strong inflation linkage of cashflows providing investors with greater comfort around future performance. Policy-backed investment in electrification and grid expansion, together with rising expectations for AI-related power demand, has brought a sector once viewed as relatively defensive into sharper focus for a wider group of investors.

As hopes for a resolution to the conflict resurface, we are again reminded of the importance of diligence and rigour in investment decision-making and of looking beyond first-order effects. One might have expected two traditionally defensive or safe haven themes to have delivered similar performance in portfolios this year, but gold and infrastructure have diverged relative to wider global equities. While this is not unique to these particular themes, it does highlight the need to combine long-term conviction with tactical flexibility in an evolving market environment.

The week ahead

US macro data: Existing home sales (Monday); CPI (Tuesday) PPI (Wednesday) and Retail Sales (Thursday) will give a further read on underlying strength of the US economy. Consensus is for broadly flat home sales and month on month CPI/PPI reads, with an uptick in year-on-year CPI and weakness in core retail sales.

Oil: Crude oil inventories and OPEC monthly market report on Wednesday will give colour on the current state of the oil market.

Geopolitics: US President Trump is due to meet Xi Jinping on Wednesday – Friday this week, in the first visit to China by a US President in nearly a decade. Tariffs and the Iran war will be the likely focus of discussion, with potential for market-moving updates in both directions.

 

This week in summary

• Global equities rose 0.76% on the week and 10.15% in April, with the US leading thanks to exceptionally strong and broad‑based earnings
• The ‘Magnificent Seven’ delivered across-the-board earnings beats, though market reactions were mixed; the group finished the week up 0.45% amid excitement over Artificial Intelligence (AI)‑driven demand offset by scrutiny of rising expenses and investment
• AI‑related capital expenditure remains extremely strong, with multiple investment categories hitting record highs and high‑tech’s share of US non‑residential capex reaching a record 55%
• Ten major central banks met with few surprises; all held rates, though the US Federal Reserve (Fed) saw unusual dissent
• Markets expect US cuts while the European Central Bank (ECB) and Bank of England (BoE) face pressure to tighten despite weaker economies
• US labour‑market data remains robust, with weekly jobless claims hitting their lowest level since 1969 last week, raising the possibility of a stronger‑than‑expected April employment report due this Friday.

Market review

US equities lead on earnings strength

Global equities ended the week up a muted 0.76%, but April closed with a striking 10.15% gain - the strongest monthly return since November 2020. The US continues to lead the rally, supported by broad‑based and exceptionally strong earnings. With most companies now having reported, the market is on track for a sixth consecutive quarter of double‑digit earnings growth. Analyst expectations for earnings growth over the next year rose to 21.2% last week, helping to justify the rebound following the March sell‑off around the Iran conflict.

The focus last week was on the ‘Magnificent Seven’, with five of the seven mega‑cap tech names reporting. All five beat expectations on both revenue and earnings, though market reactions were mixed as investors weighed AI‑related demand against rising expenses/investment. The group showed wide dispersion and ended the week up 0.45%.

A key takeaway is that AI‑driven capital expenditure remains extremely strong, with no signs of slowing, and external capital‑spending indicators are red hot. Nondefense capital goods orders (excluding aircraft) hit fresh record highs in March, continuing the strong uptrend since 2024. Intellectual property (including software) and business‑equipment investment (including semiconductors and servers) also reached record highs in the first quarter and have been rising for five years. Software, information‑processing equipment, and  research and development have likewise reached fresh record highs this year. Growth in information‑processing equipment has steepened significantly amid the AI‑driven investment boom, pushing a high‑tech’s share of total non‑residential capital spending to a record 55%.

Few surprises from central banks

There were a total of 10 central bank meetings last week including the Fed, ECB, the BoE and the Bank of Japan (BoJ). All face renewed inflation challenges. The key question is, of course, how much inflation is coming down the pipeline and how central banks will respond.

The Fed has a dual mandate explicitly targeting full employment as well as inflation, this makes it easier for the Federal Open Markets Committee (FOMC) to prioritise the labour market over inflation and to delay interest rate hikes. It helps that the US is about half as vulnerable to oil shocks as Europe or Asia. Markets still anticipate interest rate cuts in the US this year, while the ECB and BoE are expected to raise rates. However, both the UK and eurozone have weaker economies, and the transmission from supply‑side inflation (energy) to demand‑side inflation (wages and goods) is less clear. Workers have less bargaining power than in 2022, and firms may struggle to pass on costs to already‑pressured consumers. This may make policymakers more cautious about tightening further, even as markets price in additional hikes.

The Fed, ECB, BoE and BoJ all held rates steady last week and there were few surprises with the BoE, ECB and BoJ all hinting at their willingness to potentially raise rates when necessary. The Fed, however, saw an unusually high number of dissenters: one voting for a rate cut rather than a hold, and three opposing the inclusion of language implying a continued easing bias. This was notably the final FOMC meeting chaired by Powell and marked the highest number of dissents during his tenure.

While Powell’s term as chair ends in May he has vowed to remain on the Board of Governors for an unspecified period (an uncommon choice, as outgoing chairs typically step down entirely). He cited political interference as his reason for remaining. Powell’s term on the Board runs until January 2028.

The week ahead

US employment report:

The US labour market has remained robust this year, with job growth at larger companies offsetting cooling labour demand among smaller businesses. The unemployment rate is expected to hold at 4.3% in April. Weekly labour‑market data for April has also been remarkably strong. Initial unemployment claims fell last week to their lowest level since 1969, indicating that layoff activity remains exceptionally subdued. Continuing claims are also declining. This strength in the high‑frequency data raises the possibility of a stronger‑than‑expected April employment report from the Bureau of Labor Statistics.

 

 

This week in summary

• Equity markets paused after a sharp April rebound, with US strength supported by corporate earnings, while Europe and other regions lagged amid ongoing Middle East uncertainty
• Oil has surged to $105 per barrel (bbl) but the market has adapted well to the historic supply shock through rerouted flows and emergency supply
• The energy shock is feeding into inflation, with UK Consumer Price Index (CPI) rising to 3.3%, though pressures remain largely energy-led for now
• Central banks are expected to look through the spike, with inflation expectations still anchored, keeping the bar high for further tightening even as rate cuts are pushed out
• A busy week ahead, with major central banks expected to hold rates, alongside US growth rebounding and early signs of a conflict-related slowdown in euro area data.

Market review

Schrödinger’s Strait: oil shock, contained

The market recovery in April has been more sprint than marathon. While the US clung to its highs last week thanks to some strong corporate results, Europe and other regions slipped back, once again reacting to developments in the Middle East. The ceasefire may have been extended, but it remains fragile. The Strait of Hormuz is simultaneously open and closed (‘Schrödinger’s Strait’), and negotiations are stale, at best.

With both sides unyielding and with President Trump keen to end the conflict, it may well be that further military escalation is needed to expedite the war. There are hawkish members of the administration who are inclined to ‘finish the job’ in forcing regime change and this remains a potentially overlooked near-term risk for markets. For the moment, a continuation of extended ceasefires and stalemated negotiations seems the most likely outcome and equities are attempting to look through it all and focus on the rosier fundamental picture.

Oil remains the market’s most direct pressure point. Brent rose 16.5% last week to $105/bbl, yet some analysts have noted that the move still looks contained relative to the scale of disruption. The Arab oil embargo in 1973 removed roughly 5% of global supply and drove a 400% price surge. Today’s shock is significantly larger, yet prices have moved from around $60 to $100, surging rather than spiralling.

As highlighted by economist Ed Yardeni, this reflects a market that is far more adaptive than in past crises.

First, supply has not disappeared, it was disrupted and now, where possible, is being rerouted. Saudi Arabia and the UAE have pushed alternative pipeline infrastructure to capacity, diverting flows away from the Strait and offsetting the loss of seaborne supply by c.7m barrels per day (c.35% of the supply previously through the Strait).

Second, emergency supply has filled part of the gap. Strategic reserve releases and policy flexibility to accommodate sanctioned barrels, have injected additional liquidity into the market.

Third, headline prices are masking regional stress and illiquidity. While Brent has consolidated near $100, physical markets, particularly in Asia, are far tighter, with buyers paying substantial premiums to secure immediate supply. The global benchmark and futures (where two parties agree today to buy or sell something at a set price on a future date) therefore understate the severity of local dislocations in the spot market.

Fourth, like the old saying ‘the cure for high oil prices is high oil prices’ demand is already adjusting lower. Higher prices are beginning to ration consumption, from reduced air travel to government-imposed efficiency measures across emerging markets. The International Energy Agency (IEA) now expects global oil demand to contract this year.

Finally, and perhaps most importantly, the global economy is simply less energy intensive than in previous decades. That lowers the price required to rebalance supply and demand, preventing the kind of extreme price spikes seen in the 1970s. The global economy is more protected against high energy prices and $150 could well be the new $100, the level previously assumed to cause a recession.

All these factors considered, a reasonable base case may be for oil to trade between $85 and $100/bbl for the short to medium term.

The energy shock is already feeding into headline inflation. In the UK, CPI rose to 3.3% in March, up from 3.0%, with the increase almost entirely attributable to higher energy prices. A similar pattern, to a lesser extent, is evident in the US.

For now, central banks are likely to look through the initial energy-driven spike. Core inflation remains relatively contained and, longer-term inflation expectations are still anchored. Futures prices in the UK still show inflation undershooting the Bank of England’s 2% target over the medium term. Rate cuts have been delayed, but the bar for renewed tightening remains high. As long as expectations stay anchored and second-round effects are contained, this is more likely to slow the pace of easing than reverse it entirely. As long as a resolution to the conflict remains elusive, bond yields in the UK and Europe are likely to remain elevated and the probability for more structurally embedded inflation is increased.

The week ahead

Central bank meetings:

There are a total of ten central bank meetings this week including the Bank of England, the US Federal Reserve, the European Central Bank (ECB) and the Bank of Japan. All are expected to hold rates steady while maintaining flexibility to hike rates if signs of second-order effects begin to appear. 

US GDP growth: 

Economic growth in the US is expected to have accelerated in the first quarter to 2% from 0.5% in the final quarter of last year. The temporary slowdown in Q4 was driven predominantly by the government shutdown. This year consumer spending has softened slightly on the back of elevated inflation fears while business investment has been robust. 

Euro-area GDP growth:

Growth in the first quarter is expected to come in at 0.2%, a slower pace that evidences the first bit of damage from the conflict in the Middle East. The figures are released the same day as the ECB’s rate decision and the inflation report for April. Inflation is expected at 3.0%, up from 2.6%. 

 

 

This week in summary

• Equities rebound sharply to record highs, with global markets up 3.9% in USD terms, supported by strong earnings, resilient data and easing geopolitical tensions
• The ceasefire between the US and Iran supports sentiment but risks linger, with lower oil prices offset by ongoing disruption in the Strait of Hormuz and fragile regional dynamics
• Gilt demand surges despite higher yields, with a record UK syndication highlighting strong appetite amid improved valuations
• UK inflation in focus this week, with March CPI expected to rise to 3.3%, driven largely by higher fuel prices and geopolitical effects.

Market review

Upbeat earnings drive equities back to highs

A strong start to earnings season helped push equities back to record highs. Global equities gained 3.9% in USD terms with the technology sector once again the best performing sector, notching a 7.7% return. The rally, led by US stocks, was supported by a combination of resilient economic data, robust earnings, and most prominently, easing geopolitical tensions.

Perhaps most striking is the speed of the recovery. Equity markets have returned to highs after hitting lows just over a fortnight ago, one of the fastest rebounds of its kind. Last week was the first time the US market gained more than 3% for a third consecutive week. Market leadership remains highly rotational as the losers have become winners.

The US-Iran ceasefire, alongside signs of broader regional de-escalation after confirmation from Iranian Foreign Minister Abbas Araghchi that the Strait of Hormuz was “fully open”, supported sentiment and drove a sharp decline in oil prices. As has often been the case in this conflict, developments over the weekend have complicated the picture. Tanker crossings in the Strait have barely shown any recovery. Iranian gunboats attacked a tanker while the US seized and boarded an Iranian vessel.

The equity market recovery has felt almost instantaneous. The move does leave markets vulnerable to a deterioration in the conflict. There is also an underlying assumption that any lasting ceasefire will return things back to the previous equilibrium but much like putting a genie back in a bottle restoring trade through the Strait of Hormuz could prove more difficult. That said, as long as fundamentals and economic data remain robust, investors may continue to prioritise the fundamental picture over the murky waters of the Hormuz. 

UK government bonds draw record demand

Price pressures in the gilt market (UK government bonds) have eased in April while demand has proved strong at current higher yield levels. The UK Debt Management Office issued a record £15bn in a ten-year gilt syndication which attracted demand of nearly ten times the amount issued.

Gilts in the two  to seven year sector continue to yield up to around 4.4% - around 0.5% higher than at the end of February - offering an attractive yield in the context of subdued economic conditions. While inflation may remain elevated in the short term, most medium term projections still point to moderation over coming years. The OECD, for example, expects UK CPI to average around 4% in 2026 before falling to approximately 2.6% in 2027. Although forecasts are particularly difficult in the current climate the case for rate hikes appears limited against a backdrop of soft growth and rising unemployment.

Although it has adjusted lower, market pricing for the Bank of England (BoE) base rate nevertheless continues to imply further tightening this year, a stance that remains difficult to reconcile with policymakers’ recent messaging. Immediately following the March Monetary Policy Committee meeting, BoE Governor Andrew Bailey cautioned against reaching any strong conclusions on rate hikes while Committee members through March and April continued to emphasise a challenging economic backdrop.

This suggests a relatively high bar for additional rate increases, particularly if incoming data continue to point to a weak economy. Policymakers would likely opt to look through the near term inflationary impulse.

The week ahead

Wednesday: UK inflation

Inflation is expected to have risen to 3.3% in March showing the first impact of the US-Iran war. Fuel prices will be the main contributor having risen an expected c.9%. Bloomberg economics’ baseline scenario puts inflation ending the year 1.3% above their pre-war scenario, much depends however on geopolitical developments from here.

 

This week in summary

• Markets rallied sharply on the two-week ceasefire in Iran, with global equities up 4.1% in USD terms and credit tightening back towards pre-conflict levels
• Performance was broad-based, led by US technology, while energy lagged as oil prices fell back below US$100 per barrel (Bbl)
• Inflation is rising, driven by energy, while growth expectations are being revised lower
• The current state of the ceasefire is opaque, with ongoing disruption in the Strait of Hormuz
• Focus this week shifts to earnings season, with bank results and forward guidance on margins key to determining whether recent market optimism can be sustained.

Market review

Markets surge on fragile ceasefire

Markets swung sharply higher again last week. Global equities gained 4.1% in USD terms, with most of the move concentrated midweek following the announcement of a two-week ceasefire between the US and Iran. A weaker US dollar diluted returns to 2.1% in sterling terms, but the direction of travel was clear as investors moved quickly back into risk.

The rally was broad-based, US equities-led, with technology outperforming. Credit markets followed suit, tightening forcefully back towards pre-conflict levels. Energy was the only sector to post negative returns as oil prices fell back below US$100/Bbl, registering their steepest daily decline since 2020.

Core government bonds rallied over the week, particularly in the UK and Europe, as expectations for rate hikes were pared back. Investors are constantly reassessing the finely balanced and fluctuating risks to inflation and growth. Investor concerns so far have been heavily tilted towards the ‘flation’ over the ‘stag’. The positive moves in bond markets last week were a welcome shift towards the ‘stag’.

Inflation is beginning to move higher, driven entirely by energy costs. In the US, CPI inflation rose to 3.3% year-on-year in March. At the same time, GDP growth has been revised down, highlighting the early signs of a stagflationary impulse. Globally, the picture is one of resilience for now, but with clear signs that the energy shock is beginning to feed through.

The situation in the Middle East is evolving faster than ever. Despite the ceasefire, hostilities never fully halted, with missiles reportedly fired from Iran immediately after the ceasefire announcement, possibly due to poor communication or lack of control within the Iranian army. The unclear terms of the ceasefire (for example whether it applies to Israeli strikes against Hezbollah in Lebanon) highlight the fragility of the agreement.

The trade situation in the Hormuz is still unclear too. Research firm Citrini even sent an analyst to the Strait to report back. After avoiding Iranian drones & patrol boats and after being detained by the Omani coast guard his conclusion was that the Strait is ‘neither open, nor closed’. President Trump has announced that the US will begin to blockade the Strait themselves after talks collapsed in Pakistan over the weekend.

The US has inflicted significant damage against Iranian military and while they are winning the kinetic war they are losing the economic war. The US has devastated Iranian military capability including 90% of its naval fleet. Despite this Iran retains just enough capacity to block the Hormuz and disrupt the flow of commerce. Both sides believe they have the upper hand in negotiations which may be a sign that further damage needs to be done before any ground can be made diplomatically.

The week ahead

Earnings season

It is a relatively quiet week on the economic calendar, leaving markets firmly focused on developments in the Middle East. However, earnings season now begins, with several major banks kicking things off.

Expectations are high, with banks set to deliver another strong set of results. The focus will be less on the headline numbers and more on guidance, particularly around margins. Can companies sustain margins in the face of rising input costs?

For now, the bar is high and the direction and scale of earnings surprises will be critical in determining whether the recent market optimism is justified.

 

This week in summary

• Markets rebounded despite volatility, with equities and bonds both gaining as optimism around a potential ceasefire in the Middle East improved sentiment
• Price action remains reactive, with markets at times driven more by headlines and Truth Social than underlying fundamentals
• Beneath the surface, fundamentals are holding up, with resilient economic data and expanding corporate margins
• Sector leadership reflected the conflict, with previously pressured areas rebounding most strongly
• Focus this week centres on Donald Trump’s deadline on Iran and US inflation data, with escalation and high energy costs testing the balance between resilient fundamentals and geopolitical risk.

Market review - what's happening now?

Markets rebound on strong fundamentals and hope for a ceasefire

In Dr. Seuss’ ‘If I Ran the Circus’, the 'Zoom-a-Zoop' troupe’s trapeze act is so chaotic that no one knows ‘who will catch which by the what and just where, or just when and just how in which part of the air’. It has been an apt parable for markets since the conflict in the Middle East began six weeks ago. The unpredictable rotations have been uncomfortable, but once we cut through the noise there is room for optimism. Markets have been reactive; passengers to Truth Social rather than fundamentals.

Beneath the surface, the picture remains stronger than daily price action suggests. Panic is rarely a profitable strategy. History rewards patience, and over time fundamentals such as earnings, growth and economic strength prevail over short-term geopolitical noise.

Last week equities and bonds both performed well, but measurements week-on-week have often felt unhelpful given the scale of daily moves. An interesting pattern has emerged where markets have been weak in the last days of each week as investors have been cautious of carrying risk into the weekend, which has often been where the key developments in the war have occurred. Easter broke this trend with global equities rising 3.6% in sterling terms. Regions and sectors most sensitive to the conflict were the biggest winners. The optimism stemmed from emanations out of Iran that some form of settlement was possible in the short-term.

Communication Services and Technology alongside the Materials and Real Estate sectors gained the most. Bonds also rallied with gilts (UK government bonds) leading the charge with the 10-year gilt yield falling 0.14% to 4.83%.

Markets open today on stronger footing with events over the weekend thankfully mostly muted following the terrific rescue of the downed F-15E servicemen. Optimism could fade quickly with Trump’s self-imposed deadline on Iran to re-open the Strait of Hormuz by 20.00 EST today. Trump threatens extensive strikes against Iran’s infrastructure, specifically bridges and energy production facilities.

For European policymakers, the focus remains on reopening the Strait of Hormuz through diplomacy rather than military escalation. That requires coordination with regional powers and other major energy importers, while attempting to reduce Iran’s incentives to keep the Strait closed without provoking further tension with the US. This is a difficult balance to strike. Nonetheless, the UK’s Foreign Secretary, Yvette Cooper hosted a call with counterparts from about 40 other nations aimed at doing exactly that. Europe is not insulated from this conflict. Its reliance on imported energy leaves it particularly exposed, and the adopted ‘this is not our war’ philosophy to-date sits in contrast with economic reality.

Economic data over the week was supportive, particularly the S&P Global Manufacturing survey, which reported expanding manufacturing activity globally despite the war. This was complemented by a particularly robust US labour market report with 178k new jobs created in March, the biggest increase since 2024. Although this was a strong report, previous numbers were revised lower and this data is set amidst a broader cooling trend for the labour market.

From a corporate perspective, profit margins continue to edge higher and will be a key focus as we move into the upcoming reporting season. The recent improvement has been supported in part by the strength in the energy sector, but it is also evident more broadly across the market. As long as companies are able to maintain or expand margins, markets tend to remain well supported from a fundamental perspective. That still appears to be the case today. While there is always a risk that earnings disappoint against a more uncertain backdrop, there is little evidence of any meaningful deterioration so far.

The first quarter ended with another note of confidence where global M&A activity recorded its most impressive first quarter in history with total transactions of US$1.3tn. On this front there is an exciting pipeline for deals and IPOs for the remainder of 2026. It is still early days to say with any certainty what the impact of a potential extended conflict will mean for deal activity and for the global economy, but there are many reasons to remain optimistic. 

The week ahead – what next for investment markets?

Tuesday: Trump’s deadline on Iran

“All hell will rain down on Iran” if the Strait of Hormuz is not opened today by 20.00 EST, according to President Trump. Both sides are reportedly negotiating a ceasefire but will be far from agreeing terms, it seems that today escalation is more likely than successful negotiation.

Oil prices remain elevated six weeks into the conflict, and the longer the disruption persists, the greater the risk that the inflation impulse feeds more meaningfully into the global economy. The window for a clean resolution is narrowing. Without a de-escalation, markets may be forced to reassess the current balance between resilient fundamentals and rising geopolitical risk.

Friday: US CPI inflation

Inflation is expected to rise to 3.4% for March thanks to rising gasoline prices, the most immediate impact from the Iran war. Economists expect a monthly reading of 1%, the highest since June 2022.

Markets for the week

 

 

 

 

This week in summary

• Volatility rose sharply, with the VIX Index at its highest since 2025, as Middle East developments dominated a quiet data week
• Equity and credit markets remained resilient despite the shock, suggesting a benign growth and inflation outlook is still being priced
• Continued weakness in UK government bonds saw yields move higher on fears of a more persistent inflation impulse
• Markets are now pricing two conflicting narratives: resilient growth versus entrenched inflation
• The bond market appears focused on upside inflation risks, while equities continue to anchor to a softer, more stable outcome
• Focus will likely remain on the Iran war as it enters its fifth week, but eurozone inflation and US labour market data will provide an early test to the new forecasts since the war began.

Market review - what's happening now?

Bonds and equities tell separate tales

It is not just energy that is in short supply, but certainty too. The VIX Index rose to 31 last week, its highest level since the tariff volatility of 2025. With not much on the economic calendar, investors focused on developments in the Middle East with news flow steering equities, bonds and oil prices. Despite this, headline equity and credit markets have remained notably resilient, while sovereign bonds have weakened sharply, particularly in the UK. Two distinct narratives are now being priced simultaneously: a relatively benign outcome in risk assets, and a far more troubling one in government bonds.

Global equities are down 3.4% year to date in sterling terms. Emerging markets and Japan remain the standout performers, still in positive territory. The UK is broadly flat, Europe is in line with global markets, and the US has lagged, down 6.6%, with technology again under pressure last week. Credit markets tell a similar story of resilience. Global high yield spreads have widened modestly to 3.4%, around 0.5% higher on the year, while investment grade spreads sit at 0.83%, only 0.1% wider.

Taken together, risk assets continue to price a contained outcome. The market is assuming that any inflationary impulse from the conflict with Iran will prove manageable and insufficient to materially damage demand or corporate profitability.

The bond market is telling a different story. Yields have moved higher, reflecting concern that a more prolonged conflict could embed inflation. There are echoes here of the 1970s.

Late-1960s fiscal expansion associated with the Vietnam War pushed inflation higher, while monetary policy remained too accommodative for too long. The collapse of the Bretton Woods system in 1971 removed the anchor on the US dollar, adding further fuel. The subsequent energy shocks, first the Yom Kippur War and oil embargo, then the Iranian Revolution, turned an inflation problem into an inflation regime. By 1980, inflation had reached 14.8% in the US and 21.6% in the UK.

It ultimately took the Volcker Shock, with rates pushed above 20% under Paul Volcker, to restore credibility, at the cost of a deep recession and a prolonged period of weak real equity returns.

The parallel is not exact, but it is instructive. If the bond market is right, and inflation proves persistent, then current equity pricing looks sanguine.

For now, there is little evidence that this dynamic is taking hold. It may be that bonds are aggressively pricing a tail risk, while equities remain anchored to a more probable and resilient path. In doing so, the bond market appears focused on upside inflation risks while underappreciating the downside risks to growth.

There remains a path back toward something resembling the previous equilibrium if the conflict de-escalates quickly, but that window is narrowing. Initial mitigation mechanisms, whether through rerouting supply, drawing on reserves or utilising sanctioned flows, are finite. Even in the event of a ceasefire, with the Iranian regime still in place the geopolitical risk premium is unlikely to fully dissipate. The risk of renewed disruption to the Strait of Hormuz, and by extension global energy supply, remains a live one.

The week ahead – what next for investment markets?

Tuesday: Eurozone inflation

The preliminary reading for inflation in March is expected to come in hot at 2.6% rising from 1.9% in February. This will be the first glimpse into inflation since the surge in oil prices triggered by the Iran war. 

Friday: US employment data

Unemployment in the US is expected to remain at 4.4% while job growth and labour participation likely picked up from a weak reading in February. 

This week in summary

• Geopolitical risk remained elevated as the conflict between the US, Israel and Iran intensified, disrupting energy markets and keeping investors focused on the risk of a prolonged shock to oil and gas supply through the Strait of Hormuz
• Global equity markets declined as rising energy prices, renewed inflation concerns and mixed central bank communication weighed on sentiment, with US equities leading declines, though energy stocks provided notable relative support
• Government bond markets sold off sharply, led by UK gilts, as investors reassessed inflation risks and interest rate expectations following a more hawkish shift in central bank rhetoric
• Scrutiny of private credit increased amid retail investor outflows and governance concerns, though spillover risks to the broader financial system remain limited.

Market review - what's happening now?

Middle East: Energy shock dominates, but markets remain measured

Developments in the Middle East continued to dominate global markets this week, with investor attention firmly centred on the Strait of Hormuz and the implications for global energy supply. Continued attacks on shipping, damage to key infrastructure and restrictions on transit have raised the risk of a significant energy shock, keeping volatility elevated across commodity markets.

While the headline exposure remains substantial – around a fifth of global oil supply normally transits the Strait – the realised disruption to supply has so far been less severe than initially feared. Limited transit continues for selected countries, bypass pipelines in Saudi Arabia and the UAE are operating near capacity and coordinated strategic reserve releases have helped offset part of the shortfall. At the same time, higher prices and slowing activity are beginning to temper demand.

Energy markets have nevertheless reacted forcefully. Oil prices remain elevated, while gas prices have risen sharply, particularly in Europe and Asia. Despite this, broader financial markets have remained relatively orderly. Equity drawdowns have been contained and moves in bond yields, while meaningful, suggest investors are still assuming a shorter or more contained conflict.

That said, risks remain clearly skewed. Markets are likely to stay highly sensitive to headlines, particularly around any further escalation or credible signs of de escalation. Sustained disruption to energy infrastructure or supply routes would likely prompt more pronounced moves across both equity and fixed income markets.

Central banks: Policy signals drive volatility and repricing

The latest round of central bank meetings demonstrated once again the difficulty policymakers face in navigating an energy driven supply shock. While the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) all held rates steady, market reactions were driven less by the decisions themselves and more by shifts in tone, projections and forward guidance.

In the UK, gilt markets were at the centre of the reaction. Following the BoE’s meeting, upward revisions to near term inflation projections and references to potential tightening triggered a sharp repricing in rates. Yields moved significantly higher, with the 10 year approaching 5% – its highest level since 2008 – and markets shifted to price in up to three rate hikes by year end, a dramatic reversal from expectations for cuts at the start of the year.

This response appears difficult to reconcile with underlying domestic conditions. Governor Andrew Bailey later sought to temper market expectations, emphasising that current inflation pressures largely reflect an external energy shock rather than strength in domestic demand. With UK growth stagnating, unemployment at 5.2% and demand softening, the outlook remains more consistent with a prolonged pause and eventual easing once energy pressures fade.

From an investment perspective, the repricing has improved the attractiveness of UK fixed income. The ‘belly’ of the curve – gilts in the three  to ten year range – offers a compelling balance of yield and volatility, capturing elevated starting yields without the extreme price sensitivity of longer maturities.

In the United States, the Fed also held rates steady, maintaining a cautious stance while acknowledging extreme levels of uncertainty. Chair Jerome Powell highlighted the risk that energy driven shocks could become embedded in inflation expectations, reinforcing the challenge of balancing inflation control against slowing growth. This was reflected in the data, with producer price inflation accelerating to 3.4% year on year, its fastest pace in a year.

US equities declined amid renewed inflation concerns and rising yields, with major indices ending the week lower. Energy stocks stood out as clear outperformers, benefiting from higher oil prices. Treasury yields moved higher overall, with the 10 year rising to around 4.4% as investors reassessed the policy outlook.

In Europe, the ECB also kept rates on hold but raised its inflation forecast, warning that higher oil and gas prices could have a material near term impact. Across developed markets, central banks remain on hold but increasingly constrained, as energy driven inflation pressures complicate the disinflation narrative.

Private credit: Cracks emerge, but risks remain contained

Private credit markets came under increased scrutiny as retail investors stepped up withdrawals from semi liquid funds, exposing structural weaknesses in parts of the asset class.

Pressure reflects a combination of factors, including high profile instances of fraud that have highlighted risks in opaque lending structures, concerns around underwriting standards – particularly in software related lending – and persistent uncertainty around asset valuation in the absence of frequent market pricing.

These issues have driven elevated redemption requests in retail focused vehicles. However, built in structural features such as redemption caps have limited the need for forced asset sales, allowing stress to be absorbed gradually rather than through disorderly market moves. Investors seeking liquidity are instead facing delays, while underlying assets continue to reprice over time.

Importantly, broader systemic risks appear contained. Private credit represents a relatively small share of total corporate borrowing, and most capital remains locked in long term institutional structures. While exposures across banks and non bank lenders warrant monitoring, they remain modest relative to the size of the overall financial system.

The adjustment is therefore likely to play out over time, through declining valuations and selective defaults rather than a sudden dislocation. At the same time, significant capital has been raised by distressed and opportunistic credit investors, providing a potential backstop by supporting secondary market demand and limiting wider contagion.

The week ahead – what next for investment markets?

Geopolitical developments in the Middle East:

Markets will remain highly sensitive to developments around the Strait of Hormuz, energy infrastructure and any signs of escalation or de escalation

Tuesday: US, UK, Europe, Japan and Australia flash Purchasing Managers’ Index (PMI) for March – may give an indication of whether the conflict is impacting sentiment.

Quieter week for macro news:

Tuesday: US Manufacturing and Services PMI – both expected to remain in expansionary territory

Tuesday: Japan Consumer Price Index (CPI) for February – headline inflation fell last month but core remains sticky – important read for the newly energised Takaichi government

Wednesday: UK CPI for February – expected to remain constant at 3%

Thursday: US Initial Jobless Claims – expected to tick up slightly versus last month’s read.

This week in summary

• The escalating conflict in Iran kept markets volatile, with Brent crude briefly reaching $120 per barrel (bbl) before ending the week up 10.8%, leaving the Iran war responsible for roughly one-third of the current oil price
• Rising energy prices pushed short-dated bond yields sharply higher, particularly in the UK, where the two-year gilt (UK government bond) yield has risen 61 basis points (bps) since the end of February as markets reassess inflation risks
• The Strait of Hormuz has become the central variable for markets, with around one-fifth of global oil and liquefied natural gas (LNG) flows passing through the waterway, meaning prolonged disruption would represent a significant global supply shock
• Outside of energy, defence and utilities markets struggled, with the US dollar acting as the primary safe-haven while technology stocks continued to correct amid a broader rotation in equities
• In the week ahead, attention turns to a trio of central bank meetings, with the US Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) all expected to hold rates while assessing the inflationary implications of higher energy prices
• Updated economic projections from the Fed and policy guidance from the BoE and ECB will be closely watched for signals on the extent to which the energy shock delays the expected path of rate cuts.

Market review – what’s happening now

The battle for the Strait of Hormuz

Volatile markets remained fixated on the war in Iran. Brent crude surged to $120/bbl on Monday before ending the week at $103.1, up 11.3% on the week and 67% year-to-date. The Iran war shock is one-third of today’s oil price.

President Trump suggested early in the week that the conflict was progressing ahead of schedule and could end soon, briefly lifting risk sentiment. Those hopes quickly faded with reality as no such certainty can be given in the fog of war. Iran seems to be hoping that a prolonged conflict that keeps oil prices elevated will erode the US’ resolve for war and increase international and domestic pressure to strike a deal.

The upward pressure on short-dated bond yields has been severe, with the UK the main pressure point. The two-year gilt yield has risen from 3.52% at the end of February to 4.13%, an increase of 61bps. This compares with a 34bps rise in the two-year US Treasury yield and a 44bps increase in the two-year German bund yield.

For markets, the central concern remains inflation, and the key variable is the Strait of Hormuz. Roughly one fifth of global oil and liquefied natural gas flows through the Strait, alongside around 5% of global trade. Its effective paralysis therefore represents a significant global supply-side shock and has become the linchpin of the war. The longer the Strait remains disrupted, the greater the risk that this energy shock spreads through supply chains and begins to generate broader inflationary pressure.

A battle for control of the Strait increasingly appears inevitable. Iran and its Houthi proxy in Yemen continue to threaten shipping routes, while the US and its allies attempt to neutralise their ability to strike commercial vessels. Although US and Israeli forces have reportedly made progress in degrading Iran’s missile capabilities, the country’s large stockpile of relatively inexpensive Shahed drones may prove more difficult to eliminate. Their ability to be launched from unmarked civilian vehicles makes them particularly challenging to detect and destroy.

Interestingly, President Trump has recently shifted from celebrating low energy prices to suggesting that higher oil prices are good for the US, a U-turn that may hint at expectations for a longer conflict and the President’s determination to see the Islamic Revolutionary Guard Corps (IRGC) destroyed.

With central banks now confronting this new and unpredictable world, the outlook for interest rates has too become increasingly uncertain. The BoE had previously been expected to cut rates at this Thursday’s meeting, but that now appears unlikely. Markets have even begun pricing the possibility of a rate increase later this year. That seems premature given the negative momentum in the UK economy, despite the country’s sensitivity to energy prices (see last week’s note).

The Fed appears more comfortable looking through the shock. The US economy is also more insulated from the shock given its domestic energy production and large strategic reserves. Governor Christopher Waller suggested that the energy spike is likely to prove a one-off event rather than the beginning of sustained inflation. This comes as US labour market data surprised to the downside, with February payrolls showing a loss of 92,000 jobs against expectations for a gain of 55,000. While the labour market is softening, solid corporate profit growth is still expected to keep it from deteriorating dramatically in the short-medium term.

The ECB sits somewhere between these two positions. Having already reached what it considers a neutral policy rate, the ECB has paused its easing cycle. However, President Christine Lagarde has struck a more hawkish tone in response, emphasising that the ECB would act to prevent a repeat of the previous inflation surge. Governing Council member Peter Kazimir suggested that rate hikes could occur sooner than markets currently expect.

In terms of market performance last week, outside of energy, utilities & defence there were, once again, few places to hide. The US dollar has remained the purest safe haven trade, strengthening from 1.385 against sterling at the end of January to 1.323. US dollar strength has helped offset losses in US equities when converting returns back into sterling. In US dollar terms, the rotation out of tech has seen the Magnificent 7 hit correction territory (a decline of >10%) as measured by the Bloomberg Mag 7 index, a correction is seen as a healthy pullback within a long-term positive trend while bear market territory is defined as a decline of greater than 20%.

The week ahead – what next for investment markets?

Wednesday 18 March: Fed rate decision

The Fed is widely expected to hold rates after cutting at the final three meetings of last year. A rate cut would likely be welcomed given the recent deterioration in labour market data, but the oil shock provides the Fed with an additional reason to pause. This meeting will also include an updated Summary of Economic Projections. Markets expect growth forecasts to be revised lower, inflation slightly higher and unemployment modestly higher.

Thursday 19 March: BoE rate decision

The BoE will likely hold Bank Rate at 3.75%. The sharp rise in energy prices since the last meeting complicates the outlook and will likely force Governor Bailey to soften his previously dovish tone. While the Bank still intends to cut rates later this year, the timing of those cuts now depends heavily on the trajectory of oil prices and the Iran conflict.

Thursday 19 March: ECB rate decision

The ECB is also expected to leave rates unchanged at what it considers the neutral level. However, President Lagarde has recently adopted a more hawkish tone in response to the energy shock, emphasising the ECB’s determination to prevent a repeat of the previous inflation surge. Markets will focus on any guidance or key metrics that will help determine when tightening might be likely.