Weekly Market Recap

The second quarter ended with a pretty good week for stocks, but plenty of drama remains.

Tension remains despite oil prices falling significantly since the likelihood increased that the Strait of Hormuz would reopen. Iran harassed ships taking the southern route, which goes through Omani waters, and the U.S. responded by revoking a waiver on Iranian oil sales and striking 80 targets within Iran.

The two parties reaching an agreement remains challenging. The oil price rose but remains well below its recent peak.

Cracks in the capex story or healthy consolidation?

AI infrastructure has become the modern market bellwether. While questions remain over the efficacy of hyperscaler capital expenditure (capex), there seems to be less controversy about holding the beneficiaries of that capex, the semiconductors and memory chip producers and associated electrical suppliers.

The remaining controversy refers to how long hyperscalers will keep pumping significant, upfront capital investment into their AI infrastructure. The most recent niggle of doubt comes from leaks suggesting Meta could lease computing capacity. That might be welcome as a source of revenue, but when Mark Zuckerberg has discussed it previously, he has described it as a solution if Meta was to overbuild.

The leaks came after xAI agreed to lease computing capacity to Anthropic, and with token costs (the per unit pricing of AI models) having slipped nearly 20% from their May peak, it created some nervousness that the world might already have enough computing capacity, which would obviously imply lower future orders. However, that would seem difficult to square with the lengthening backlogs revealed by other hyperscalers.

While chip stocks have eased back from their peaks, they look more like a healthy consolidation after an outstanding performance than a reversal.

From a technical perspective, market breadth has been picking up. This is encouraging at a time when the market seemed to rally despite a weak economy.

One important aspect is that the resumption of oil flow in the Strait of Hormuz has led to an easing of inflation pressure. Data on U.S. real income and spending growth has shown how higher inflation has been eating into real incomes, causing them to shrink marginally relative to last year.

This means that Americans have reduced their savings to a historically low level. It is not yet unsustainable, and evidence seems to indicate that immediate future spending growth is likely to be maintained. But some relief through lower inflation needs to come for real spending to be maintained.

U.S. jobs growth stalls as AI drives layoffs

The latest U.S. non-farm payrolls report was downbeat, with just 57,000 new jobs created in June. The labour market doesn’t seem strong enough to generate significant wage demands, although a shrinking labour force means that it isn’t too slack either.

The best outcome for the economy would be wage growth without inflation through faster productivity. Is that happening? The fact that the Challenger jobs report cited AI as the most common reason for layoffs throughout 2026 suggests that it might be.

The report only covers a small fraction of the total layoffs in a given month, but if it’s indicative of a broader trend then it would seem to indicate that companies are beginning to make efficiency savings through AI.

Germany accepts pensions reform package

Pension spending is a growing fiscal challenge across the Eurozone, and it’s set to rise by around 1% of GDP by 2035 as populations age.

Germany faces a particular challenge: its working-age population is falling faster than that of most peers, yet its pension system is almost entirely pay-as-you-go and unfunded. Its retirement assets equate to less than 15% of GDP, compared to around 80% in the UK and 150% in the U.S., according to Capital Economics.

The Merz government initially made things worse by extending the suspension of Germany’s sustainability factor until 2031 and expanding mothers’ pension entitlements. The ‘sustainability factor’ refers to a mechanism within Germany’s pension system that limits the pension level if there are more retirees than active workers paying in. The moves are estimated by Capital Economics to add 0.4% of GDP to pension spending by 2035.

However, this week, Merz’s coalition government accepted a reform package from an independent commission that improves things. Its two most significant recommendations are a six-month increase in the state pension age and the creation of a compulsory Defined Contribution (DC) scheme (modelled on Sweden’s premium pension system).

This is expected to channel around 30 billion euros per year into capital markets including equities, venture capital and private equity.

It will take decades to realise the benefits. But the long-run implications are significant: the DC scheme could structurally increase institutional demand for European equities and create new flows for asset managers and private equity. It’ll build up slowly, but the concept seems sound.

Andy Burnham’s Labour leadership speech

Reform was also in the air during Andy Burnham’s speech last week, which established his intention to succeed Sir Keir Starmer as Prime Minister.

This would have been a bigger deal a few weeks ago but Burnham’s critical conversion to backing existing fiscal rules, abandoning his previous scepticism of bond market constraints has been the primary source of market reassurance.

With fiscal policy constrained, the attention has shifted to reforms that may come with immaterial costs, such as devolution. It’s true that the UK has become more centralised over the past 20 years. What is less clear is whether devolution will improve growth.

Research suggests that the critical form of devolution that would improve performance would be the devolution of revenue raising, rather than simply spending larger grants from central government.

Procurement reform is the most immediate corporate sector implication. Burnham explicitly commits to ending “chasing cut-price deals around the world” and applying social value weighting to all eligible public contracts, including defence. This is a material positive for UK-based manufacturers and suppliers in steel, defence and energy and food, and a risk for international incumbents.

Utilities are a clear watch item. The commitment to greater public control of water, energy and transport, modelled on Greater Manchester’s bus franchising, is a directional warning for private operators of listed infrastructure assets. Having seemingly accepted that they can’t be brought into public ownership, stricter regulation seems more likely.

Housing and construction represent the most concrete fiscal and sectoral opportunity. A large-scale council house building programme using public land, framed explicitly as a fix for what Burnham calls the “ruinous impact” of the housing crisis on public finances, would be a significant positive for the construction sector. However, house building has been promised by previous governments and not delivered.

The most positive thing from the UK perspective has been the lack of a negative reaction from the gilt market.

We expect that Burnham will feel constrained from radical policy by the fact that the mandate he is inheriting was won based upon Starmer’s manifesto. He will need a significant bounce in the polls to be tempted to seek a mandate of his own. But the biggest single constraint on governments is the bond market’s reaction to any policies, which he’s managed to tame for now.

The markets welcomed further progress in the Middle East last week, as commercial traffic through the Strait of Hormuz continued to recover. While uncertainty remains around the longer-term peace process, more tankers are now passing through the waterway, allowing oil exports to gradually resume and easing concerns over a prolonged supply disruption.

However, the recovery has not been instantaneous. Early last week, shipping volumes remained well below normal as vessels navigated cautiously and logistical bottlenecks persisted. A ceasefire agreement alone does not immediately restore energy supply.

Oil fields need to restart production, inventories need rebuilding and shipping networks take time to normalise. But as traffic steadily increased throughout the week, confidence grew that exports would continue recovering. Brent crude oil consequently fell back to around its pre-conflict level, reversing much of the sharp spike seen earlier this month.

For investors, lower oil prices are welcome news. They should help reduce headline inflation over the coming months and prevent inflation expectations from becoming entrenched. As a result, markets have pared back some of the additional interest rate hikes that were priced in during the height of the war.

That said, policymakers are unlikely to become complacent. The ceasefire remains fragile, negotiations between the U.S. and Iran are still ongoing, and any renewed disruption could quickly reverse the recent improvement.

For now, however, the risk of a sustained global energy shock appears significantly lower than it did only a fortnight ago.

A resilient U.S. economy keeps the Fed hawkish

While energy prices have become less of a concern, the latest U.S. economic data reminded investors that domestic demand remains remarkably resilient.

Personal income and consumer spending both exceeded expectations, highlighting the strength of the U.S. consumer. Meanwhile, inflation remained stubbornly high.

Headline Personal Consumption Expenditures (PCE) inflation rose to 4.1% year-on-year while core PCE inflation accelerated to 3.4% in May, remaining well above the Fed’s 2% target and reaching a three-year high.

The combination creates an interesting backdrop for policymakers. Falling oil prices should gradually reduce headline inflation over the coming months. However, resilient consumer spending, elevated core inflation and rising technology component costs driven by the AI investment boom, suggest underlying price pressures remain persistent.

Taken together, the data reinforce the Fed’s hawkish stance. Markets have pared back some of the additional tightening that was priced in during the oil price spike, but investors still expect roughly one further rate hike this year.

Memory emerges as the key AI winner, but at what cost?

Last week’s most significant corporate news came from Micron, whose latest results reinforced the strength of the AI infrastructure investment cycle.

Increasingly, memory is emerging as one of the key bottlenecks in AI. Every advanced AI accelerator and hyperscale data centre consumes vast quantities of memory chips. Demand is growing much faster than supply, giving memory manufacturers significant pricing power.

Micron delivered revenue guidance well ahead of expectations while forecasting adjusted gross margins of around 86% next quarter, an extraordinary level in any industry. The company has also secured multi-year supply agreements with clients, suggesting memory pricing could remain exceptionally strong well into 2027.

However, the implications extend well beyond the semiconductor sector. Apple surprised markets by raising prices across Macs, iPads and several other products, explicitly citing soaring memory and storage costs.

The company described recent increases in component prices as unprecedented, highlighting how the AI infrastructure build-out is beginning to ripple through the broader technology ecosystem.

This illustrates an increasingly important distinction for investors. Companies supplying critical AI infrastructure continue to benefit directly from rising demand, while companies buying those components face higher input costs, which may pressure margins or require higher prices for consumers.

That divergence is becoming more visible in equity market performance. Semiconductor stocks have continued to outperform, while members of the ‘Magnificent Seven’ have lagged in recent weeks. Rather than signalling weakness in the AI theme, investors are becoming more selective, differentiating between the companies enabling the AI build-out and those bearing much of its cost.

We remain constructive on the long-term AI opportunity, but after a blistering rally in AI semiconductor stocks, greater volatility should be expected. Regarding the memory suppliers, our equity analysts believe the risk is that these are cyclical stocks, where valuations appear to be predicting record profitability over a timeframe that looks overly optimistic and may not materialise.

As the investment cycle continues, markets will increasingly look beyond AI spending and focus on monetisation, returns on investment and earnings delivery.

The secular growth story remains firmly intact, but investors are likely to become much more selective along the way. Diversification across regions, sectors and asset classes remains an important playbook in the rapidly changing investment landscape of the AI era.

Events to look out for this month

U.S. jobs report:

Another strong labour market report could reinforce expectations for the Fed to raise interest rates.

Eurozone inflation:

June’s consumer price index is expected to ease as lower energy prices feed through, but core inflation will determine whether the European Central Bank needs to hike rates again.

Labour leadership:

As Andy Burnham remains the front-runner for prime minister, markets will focus on his potential chancellor and the fiscal outlook.

Markets this week were shaped by three significant developments: encouraging signs from the Middle East, a more cautious tone from the US Federal Reserve, and an evolving political picture in the UK. Here is what happened and what it could mean for your investments.

A step towards stability in the Middle East

One of the most positive stories this week came from the Middle East, where the US and Iran have signed a memorandum of understanding aimed at restoring energy flows through the Strait of Hormuz, one of the world's most important shipping routes for oil and gas.

Negotiations are continuing, with both sides working towards a broader agreement that could bring a more lasting reduction in regional tensions. There are still significant hurdles to overcome, but the direction of travel is encouraging.

Markets have responded positively. More vessels are now passing through the Strait of Hormuz, and oil prices have fallen as investors begin to factor in the prospect of improved energy supplies from the region. If oil prices remain lower, this should help ease inflationary pressures in the months ahead and provide support for global economic growth.

It is worth noting that geopolitical risks have not disappeared and talks are ongoing. However, compared with a few weeks ago, there is growing confidence in markets that the worst-case scenario for energy prices may be avoided.

The US Federal Reserve: Holding rates, but sending a clear message

Across the Atlantic, the US Federal Reserve held interest rates unchanged at its latest policy meeting. But while the decision itself was no surprise, the message that came with it was notably more hawkish, meaning the central bank is leaning towards tighter monetary policy rather than looser.

New Fed Chair Kevin Warsh made clear that bringing inflation back to the 2% target remains the central bank's number one priority. Updated economic projections suggest inflation is likely to stay higher than previously expected, and most Fed committee members now see interest rates moving higher this year rather than lower.

This marks a significant shift. Just a few months ago, markets had been expecting rate cuts in 2026. Now, those expectations have been replaced by the prospect of approximately two rate rises over the next twelve months.

Mr Warsh also announced plans to establish a task force to review the Fed's policy framework and communication strategy. This reflects a desire to strengthen the central bank's credibility after inflation proved far more persistent than policymakers had initially anticipated.

The broader message from the Fed is clear: inflation is the priority, rates are not coming down soon, and the central bank is committed to restoring price stability.

UK Politics: A new Prime Minister on the horizon

Closer to home, UK political developments have been closely watched by markets. Andy Burnham's decisive victory in the Makerfield by-election has secured his return to Parliament, making him eligible to contest the Labour leadership following Keir Starmer's decision to step down. Mr Burnham has quickly emerged as the clear front-runner, with betting markets placing a 97% probability on him becoming Prime Minister this year.

Despite the significance of this development, the reaction in financial markets has been relatively modest. This is largely because investors had already built a meaningful political risk premium into sterling and UK government bonds (gilts), meaning the outcome was broadly anticipated.

For markets, the bigger question is not who leads the next government, but what they will be able to do given the fiscal constraints they face.

The UK's fiscal challenge

The UK's public finances remain under considerable pressure. Recent government borrowing figures came in significantly above expectations, highlighting the difficult trade-offs facing policymakers. With debt servicing costs rising and public finances stretched, whoever takes office will face real limits on their ability to spend or cut taxes.

Maintaining market confidence in UK assets will depend on continued adherence to the UK's fiscal framework, respect for the Office for Budget Responsibility's independence, and the ongoing operational independence of the Bank of England. These are the anchors that investors look to when assessing the credibility of UK economic policy.

What this means for investors

This week's developments offer a broadly mixed picture. Progress in the Middle East is a welcome source of stability, and lower oil prices could prove supportive for both inflation and growth globally. In the US, the Federal Reserve's hawkish stance is a reminder that the path back to lower interest rates may be longer than hoped. And in the UK, while political change appears likely, the more pressing issue is how the next government manages a challenging fiscal inheritance.

As always, markets are driven by a complex mix of factors, and short-term volatility is a normal part of investing. We continue to monitor developments on your behalf and will keep you updated as the picture evolves.

There has been some drama in markets recently. As a reminder, investors began last week scarred by a sharp sell-off in technology stocks and fears that U.S.-Iran ceasefire negotiations seemed to have stalled. 

In the week after the sharpest drop in NASDAQ this year, sentiment was weak but the trend that developed was one of progress towards a deal that could open the Strait of Hormuz. This would take some pressure off the very tight markets for energy and associated industrial chemicals. But it wasn’t without setbacks. 

Iran downed a U.S. helicopter, the U.S. launched retaliatory strikes, and Iran struck back. Both sides maintained, seemingly implausibly, that the ceasefire remained in place. Energy prices barely flinched.

Then on Thursday (11 June) evening, the tone shifted dramatically. President Trump declared the conflict was over and suggested a deal could be signed as soon as the weekend. Iran was more cautious, noting that no conclusion had been reached and that the U.S. had raised new demands. By Friday morning, oil was at its lowest since April, bond yields had fallen sharply, and equities were firm across Europe following a strong U.S. session.

For portfolios, the implications cut both ways. Lower oil prices ease inflationary pressure globally and reduce input costs for businesses, but they create a headwind for the energy-heavy FTSE 100, which closed near 10,400. 

The domestically focused FTSE 250 traded cautiously all of last week, caught between the benefit of lower energy costs and the reality of sustained high borrowing rates. U.S. equities, particularly in technology and semiconductors, rallied hard as the geopolitical risk premium unwound and AI-related earnings momentum continued.

The ECB hikes – and it won’t be the last

The ECB became the first major central bank to raise rates in response to the oil shock, lifting its policy rate by 25 basis points to 2.25%. President Lagarde noted that the energy shock was broadening throughout the economy, with indirect costs now becoming evident. 

The ECB’s updated projections revised inflation higher and growth lower, but it is clearly prioritising price stability, its sole mandate. The ECB now sees core Consumer Price Index (CPI) remaining above 2% at least through 2028.

Two further quarter-point hikes are priced into overnight index swaps, and there is no obvious reason to think those odds are wrong. Eurozone unemployment remains near an all-time low, and household balance sheets remain resilient, the debt service ratio sits at its lowest since the late 1990s.

The ECB appears confident that moderate tightening will not crush the economy. That said, growth momentum has clearly weakened relative to the U.S., and wage growth at just over 2% remains muted. 

Without a major re-acceleration in energy prices, aggressive hiking seems unlikely. The Fed and BoE both meet next week, neither is expected to hike, as their policy rates remain above neutral, unlike the ECB’s pre-meeting position. The UK is expected to raise rates this year but not until September.

Treasury yields – conditions still point towards higher yields

Several Fed officials have pushed back against the idea that AI-driven productivity gains justify rate cuts. New Chair Kevin Warsh’s view that AI is disinflationary appears to be a long-term thesis at best; in the near term, soaring demand for electricity, memory chips and the wealth effect from rising equity markets are all inflationary.

With growth momentum improving, the AI capex boom continuing, and bond supply increasing as government debt-to-GDP rises, yields are more likely to drift higher than lower, though many investors have already bet on higher yields, leaving limited room for further moves upward.

Gold has lost momentum since the conflict began

The inverse correlation between gold and Treasury yields has reasserted itself, and with yields likely to drift higher, that’s a headwind.

Gold now trades as a very risk-on asset, its volatility exceeds that of the S&P 500, leaving it vulnerable to outsized losses in any broader market sell-off. A rising oil price would strengthen the dollar, another negative for gold, and would pressure major importing nations like Turkey and India to implement policies that weigh on aggregate demand for the metal. 

The technical picture has also deteriorated, with an emerging pattern of lower highs and lower lows. Interestingly the recent drop in oil has not helped the gold price much. Unlike other asset classes where lower valuations can entice new investors, with gold it seems sensible to moderate exposure until a more positive trend emerges.

This does not represent a structurally negative view. The long-term case, central bank diversification away from Western assets, China’s reserves still below 10% in gold, and scope for dollar depreciation over time remains intact. China has been making contrarian purchases during this period of gold price weakness. But tactically, the balance of risks no longer seems supportive.

Coming up – 17 June 2026 to 23 June 2026

Makerfield: 

The 76,000 voters of Makerfield will spend this week at the centre of the UK political world when they are expected to return Andy Burnham as their MP, setting the stage for him to run for the role of prime minister.

Interest rate decisions: 

Neither the UK nor the U.S. are expected to change interest rates at this week’s meetings, but the Fed will be in focus because it will be Kevin Warsh’s first meeting as chair. 

He had indicated to President Trump that he would be open to cutting interest rates, but with inflation above target and the economy seemingly creating new jobs, other members are likely to be considering an increase.

China’s economic data dump: 

Retail sales, industrial production and investment will reveal the extent to which China is benefitting from the export boom it’s enjoying since the closure of the Strait of Hormuz.

The first week of June was shaped by two forces pulling in different directions: a frozen geopolitical standoff that refused to thaw, and a sharp rotation within U.S. equity markets that reminded us how quickly sentiment can shift beneath the surface of headline indices.

The impact of high oil prices on the economy, and concerns that this could continue, have left investors struggling with where to allocate their savings, pensions, dividends and corporate buyback capital. The area of the equity market least affected has been AI stocks, which rallied sharply during May, creating a divided market.

Last week, that trend hit a speed bump. Stocks were already looking extended on Wednesday evening, when Broadcom reported results that were strong in absolute terms but merely met rather than beat expectations.

In a market that has been leaning heavily on the AI narrative, that disappointment was enough to trigger weakness across the Nasdaq. Capital rotated into healthcare and financials, nudging the Dow Jones, which is rich in those sectors, to a new record closing high. It was a useful reminder that the AI trade, while powerful, is not immune to gravity, and that the broadening of market leadership we have been hoping for is beginning to materialise.

It also serves as a reminder that capital markets can be fickle, which is relevant as work continues on the blockbuster initial public offerings (IPO) planned for this year.

Perhaps opportunistically, Alphabet (which owns Google) used the accommodative market conditions to raise USD85 billion of new equity. It is a mere 2% of its USD4 trillion market valuation, but enough to eclipse the mega IPOs still to come. Alphabet is specifically sneaking in ahead of other flotations over the coming weeks, taking advantage of the abundant liquidity environment.

Not everyone believes that the environment will remain all year. Databricks confirmed that it won’t IPO this year because of the anticipated congestion from already planned issues.

One source of demand for these issues will come from tracker funds once they are included within indices. S&P surprised the world by deciding not to update its index inclusion methodology. Nasdaq, by contrast, has fast-tracked inclusion and adopted an enhanced weighting to partially compensate for the low free float these companies will have at IPO.

The wait in the Strait

On the diplomatic front, progress towards reopening the Strait of Hormuz has stalled with the closure now approaching its hundredth day.

Iran pulled out of direct negotiations early last week, insisting on a resolution between Israel and Lebanon as a precondition. The U.S. duly brokered a ceasefire with Beirut, but Hezbollah rejected it, leaving the process stuck. By last Friday, there were no signs of meaningful progress.

What is notable is how little this has moved markets. Brent crude oil held steady near USD97.60 per barrel, and the broader ‘Gulf risk-off’ trade, higher oil, higher yields, weaker gold, flickered on and off through the week without gaining real momentum.

During the geopolitical stalemate, oil prices have settled into a predictable, elevated range of USD90 to USD100 per barrel. This is likely proving more uncomfortable for the 20,000 seafarers trapped in the Persian Gulf than it has been for investors. 

The high energy prices are unwelcome but no longer panic-inducing. Maintaining that level has been partly driven by the release of strategic reserves, and partly by economic measures that have been undertaken, particularly in emerging markets.

The other notable feature of the week’s Gulf inactivity is that President Donald Trump had a reportedly terse call with Israeli Prime Minister Benjamin Netanyahu. The call was in response to Iran’s demand that any reopening of the Strait of Hormuz would be conditional upon a ceasefire in Lebanon. Iran would seem to be a relatively tough negotiating partner.

U.S. jobs growth almost doubles the forecast

Investors may be more focused on AI and geopolitics, but the economy is typically the most critical factor determining investment returns.

Expectations were modest for U.S. jobs growth given that consumers, who make up the largest share of economic growth, are under pressure from rising energy costs. An additional consideration is the larger structural risk to jobs stemming from AI. Thursday’s (4 June) Challenger Jobs Report showed an accelerating trend of layoffs associated with AI. 

As far as May was concerned, new jobs growth seems to have been very robust, coming in at 172,000 new jobs, almost double the consensus forecast. April’s jobs growth was also revised higher.

While there was no additional concern on wage growth, it still places pressure on the Federal Reserve (the Fed) to raise interest rates. There are two reasons for this: inflation remaining above target, and the robust labour market.

This pushed interest rate expectations higher, prompting a significant rotation away from the market’s former AI-related winners and back towards some of the previous laggards. 

The sell off seemed to be mostly a function of over-extended positioning rather than an obvious market top. We believe equity markets would be more susceptible to weak labour markets indicating weaker equity flows, than strong equity markets indicating higher interest rates.

Coming up – 9 June 2026 to 15 June 2026

Pressure building: 

After last week’s strong jobs growth, any pick-up in U.S. inflation this week will intensify pressure on the Fed to raise interest rates.

Lift-off: 

The European Central Bank is expected to raise interest rates on Thursday.

Kick-off:

The World Cup – which will take place in the U.S., Canada and Mexico – begins.

Reports emerged late last week that the U.S. and Iran have reached a preliminary agreement to extend the current ceasefire by 60 days and open formal discussions on Iran’s nuclear programme.

Oil prices fell on the news, with Brent crude dropping to around USD 92 a barrel. However, it is worth noting that the Brent crude price was over USD120 a month ago.

This demonstrates how volatile prices have been, and how quickly they can shift from driving up to weighing down monthly inflation.

In details confirmed by multiple news agencies, an anonymous source suggests the memorandum of understanding between the U.S. and Iran would guarantee unrestricted shipping through the Strait of Hormuz, with Iran required to remove mines from the waterway within 30 days. Pakistan has been actively involved, acting as mediator.

However, speculation over the reopening of the Strait of Hormuz increasingly feels like Groundhog Day. Potential sticking points remain unresolved. Beyond the nuclear question, negotiators must resolve how much of Iran's USD 24 billion in frozen assets will be released, and who controls traffic through the Strait of Hormuz in the future.

The most pressing issue of the moment has become how to resolve Israel’s active conflict with Lebanon. Iran’s semi-official Tasnim news agency reported that Iran would withdraw from negotiations with the U.S. while that conflict continues.

Last week, the U.S. also acted against Iran's Persian Gulf Strait Authority, accusing it of extorting vessels seeking passage, with some ships receiving payment demands of up to USD 2 million for safe transit.

Some factions within Iran believe this shows the country’s bargaining position is improving as summer approaches and inventory pressures intensify (see below for more detail). This is because Iran receives revenue through sanctions waivers and Strait transit fees, while using the ceasefire to rebuild military capabilities.

Over the weekend, the U.S. struck Iranian command and control sites in response to the downing of a U.S. drone. Iran, in turn, responded by targeting a U.S. base in Kuwait. These incidents continued alongside ongoing negotiations without breaking the current ‘ceasefire’.

Progress seems to have been made, even while the ceasefire itself comes under increasing strain. The summer months of June, July, and August represent the first genuine stress test of whether markets have been right to assume an early resolution.

The ticking clock

If a deal is eventually reached, the damage already done to global energy markets is considerable, and the window to prevent a crisis is narrowing.

The effective closure of the Strait of Hormuz since late February has removed up to around a fifth of the world’s oil and liquefied natural gas supplies from normal circulation. Global oil inventories, the buffer that allows the world to keep functioning when supply is disrupted, are approaching all-time lows. The Strategic Petroleum Reserve, a U.S. government-held stockpile, has been softening the impact.

The timeline, as RBC Capital Markets analysis makes clear, is stark. If inventory drawdowns continue at their current pace, the world could reach critically low levels of what analysts call ‘inventory cover’, the number of days refineries can keep operating on existing stocks, by as early as October and potentially even sooner.

At below roughly 30 to 40 days of cover, normal industrial operations begin to break down, as refineries run short of the crude oil they need to function. RBC Capital Market analysis also suggests that the true pace of drawdowns may be understated, since inventory data from less transparent markets, such as China, is difficult to verify.

Collateral damage

The energy shock has created a deeply uncomfortable situation for central banks around the world.

Their primary mandate is to keep inflation under control, typically targeting a rate of around 2%. The conventional tool for doing so is raising interest rates, which makes borrowing more expensive and cools economic activity. The problem is that several major economies are already weakening, making aggressive rate rises potentially damaging.

Inflation data released last week confirmed that energy-driven price pressures are spreading.

In Europe, inflation reached 2.8% in France, 3.3% in Italy, and 3.6% in Spain in May. The European Central Bank is likely to increase rates at its June meeting even as the Eurozone economy weakens. The composite purchasing managers index, a broad measure of business activity, fell to a 31-month low in May, and France’s economy shrank in the first quarter of 2026.

Raising rates in a weakening economy to control prices affected by global supply, rather than local demand, seems futile to some.

That debate is raging in the U.S., where professional forecasters have revised up inflation expectations to 3.6% for the end of 2026, and where inflation has been above the Federal Reserve (the Fed)’s 2% target for more than five years.

Former New York Fed President William Dudley warned last week that the Fed risks losing credibility if it continues to hold back. However, Minneapolis Fed President Neel Kashkari, currently a voting member, argued the opposite, that it’s too early to act without more data.

The broader picture is one of a world where supply disruptions, of which the Strait of Hormuz is the most consequential current example, are recurring often enough to be considered a feature, rather than a temporary shock. There are persistent sources of potential inflationary pressure, and central banks will continue to feel compelled to tighten policy even when growth is fragile.

A durable resolution to the Iran-U.S. war would provide meaningful relief. But as last week’s cautious, unconfirmed, still-contested reports remind us, that resolution remains some distance away.

Coming up – 2 June 2026 to 8 June 2026

Deal or no deal:

Will last week’s leaks of a deal related to the Strait of Hormuz be confirmed officially? On what terms is the agreement being reached?

Steady jobs growth:

The U.S. is still expected to have created jobs at a modest pace in May.

Rate setters:

There are a lot of central bank speeches taking place, providing an opportunity to hear how they balance growth and inflation concerns.