Weekly Market Recap

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.

Global stocks hit new highs this week. Investors were increasingly willing to look past geopolitical volatility, focusing instead on the strength of corporate earnings and the ongoing AI investment cycle. The Iran-U.S. war continues to dominate the geopolitical backdrop. Oil prices have remained highly reactive to headlines surrounding ceasefire negotiations and the Strait of Hormuz.

Oil prices have fluctuated sharply around the USD100 per barrel level as markets weigh hopes of eventual de-escalation against the risk of prolonged supply disruption.

While negotiations remain complicated and unpredictable, investors still broadly believe both sides have incentives to avoid a sustained closure of the Strait of Hormuz.

Despite elevated oil prices and persistent geopolitical uncertainty, risk sentiment has remained remarkably constructive. A major reason is the continued strength of the AI ecosystem, which is increasingly driving both earnings growth and market leadership.

Recent semiconductor earnings (e.g., Nvidia’s results last week, which sizeably beat earnings expectations) once again reinforced that demand for AI infrastructure remains exceptionally strong. Companies across the ecosystem continue to report rapid revenue growth, strong pricing power and very high profit margins, supported by relentless spending on data centres and computing capacity.

One of the standout developments this week was semiconductor manufacturer Micron reaching a USD1 trillion market capitalisation milestone, highlighting how enthusiasm has broadened beyond just the largest AI chip designers. Memory chips have become one of the clearest beneficiaries of the AI boom, as increasingly sophisticated AI models require enormous amounts of high-bandwidth memory to process and train data efficiently.

Importantly, this is both a demand story and pricing story. Tight supply conditions and surging demand for advanced memory products have driven sharp increases in memory chip prices, leading investors to significantly rerate valuations across parts of the semiconductor sector.

More broadly, markets are becoming increasingly optimistic that the AI investment cycle still has substantial room to run. U.S. hyperscalers continue to commit enormous capital expenditure towards AI infrastructure, reinforcing confidence that this is evolving into a multi-year structural growth theme rather than a short-term technology rally.

For now, that powerful combination of resilient earnings, expanding profit margins and sustained AI spending continues to outweigh concerns around geopolitics and energy volatility.

Markets remain hopeful that tensions in the Middle East will eventually ease and that shipping through the Strait of Hormuz can normalise. In the meantime, AI remains the dominant anchor for investor sentiment.

All eyes are on the UK economy

The UK economy is in focus as it’s at risk from higher energy prices, in turn causing higher interest rates and borrowing costs, while at the same time suffering from a political crisis.

Crucial to this is the outlook for inflation. Last Wednesday’s Consumer Price Index (CPI) release showed headline inflation dropping to 2.8% in April, down from 3.3% in March. Core CPI also moderated to 2.5%, driven largely by downward pressure in housing and household services offsetting a sharp spike in motor fuel costs.

This softer-than-expected reading provides the BoE with some breathing space on interest rates. But it also highlights the cost of the war in the Middle East: without the geopolitical disruption to energy markets, inflation would likely have returned to the 2% target this month.

The reprieve is temporary: the energy price cap is set on a lagging basis and will shift from tailwind to headwind in June and will be felt in July’s bills. Fortunately, for now there’s little evidence of second-round effects where fuel causes higher wage demands. In fact, the labour market seems weak, a far cry from 2022 when the last energy-driven price spike hit.

UK jobs appeared to contract sharply in April

Last Tuesday’s Office for National Statistics release was materially worse than expected. Unemployment ticked up to 5%, but the real alarm was the early estimate of payrolled employees for April, showing a drop of 100,000, far exceeding the roughly 20,000 decline economists had pencilled in, and the largest single-month fall since the start of the pandemic.  

However, these data get heavily revised, particularly at this time of year. Each of the last three years have seen similar estimates of lost jobs, which have proven to be false when revised the following month. Nevertheless, the BoE faces a genuinely difficult balancing act and is now expected to defer interest rate increases until July or September.

Friday’s data showed UK government borrowing reached £24.3 billion in April, significantly exceeding the £20.9 billion forecast and applying further pressure to the national deficit.

Retail sales contracted by 1.3%, heavily concentrated in a striking 10% drop in fuel sales, indicating a clear behavioural shift as consumers actively drive less and dip into savings to manage sustained high energy costs. Consumer confidence slipped further into negative territory.

Thursday’s flash purchasing managers indices confirmed the pattern of divergence: U.S. manufacturing surprised to the upside, signalling resilience in the American industrial sector, while Eurozone indices remained largely in contraction territory. The UK services sector moved into deep contraction, though manufacturing held up.

This combination of softening inflation and strained consumer activity caused a slight recalibration in fixed-income markets. As the data suggested the economy is cooling, investors pared back expectations for prolonged elevated rates. In the UK, gilt yields fell marginally toward the end of the week, with the 10-year dipping to 4.9%.

Coming up – 2 June to 9 June 2026

Gulf sale: 

Attention will remain on whether any of the floating stocks of oil in the Persian Gulf are able to transit the Strait of Hormuz and reach market. U.S. Secretary of State Marco Rubio expressed confidence that a deal can be reached, but such hope has been misplaced in the past.

U.S. consumer confidence: 

As already evident in opinion polls, U.S. consumers are feeling the prick from higher fuel prices, which will likely also be reflected in consumer confidence surveys.

Inflation: 

Early estimates of May’s inflation will be delivered.

The UK was firmly in the spotlight last week as the prospect of a new prime minister looms. Its most pressing challenges have largely been imported, but domestic political pressure, building quietly for months, is now demanding a response.

Local election results confirmed heavy losses for Labour, with Reform and the Greens the main beneficiaries. Polymarket odds of Keir Starmer being replaced by the end of June had risen above 60%.

As for his potential challengers, Wes Streeting has resigned from the cabinet, Angela Rayner confirmed she’s been cleared by tax authorities following an investigation, and Andy Burnham has secured a path to a parliamentary seat, via a by-election he is expected to win. The latter development coincided with a sharp sterling depreciation.

Markets are uneasy about Burnham for identifiable reasons. He has spoken publicly about moving beyond being “in hock to the bond markets” and has described deregulation, privatisation, austerity and Brexit as “the four horsemen of Britain’s apocalypse.” He has also signalled ambitions to recapture public control over housing, energy, water, rail and buses.

However one views these positions, reversing them would require substantial spending and carry execution risk, precisely the combination that makes bond investors nervous. Prediction markets give Burnham a 60% chance of success.

The UK’s first quarter GDP data provided some positive offset, coming in at 0.6% quarter-on-quarter and generally quite strong, with March showing 0.3% growth against expectations of a modest contraction. This suggests UK consumers were able to weather the increase in energy costs during March, probably because UK households raised their savings rates last year to withstand tough economic conditions.

This resilience may reinforce the case for the Bank of England (BoE) to increase rates this year. However, this must be weighed against indications that the housing market is weakening, and survey data suggesting more recent retail sales are likely to be weaker.

The BoE is expected to raise rates at least twice this year, and UK 10-year government gilt yields topped 5.1%, which is higher than 2022 levels. Most of this relates to the prolonged increase in energy costs and impact on inflation, but the political drama is clearly causing some underperformance from UK bonds.

Strait standoff tightens as Trump-Xi talks disappoint

While political drama may be brewing at home, the Iran-U.S. conflict remained the most important issue across markets last week, with hopes of a diplomatic breakthrough fading as the days progressed. Early last week, the lack of progress in nuclear talks between the U.S. and Iran pushed energy prices higher and weighed on European equities.

By mid-week, satellite imagery confirmed that oil shipments from Khargh Island, Iran’s primary export terminal, had dropped to zero for the longest stretch since the conflict began, indicating that available floating storage is running out. If Iran exhausts its remaining capacity, it will be forced to cut production outright, which has been a stated aim of the Trump administration’s blockade of the Strait of Hormuz.

Oil prices climbed roughly 8% over three sessions as the physical market tightened. This fed directly into inflation data. The U.S. producer price index (PPI) rose 1.4% month-on-month in April, the largest monthly gain since March 2022 and far above the 0.5% consensus. The annualised figure hit 6%. While the PPI is inherently more volatile than consumer prices, a miss of this magnitude signals that cost pressures are moving through supply chains.

The Japanese PPI told a similar story, marking its fastest year-on-year rise since 2023, driven by oil and naphtha (a liquid hydrocarbon mixture derived from crude oil or other natural sources, which is often used as a fuel, solvent, and petrochemical feedstock) costs, unsurprising for a country that imports 90% of its crude from the Persian Gulf.

The Donald Trump-Xi Jinping summit in Beijing, which had been a source of cautious optimism, delivered little of substance. President Trump asserted the U.S. does not need the Strait of Hormuz open.

He did discuss progress on achieving trade deals with China, including vague intentions for China to purchase U.S. oil and agricultural products and a commitment for China to buy U.S. aircrafts.

Where specifics were mentioned, they underwhelmed. The one notable development was the clearing of Chinese tech groups to purchase Nvidia’s H200 chips, which gave a brief lift to NASDAQ futures. Nvidia’s Jensen Huang joining the trip at the last minute now appears to have been the main event.

Against this backdrop, U.S. equities continued their remarkable bifurcation. Tech and AI names drove another strong session on Thursday, with Cisco jumping 20% after hours on an upgraded sales outlook. The broader market, however, struggled with the inflation data, treasuries sold off, with the 10-year yield reaching almost 4.5%, and the 20- and 30-year yields both closing above 5%.

The U.S. Senate’s narrow confirmation of Kevin Warsh as the next Federal Reserve (the Fed) Chair (54-45, almost entirely along party lines) adds another variable. His first meeting in June will be closely watched, though he’s unlikely to have sufficient data clarity to support any rate move in that timeframe.

What is notable is that since the nomination process began, market expectations have shifted from rate cuts to rate increases. If the new chair doesn’t manage to cut interest rates, history suggests he might receive criticism from the president.

Inflation: Punchy but not panic-inducing

The U.S. CPI for April showed headline prices accelerating to 3.8% year-on-year, the highest since the post-COVID-19 spike. Core CPI rose 0.4% month-on-month, the first upside surprise in several months. However, the detail was less alarming than the headline.

The jump in shelter costs was largely a statistical quirk from the government shutdown last autumn, which caused a full year of accumulated rent increases to appear in a single month’s data.

Alternative measures of rental inflation, including the Zillow index, continue to decelerate. Core goods inflation showed surprisingly little tariff pass-through, and Bloomberg Economics assessed that the impact from the ‘Liberation Day’ tariffs is now mostly complete.

The areas to watch are food prices, where fertiliser supply disruption through the Strait poses an upside risk, and semiconductor-driven tech inflation, where Samsung has warned of further market tightening next year.

Household inflation expectations have edged up modestly, but not to levels that would alarm the Fed. We expect the new Warsh-led Fed to remain in wait-and-see mode, with neither a bias to hike nor cut.

The Iran-U.S. conflict dominated proceedings once again last week. It began with the fallout from a U.S. operation to force the Strait of Hormuz open by facilitating the transport of tankers with naval escorts. The convoys came under fire and investors were concerned that this would trigger a collapse of the ceasefire, providing a downbeat start to the week.

The operation was halted after a day. By mid-week, President Donald Trump used it as the basis for a reattempt at negotiation. Secretary of State Marco Rubio stated in exceptionally direct terms that “the combat phase is over”, language that was unusually conciliatory.

The Trump administration confirmed it had sent a proposal for the reopening of the Strait of Hormuz to Iran. This triggered a substantial rally even though Iran was initially cool towards the proposed terms, particularly any moratorium on uranium enrichment.

The possibility of a deal saw equities, particularly European equities, rally, with government bond yields falling sharply. But at the beginning of this week, negotiations have only highlighted how far apart each party is.

The broader picture remains one of an energy shock, with compounding implications for Europe, such as:

• elevated gas prices (materially above U.S. levels)
• fiscal constraints, with debt-to-GDP ratios converging on, or exceeding, 100% in several countries
• the additional burden of increased defence spending.

These challenges are connected rather than isolated.

So, when the U.S. and Iran re-engaged in ballistic operations following assaults on U.S. ships, and even as the U.S. awaits a response on its offer, equities have retreated, cyclical sectors have underperformed, and the more defensive corners of the market, including technology, have held up relatively better.

We believe both sides would like to see the Strait reopened, so while there have been several false dawns, eventually one of these potential agreements is likely to take hold.

UK political changes are afoot

Last week also saw the UK hold local elections.

The results showed a remarkable swing from the Labour Party towards Reform. To a substantially smaller extent, the Conservatives and independent councillors lost out to the Liberal Democrats and Green candidates.

The probability of a change in prime minister and the response in gilt markets

Source: Associated Press

The results were not hugely surprising and there was little reaction in the bond market. However, there is now a concern that these poor results could bring about a leadership challenge resulting in the fall of Prime Minister Sir Keir Starmer and, more specifically, Chancellor Rachel Reeves.

Potential candidates could be more inclined to increase spending, leading to more bond issuance and possibly higher inflation.

Prediction markets place approximately a 45% probability on the prime minister departing by the end of June, and a 60% to 70% probability of him departing by year-end, a number that fell when he vowed not to resign but rose once more as signs of rebellion from the party, and even within the cabinet, started to grow.

The gilt market has been concerned about the impact of a new Prime Minister as they may feel compelled to jeopardise fiscal sustainability to meet their political objectives. It seems likely that any future leader will be aware of how important it is to respect the bond market, however, they’ll also need to cope with external factors (such as the U.S.-Iran conflict), which put additional pressure on the government finances.

In recent weeks it’s been made clear that the Persian Gulf war has been the most significant bond market concern.

The U.S. jobs market holds up

In the U.S., frustration continues to grow with the economy.

Polling suggests that attitudes towards the war are fairly static, but attitudes towards the inflation it has created are becoming increasingly uniform.

Earnings reports cited the increasing pressure on the lower income cohorts, but so far, the jobs market is holding up. Job openings have plateaued, and there are still a significant number of people quitting their roles (implying they’ve found better employment elsewhere).

The latest jobless claims data remains subdued. Last month, 100,000+ new jobs were created in the U.S. Jobs growth has been slowing in recent years, but recent months have seen it stronger than anticipated.

The only concern is the increase in the number of job cuts in April, which the monthly Challenger Jobs Report attributed to AI. Jobs growth can slow due to cyclical factors, such as interest rate or gasoline price increases.

However, it can also slow due to structural factors, such as the roll-out of labour replacing technology driven investment.

So far, this is the second consecutive month we have seen AI mentioned as the reason for U.S. jobs cuts. It has been cited as the reason for 49,135 job cuts, about 16% of all job cuts this year. The numbers are very modest, but the trend is one that will be scrutinised.