Weekly Market Recap

Markets were dominated by two powerful themes last week: geopolitics and AI capital expenditure (capex). Escalating tensions in the Middle East pushed oil prices higher, renewing concerns over inflation and driving a repricing of interest rate expectations. 

Meanwhile, corporate earnings provided further evidence that the AI investment cycle remains firmly intact, although the enormous scale of spending is prompting greater scrutiny over future returns.

Geopolitical tensions intensified as the conflict broadened beyond Iran and the Strait of Hormuz. Risks increasingly extended into the Red Sea, where Houthi militants in Yemen targeted Saudi-linked oil tankers, raising concerns that disruption could spread across multiple critical energy and shipping routes. 

This helped push Brent crude oil to above USD100 per barrel as markets priced in a greater risk to global energy supplies. The renewed surge in oil comes just as recent inflation data had started to show some improvement. 

Headline inflation in developed economies eased in June, helped in part by lower energy prices. With oil prices now rebounding sharply, that disinflationary tailwind is likely to fade and could potentially reverse if higher prices persist.

President Donald Trump announced a new round of tariffs covering dozens of U.S. trading partners, with duties broadly ranging between 10% and 12.5%. Markets largely took the announcement in their stride; the measures are essentially a continuation and restructuring of existing tariffs under a new legal framework rather than a significant new escalation in the overall tariff burden.

Nevertheless, tariffs remain another potential source of price pressure alongside higher energy costs, adding further uncertainty to the inflation outlook at a time when inflation remains above central bank targets in many developed economies.

Bond yields rise as rate expectations turn more hawkish

Government bond yields rose across developed economies as investors reassessed how central banks may respond if higher energy prices lead to more persistent inflation. The shift in rate expectations has been significant.

In the U.S., markets are pricing in roughly a one-third chance of a Federal Reserve rate hike at its July meeting, with almost two quarter-point increases priced by year end. In Europe, the European Central Bank kept interest rates unchanged at its July meeting, but markets are increasingly pricing in the possibility of a rate increase as soon as September. 

The repricing has also been pronounced in the UK, where markets are now pricing in almost two rate hikes by year end.

For central banks, much will depend on whether the energy shock produces only a temporary increase in headline inflation or generates more persistent second-round effects. Policymakers will therefore be watching closely for signs that higher energy costs are feeding into broader prices and inflation expectations.

AI spending accelerates, but so does scrutiny

While geopolitics and inflation dominated the macroeconomic backdrop, AI remained the other major force driving markets last week. Alphabet provided perhaps the clearest illustration of both the extraordinary scale of the AI investment boom and the growing debate around its returns.

The Google parent raised its expected capex for this year to between USD195 billion and USD205 billion, as it accelerates investment into AI computing capacity and cloud infrastructure. That spending comes at a significant cost; Alphabet recorded its first ever quarterly negative free cash flow of USD5.9 billion since going public approximately two decades ago.

However, there are increasingly clear signs that rapid AI development is translating into growth. Google Cloud revenue surged 82% year-on-year, making it one of Alphabet’s fastest-growing businesses, supported by strong demand for AI infrastructure and solutions. Intel reinforced the message, with data centre sales rising 59%, benefitting from continued investment in AI and computing infrastructure.

The investment case for AI therefore remains intact. However, as capex reaches extraordinary levels, investors are increasingly scrutinising whether hyperscalers, the largest cloud and technology operators can generate sufficient revenue, profits and cashflow to justify that spending.

The earnings season is gathering pace, with updates from major technology companies likely to shape sentiment around the AI investment cycle.

UK activity rebounds thanks to football and weather

Amid the geopolitical uncertainty, there was some positive signals from the UK economy. UK inflation slowed to 2.6% in June below expectations and the lowest level in more than a year. Lower energy prices contributed to the improvement, although the subsequent rebound in oil means this favourable effect may prove temporary.

Economic activity also provided a positive surprise. The latest flash purchasing managers’ indices (PMIs) showed the composite index rising from 49.3 in June to 52.1 in July, moving back above the 50 level that separates expansion from contraction. Services activity rebounded, helped partly by stronger hospitality activity around the World Cup and warm summer weather, while manufacturing also improved.

Taken together, softer inflation and stronger activity provide some welcome evidence that the UK economy has regained momentum. However, some caution is warranted; part of the improvement may reflect temporary factors, and higher oil prices could raise costs for businesses and squeeze household purchasing power.

It remains to be seen whether the improvement can be sustained.

What is coming up?

The Federal Reserve and Bank of England: 

Monetary policy will be in focus as policymakers balance renewed inflation risks from higher oil prices against the growth outlook.

Microsoft, Meta, Apple and Amazon earnings: 

Big Tech results will put the AI investment debate back in focus, with particular attention on capex plans.

Oil and the Middle East: 

Developments around the Strait of Hormuz and the broader conflict remain a key risk for markets.

The standoff in the Gulf set the tone from last Monday’s (13 July) open and never fully released its grip. The Strait of Hormuz remains a live question, with the Joint Maritime Information Centre reporting the southern route technically open but the threat level severe, and vessels warned of mines.

Meanwhile, Iran’s Revolutionary Guard, said it would let no ship pass until foreign interference ended. Traffic appeared to halt almost entirely, though some clients close to the market suggested ships were still moving with their transponders switched off.

Last Tuesday, President Donald Trump floated a plan to charge a 20% toll on cargo transiting the Strait and to reinstate a U.S. naval blockade. The plan lacked any credible route to implementation, and by Wednesday it had quietly been dropped.

Overall, Brent crude oil prices jumped by more than 13% in a week to over $86 per barrel.

The near-term worry runs deeper than crude itself. More than 10% of global refining capacity remains offline following Russia’s export ban and repeated Ukrainian strikes on its refineries. With inventories of refined products low, that bottleneck has pushed petrol, diesel and jet fuel higher, gasoline rose around 6% at one point. 

These all feed directly into inflation expectations. Longer-dated oil futures still point to a supply glut later this year, so the market’s discomfort is about timing, not a permanent shift.

On a positive note, the latest U.S. inflation report offered some reprieve. Headline Consumer Price Index (CPI) inflation contracted 0.4% in June, driven by energy prices. Core CPI was flat on the month, the biggest downside surprise since mid-2022.

Core services excluding shelter inflation fell sharply, shelter inflation decelerated and even the tech-related categories showed deepening deflation. The odds of a July hike evaporated. But this is a pause, not an all-clear; with a tight labour market, booming AI investment, loose financial conditions and rising oil again, we still think a rate rise is likely at one of the year’s final three meetings.

The Federal Reserve (the Fed) Chair, Kevin Warsh, told Congress the Fed has “no tolerance” for persistently elevated inflation, while adding it’s in no rush.

Semiconductor stocks stumble despite strong AI fundamentals

Ironically, the sell-off came despite another week of encouraging news for the AI investment cycle.

Both TSMC and ASML delivered strong results and maintained constructive outlooks. TSMC continued to benefit from robust demand for advanced AI chips, while ASML, whose lithography machines underpin the world’s most advanced semiconductors, highlighted strong order momentum and confidence in sustained demand.

As two of the industry’s most important bellwethers, their results reinforce the view that AI infrastructure investment remains on a solid footing and that hyperscale spending continues to support the sector.

So, why did semiconductor shares fall? The answer appears to lie more in market positioning than fundamentals.

Following an exceptional rally over the past year, investors took the opportunity to lock in profits as valuations across parts of the sector became increasingly demanding. Technical factors also amplified selling pressure, including leveraged exchange-traded funds (ETFs) in South Korea that accelerated declines in memory chip stocks and increased short-term volatility.

The recent correction therefore appears to reflect sentiment rather than a meaningful change in the outlook for AI. As earnings season gathers pace, guidance from the major technology companies on AI demand, capital expenditure and monetisation will be closely watched.

Economic fundamentals remain supportive

Against the market volatility, the underlying economic picture changed very little.

Recent U.S. economic data continue to suggest that growth is resilient. Initial jobless claims have fallen more than expected in recent weeks, while retail sales indicate that consumer spending continues to hold up.

Corporate earnings have also provided reassurance. Large U.S. banks generally reported solid results, supported by resilient consumer spending, healthy credit quality and improving capital markets activity. 

While management teams remain mindful of geopolitical uncertainty and the interest rate outlook, there was little evidence of meaningful stress among either households or businesses.

Taken together, these indicators suggest the U.S. economy continues to enjoy relatively solid foundations. That should continue to provide support for corporate earnings, even if markets experience periods of heightened volatility.

Attention now turns to earnings season, with updates from the major technology companies likely to shape sentiment around the AI investment cycle. Geopolitical developments in the Middle East will also remain in focus, given their potential implications for oil prices and inflation.

What is coming up?

European Central Bank (ECB) meeting:

The ECB will likely keep its policy rate unchanged at its July meeting, as the deceleration in June CPI removed the urgency.

Strait talking:

The Gulf conflict remains unresolved, with the oil price the key wild card for inflation and bond yields.

Earnings gather pace:

With reporting season now in full swing, expect more from technology and healthcare in the days ahead.

The sense of calm for the Strait of Hormuz had disappeared by the end of last week.

Iran has continued to insist it would impose fees on vessels using the Strait of Hormuz once the 60-day negotiation window with the U.S. closes. In an early act of antagonism, Iran said China and friendly nations would receive special treatment.

On Saturday 4 July, eight ships turned back on the southern Omani route before flows resumed. By Tuesday last week, the mood had darkened sharply: an LNG carrier, the Al Rekayyat, was struck by Iranian projectiles near the Omani coast, with reports of at least one further vessel fired upon. Traffic through the Strait, which was already at a fraction of its pre-March level, looked precarious.

The U.S. responded in force. Last Wednesday, it struck some 80 sites in Iran and revoked a waiver permitting new sales of Iranian oil. Iran called both moves violations of the interim deal and vowed a decisive response. 

The dispute appears to turn on Tehran’s insistence that ships transit only through Iranian waters, a condition that was never obviously part of the agreement reached with Washington. Yet, strikingly, technical talks between the two sides were still reported to be continuing by last week’s end.

Markets took it all with remarkable composure. The oil price rose by around 8% from its lows but lacked any serious momentum. RBC’s Chief Commodity Analyst Helena Croft has stressed since the onset of the crisis that traffic is unlikely to ever fully return to February’s volumes.

Europe has been caught in an economic crossfire between the U.S. and Iran. A bank-led rally followed the onset of peace negotiations but partially reversed as the conflict resumed.

Semiconductor sector restabilises

Last week began with the market focusing its attention on the semiconductor industry, where a bout of volatility had erupted. Semiconductor and related stocks have been the market leaders over recent weeks, rising extremely sharply. 

They have become associated with speculative investment activity, and it was inevitable that, at some stage, the increases would need to consolidate at the very least.

Despite some very supportive earnings news from Samsung, the sector fell as investors took profits, but towards the end of the week, stability seemed to have returned.

Hot summer nights create mixed results for Europe

Against this background, the combination of the historic heatwave across the UK and continental Europe and a North American World Cup broadcast schedule featuring late-night kick-off times will distort typical economic performance for short-term and structural reasons. 

Global workforce data from UKG projects up to a USD17 billion drag on productivity from World Cup sleep deprivation and next-day absenteeism, while over 70% of UK workers report heat-induced capacity drops.

Six of the last eight teams in the World Cup were European, and while some South American countries seem to experience a market impact from World Cup wins, Bloomberg found little evidence of that in European markets.

Hospitality usually gets a boost from the World Cup but less so when games take place outside traditional hours. The sector also benefits from good weather, but the gains fall unevenly, and margins are squeezed by higher energy and labour costs. Data from Tenzo showed uncooled city-centre venues losing footfall, while outdoor and air-conditioned locations thrived.

Certain categories of household expenditure have soared, such as the 320% year-on-year surge in cooling appliance sales in the UK, with household air-conditioning penetration at around 20% across Europe.

The chart measures the Cooling Degree Days index, which shows how much and for how long the outside air temperature rose, or is expected to rise, above a specific baseline temperature.

If these extreme summers persist into a long-term trend, structural risks will intensify.

According to the United Nations, persistent heatwaves transition from seasonal inconveniences into structural drags on growth, with projected multi-billion-dollar gross domestic product (GDP) output losses across France and Germany due to permanent cross-border supply chain friction and road/rail infrastructure degradation.

We expect corporate capital expenditure to shift defensively towards climate adaptation and cooling infrastructure alongside productivity-enhancing innovations.

Prime minister-in-waiting

Andy Burnham looks set to become prime minister around 20 July, while Ed Miliband is considered the most likely candidate for chancellor. With both men positioned to the left of the current leadership, some observers worry about the implications for gilts.

We would caution against overreacting. Politicians often soften in office, and Burnham has already walked back his more combative remarks and committed to the existing fiscal rules. The memory of the Liz Truss episode remains fresh, centrist Labour MPs act as a counterweight and Burnham has ruled out an early election.

Indebtedness is a genuine long-term concern, but the immediate political risk should probably be discounted.

What is coming up?

Q2 in view: Large companies begin reporting their second-quarter earnings this week, with the banks getting things started on Tuesday.

Easy does it: U.S. inflation should decline slightly as new data is released.

Talk the talk: Rachel Reeves is due to deliver the Mansion House speech on Tuesday, in what could be her last major engagement as chancellor, depending upon the whims of Andy Burnham.

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.