In this Investment Strategy Quarterly, we look at the continuing impact of the Iran conflict, the outlook for the UK, economic growth in the US, and the resilience of the S&P 500. Plus, how political and geopolitical landscapes remain the key drivers of policy uncertainty.
President Trump declared the ceasefire agreement effectively “over” during the NATO summit in Ankara, prompting an immediate reaction across financial markets. Brent crude oil surged above $78 per barrel, while equity markets retreated as investors sought safer assets amid concerns that renewed disruption to global energy supplies could once again feed through into inflation. The reaction serves as a reminder that markets had become increasingly comfortable with the view that the conflict was moving towards resolution.
Government bond markets also reflected growing caution. US Treasury yields initially rose on inflation concerns linked to higher oil prices before stabilising, while investors continued to assess the implications for central bank policy. The renewed geopolitical uncertainty arrives at an awkward time for policymakers, with inflation already proving more persistent than many had hoped.
Closer to home, Andy Burnham moved significantly closer to becoming the United Kingdom’s next Prime Minister. On the first day of Labour’s nomination process, Burnham secured the backing of 322 Labour MPs, leaving him effectively unchallenged in the race to replace Sir Keir Starmer. Unless a surprise challenger emerges before nominations close, Burnham is expected to be formally confirmed as Labour leader next week and become Prime Minister shortly afterwards.
Burnham’s rise has been remarkably swift. Only weeks ago, he returned to Westminster following his by-election victory in Makerfield. His platform centres on devolving power away from London, strengthening regional economies and delivering what he describes as “good growth in every postcode”. Investors will be watching closely for further details on tax policy, public spending and infrastructure commitments once the transition of power is complete.
Meanwhile, attention also turned towards China, where June inflation data highlighted the continuing imbalance within the world’s second-largest economy. Consumer prices rose by 1.0% year-on-year, down from 1.2% in May and slightly below expectations. While inflation remains positive, the moderation suggests domestic demand continues to recover only gradually. Food prices remained weak, reflecting cautious household spending and ongoing challenges within the property sector.
In contrast, producer prices rose 4.1% year-on-year, the strongest increase since 2022. Higher commodity costs, supply chain disruptions linked to the Middle East conflict and strong demand for AI-related technology continue to support manufacturing activity. The widening gap between consumer and factory-gate inflation reinforces the two-speed nature of China’s economy, where exports and advanced manufacturing remain robust while domestic consumption continues to lag.
Market performance this week largely reflected these competing themes. Energy stocks outperformed as oil prices rallied following the renewed tensions in the Middle East, while broader equity markets struggled. The FTSE 100 fell sharply on Wednesday as investors digested the implications of higher energy prices and a potential resurgence in inflationary pressures. US markets also moved lower, with the S&P 500 and Nasdaq retreating as risk appetite weakened.
Despite the volatility, it is worth remembering that markets have repeatedly demonstrated their ability to look through geopolitical events once the immediate uncertainty passes. The key question for investors remains whether higher oil prices prove temporary or become sufficiently persistent to influence inflation expectations and central bank policy. For now, maintaining a disciplined and diversified approach remains the most effective way of navigating an environment where political and economic headlines can change rapidly.
Andy Triggs, Head of Investments
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
The former Mayor of Greater Manchester is on course to become the UK’s next Prime Minister within weeks, yet this week he spoke of a “10-year plan” for the country. Such rhetoric suggests a measured, long-term approach, with Burnham seeking to address the cost-of-living crisis while maintaining fiscal discipline and avoiding adding pressure on the public finances. He also hinted at greater public control over essential services, including water, energy and transport, signalling a willingness to expand the state’s role in key areas of the economy.
The outgoing Prime Minister, Sir Keir Starmer, does not appear willing to let Burnham take over empty-handed, with an additional £15 billion for defence spending seemingly forming part of the handover. However, this comes at the expense of several infrastructure projects, which are set to be scrapped. We covered the departure of Defence Minister John Healey a few weeklies ago. The agreed package is only £1.5 billion more than the amount previously presented to him, falling short of the £28 billion he had advocated for.
There was positive news for the UK economy, with first-quarter GDP figures showing growth of 0.6%. This marked the strongest quarterly performance since Q1 2025 and reflected the resilience of the economy before it was affected by the fallout from the US–Iran conflict. The services sector remained the main driver of growth, expanding by 0.8%, while both production and construction also recorded growth. It was a positive note on which Rachel Reeves potentially ends her tenure as Chancellor, with Andy Burnham widely expected to appoint a new candidate.
British American Tobacco (BAT) is a multinational company based in London that manufactures and sells tobacco and nicotine products. This week, the company confirmed plans to cut approximately 20% of its workforce as part of what it describes as an “AI-driven overhaul”. At times, AI appears to be a convenient justification for businesses seeking to reduce costs, rather than a reflection of the benefits the technology can genuinely deliver. The restructuring is expected to result in up to 9,000 job losses as BAT continues to grapple with sluggish sales and profit growth. Consumers have increasingly switched to alternatives as tobacco duties have risen over the past two years, while BAT has also struggled to establish a strong presence in the vape and nicotine pouch markets. Shares fell -2.3% over the week.
It is the first week of the month and, with that, the first Friday usually brings the release of the US Non-Farm Payrolls figures. However, with Independence Day falling on a Saturday this year, the US observed the holiday on Friday, meaning the figures were released a day earlier. In June, 57,000 jobs were created, well below market expectations of 110,000. The Bureau of Labor Statistics has faced criticism throughout President Trump’s second term due to frequent and sizeable revisions, and this month was no exception. May’s figure was revised to 129,000, while April’s was revised down to 148,000, resulting in a combined reduction of 74,000 jobs across the two months. This points to a significant cooling in the labour market, following a period of stronger hiring that reflected preparations for the FIFA World Cup. The leisure and hospitality sector shed 61,000 jobs, offsetting continued strength in the education and healthcare sectors, which added 69,000 roles.
In reaction to the payroll figures, US equity markets delivered a mixed performance. The S&P 500 closed largely flat on the day, while the technology-heavy Nasdaq fell -1.6%. Despite an extremely volatile second quarter, both indices recorded their strongest quarterly gains since 2020, with the S&P 500 rising 14.9% and the Nasdaq gaining 21.5%.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
Governing the United Kingdom increasingly appears to be an impossible task, with Starmer becoming the sixth Prime Minister to leave office in recent years. There is unlikely to be a contest for the party’s top job, as Wes Streeting, the former Health Secretary and a potential contender, has already declared his support for Andy Burnham. It is widely expected that Streeting will be rewarded with a senior role in Burnham’s government, with some speculating that he could be appointed Chancellor of the Exchequer.
Huw Pill, the Bank of England’s Chief Economist, was one of two members of the Monetary Policy Committee who dissented at its most recent meeting, voting in favour of a 25 basis point (0.25 percentage point) interest rate increase. Speaking on Wednesday, Pill outlined his views on monetary policy, arguing that it must remain adaptable and be designed to operate effectively in an environment of persistent uncertainty. He noted that, as central banks increasingly face unpredictable economic conditions, traditional forecasting models may become less reliable, requiring more emphasis of scenario analysis and stress-testing policy decisions. In particular, he warned that inflation could prove more persistent than currently expected and stressed that the Bank should remain prepared to tighten monetary policy further should inflationary pressures re-emerge.
In the United States, the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, rose to 4.1% year-on-year in May. This marked the first time inflation had exceeded 4% in three years, reflecting the continued impact of higher energy prices following the US-Iran conflict. With both countries having since signed an initial peace agreement, oil markets have stabilised, and WTI crude has fallen below $70 per barrel, leaving prices lower than they were before the conflict began. As a result, some easing in energy-driven inflationary pressures is expected in the coming months. Nevertheless, financial markets have increasingly priced in the possibility of a Federal Reserve rate hike, with some investors anticipating that further monetary tightening could come as early as September.
US equity markets came under broad selling pressure at the start of the week amid growing concerns that valuations in AI-related stocks had become increasingly stretched. Investor sentiment was further weighed down by the prospect of a Federal Reserve interest rate hike, which added to fears that higher borrowing costs could dampen economic growth and corporate earnings.
However, sentiment improved following results from Micron, the US semiconductor company specialising in memory chips. After shares had fallen sharply during the first two trading days of the week, the company reported quarterly revenue and profit forecasts that comfortably exceeded analysts’ expectations. Micron also revealed that customers had committed approximately $22 billion in future purchases of its memory products. The announcement sparked a strong rally in the stock, with shares rising more than 20% by the close of trading on Wednesday. Further supporting investor optimism, Micron’s CEO stated that the company sees no immediate signs of memory chip supply catching up with rapidly growing demand.
There was also some sad news this week, as Alan Greenspan, widely regarded as one of the greatest Chairs of the US Federal Reserve, passed away at the age of 100. Greenspan guided the US economy through the 1990-1991 recession and the dot com boom of the late 1990s, while overseeing the second longest economic expansion in US history, a decade of sustained growth from 1991 to 2001. Throughout his tenure, he resisted calls to raise interest rates in response to inflation concerns that ultimately failed to materialise. His ability to balance economic growth with price stability and not bend to pressure earned him the reputation as one of the most influential and respected central bankers of his generation. A true maestro.
Alongside oil, precious metals have come under pressure this week. A backdrop of increasing US rate expectations and a rising USD led to gold dipping below $4,000 an ounce and silver below $60 an ounce. Whether the Federal Reserve will ultimately raise interest rates remains unclear. With oil now at pre-conflict levels, we believe many inflationary pressures could turn out to be transitory and we could once again be considering interest rate cuts not hikes in key markets.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
A formal 14-point framework has been agreed between the two countries. The key elements of the plan include an immediate and permanent ceasefire, alongside a halt to Israel’s attacks on Lebanon. The agreement also provides for the reopening of the Strait of Hormuz with no toll imposed by Iran, the release of frozen Iranian assets and a commitment from Iran to cease the development of any nuclear weapons. Following the anticipated signing of the deal by both sides, oil markets have reacted sharply, with Brent crude falling 12% over the week to $76.00.
The impact of the conflict has been widespread and continues to be reflected in economic data. US retail sales for May rose by 0.9%, while the previous month’s figure was revised down to 0.4%. Receipts at gasoline stations remained the largest contributor, increasing by 3.4%, with motor vehicle sales also rising by 1.2%. The K shaped nature of the economy remains evident, as spending continues to be driven primarily by higher income consumers, while lower income households feel the greatest pressure from rising fuel costs. As tax refunds associated with President Trump’s One Big Beautiful Bill diminish, lower income households are likely to rely more heavily on credit to meet their expenses.
The US Federal Reserve met on Wednesday and held interest rates steady at 3.75%. This meeting marked the first under Governor Kevin Warsh, who indicated that reforms would be introduced at the central bank. The most significant change was his decision to refrain from providing forward guidance on the future path of rates, instead noting that “the good news is we will be meeting in six weeks”. This approach is intended to ensure that decisions are made on a meeting by meeting basis, grounded in the latest economic data, while also encouraging markets to focus less on decoding Fed commentary. Updated projections suggest that inflation will slow sharply next year, reducing the likelihood of President Trump securing the looser monetary policy he repeatedly called for under Warsh’s predecessor, Jerome Powell.
In the UK, CPI held steady at 2.8% for May. Markets had expected a rise to 3%, with the release coming ahead of the Bank of England’s meeting on Thursday and likely supporting the decision to hold interest rates unchanged. Lower food prices helped offset continued increases in airline fares and petrol costs. Core inflation, which excludes food and energy, edged higher from 2.5% to 2.6%.
The Bank of England did indeed hold interest rates at 3.75%, although two of the nine policymakers voted for a rate increase. Policymaker Catherine Greene joined Chief Economist Huw Pill in calling for a 25bps (0.25%) rate hike, citing the need to mitigate the risk of elevated energy prices feeding into broader inflation. Governor Andrew Bailey acknowledged that inflation remains elevated at 2.8% but indicated a willingness to tolerate this in the short term, while taking encouragement from falling oil prices following the easing of the US–Iran conflict. Markets continue to price in a 25bps (0.25%) rate increase by the end of the year.
On Thursday, Andy Burnham secured a decisive victory in the Makerfield by-election, bolstering his campaign to challenge Prime Minister Starmer. Burnham won a majority of 9,231 votes for the Labour Party over Reform UK and signalled his ambitions clearly, stating that this was the “final chance for change”. The result means Burnham will take his seat in Westminster next week, where he has already set out his position with a commitment to abide by the government’s fiscal rules. While Labour has not experienced a formal leadership revolt, previous prime ministers have stepped aside in the face of sustained internal pressure, and there is growing speculation that further ministerial resignations could follow in the coming week. In response, Starmer stated this morning that, should a leadership contest arise, he intends to stand and will not step aside.
The Bank of Japan also met this week and, unlike its peers, opted not to pause, instead raising interest rates by 25bps (0.25%) to 1%. This marked its first-rate hike of the year and brought rates to their highest level in 31 years, as policymakers continue the process of policy normalisation. Governor Ueda was absent due to illness, but Deputy Governor Uchida indicated that the Bank would continue to raise rates if inflation persists. There were also indications that price pressures are feeding through into wage growth. Japanese equities reacted positively, with the Nikkei index rallying to a new record high and gaining 6% over the week.
While progress between the US and Iran is encouraging, renewed tensions in Lebanon this morning underline the still‑fragile and evolving nature of geopolitical risks. In this environment, maintaining a disciplined and diversified approach to portfolio construction remains essential. Ensuring exposure across a range of asset classes, regions and sources of return can help manage volatility and reduce reliance on any single outcome, supporting portfolio resilience as conditions continue to evolve.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
The decision was taken unanimously, with policymakers mindful of the rise in consumer prices to 3.2% in May. Following the meeting, the ECB raised its inflation expectations to an average of 3% through to the end of the year, before easing to 2.3% in 2027. The ECB previously embarked on a steep rate hiking cycle between 2022 and 2023 to tackle inflation following Russia’s invasion of Ukraine. However, with eurozone growth declining by 0.2% in the first quarter, the central bank appears likely to adopt a more cautious approach to further tightening. Market expectations suggest that rates could increase by a further 25bps (0.25%) by the end of the year.
The Bank of Canada (BoC) also met this week, holding rates steady at 2.25%. This marked the fifth consecutive meeting without a change, as it seems policymakers are less concerned about inflation becoming broad based. As a net exporter of crude oil, Canada has benefited from higher revenues during the ongoing geopolitical tensions in the Middle East. Governor Macklem acknowledged the contraction in economic growth in the first quarter, noting that the economy appears weak rather than in a recession. Attention is also turning to the upcoming review of the United States–Mexico–Canada Agreement (USMCA), scheduled for early July, with officials increasingly concerned about the potential economic impact, particularly given the likelihood of stricter trade restrictions from the US.
UK GDP figures released this Friday morning for April showed the economy contracted by 0.1% month on month. The reversal in growth, following two consecutive months of expansion, reflects the impact of the US–Iran conflict. Services output, typically the UK’s primary driver of growth, declined by 0.2% over the month. At the same time, rising petrol prices appear to have weighed on consumer spending, contributing to a contraction in retail activity after growth in the previous month. The Bank of England is set to meet next week, although a rate hike appears unlikely as policymakers continue to exercise patience.
UK Chancellor Rachel Reeves commented following the weak data, maintaining that Labour’s economic plan had been working prior to the geopolitical conflict, pointing to strong growth at the start of the year and signs that inflation was moving towards the 2% target. She argued that the UK is in a strong position to absorb the economic impact of the conflict.
Elsewhere, this week in the Houses of Parliament, Defence Secretary John Healey became the latest minister to resign under Prime Minister Sir Keir Starmer, albeit for different reasons to many others. His departure follows a prolonged dispute over military spending, with Healey arguing that the Prime Minister had failed to commit sufficient resources to ensure national security. Starmer had previously pledged to increase defence spending to 3% of GDP; however, current plans suggest it will only reach 2.6% by 2030, highlighting the challenges the government faces in allocating additional resources.
We’ve managed to avoid talking about the US this long, but this week saw inflation rise at its fastest pace in over three years, reaching 4.2% in May. This highlights the impact of the ongoing conflict, with inflation having started the year at 2.4% and on a downward trajectory. The rising cost of living is also increasing pressure on President Trump and the Republican Party ahead of the midterm elections in November. Despite Trump’s 2024 pledge to bring inflation down, both markets and households appear increasingly reluctant to take his word at face value.
The conflict between the US and Iran remains unresolved. At the start of the week, Iran launched a missile attack on Israel. President Trump stated that he had instructed Israeli Prime Minister Netanyahu to refrain from retaliatory action; however, Israel responded the following day. A continued exchange of attacks between the US and Iran has further undermined any ceasefire that had been in place. Efforts by Pakistan and Qatar to mediate a resolution are ongoing, although progress appears limited. By the close of trading on Thursday, President Trump claimed that further attacks on Iran had been halted, with the final terms of a deal expected to be agreed in the coming days. Despite numerous false claims regarding a deal, markets did take Thursday’s announcements positively, with risk assets and precious metals rebounding strongly after weakness during the previous days.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
While England fans will be hoping for World Cup triumph there was hope that a resolution between the US and Iran would finally be agreed, as they negotiated the reopening of the Strait of Hormuz. However, early on Monday, reports emerged of a series of strikes carried out by both sides, continuing to strain the ceasefire that had been agreed. Iranian forces struck Kuwait, hitting the airport and injuring dozens of people, while the US military conducted defensive strikes closer to the Strait of Hormuz. Trump later announced that he had to instruct Israeli president Netanyahu to refrain from further attacks on Hezbollah, which only added additional pressure to the already fragile ceasefire with Iran.
Midweek, the US House of Representatives passed a war powers resolution to block President Trump from carrying out any further strikes on Iran. The vote stood at 215–208, with a number of Republicans siding with Democrats in a congressional attempt to force an end to the conflict. The news flow from the US administration often does not reflect the reality on the ground, as earlier this week Iran made it clear it would be suspending any further negotiation talks. Despite this, President Trump continues to claim that negotiations are “going very well”.
The US Fed Beige Book is a report issued by the Federal Reserve that provides a regular snapshot of economic conditions across its 12 regional districts. It essentially offers a ground-level view of how the economy is performing. The latest report indicated that the US economy is expanding at a slight to moderate pace, with business activity increasing in ten of the twelve districts. Manufacturing has also been a key bright spot, expanding across nine districts, supported by defence spending and a significant buildout of data centre infrastructure. However, one area of concern is the impact of soaring energy costs, driven by the ongoing conflict, which are reshaping consumer behaviour, with lower- to middle-income households feeling the squeeze.
It is the first Friday of the month, so with that we receive the US Non-Farm payroll figures. For May, 172,000 jobs were created, signalling continued strength in the labour market, following the addition of 179,000 jobs in the previous month. The unemployment rate also remained steady at 4.3% for the third consecutive month. Against a backdrop of moderate economic growth, this data reinforces the view of a still-resilient labour market and is unlikely to prompt the Federal Reserve to shift away from its current holding of interest rates.
Eurozone inflation for May was released on Tuesday, showing further acceleration as headline inflation rose to 3.2%, the highest level since September 2023. At the start of the year, headline inflation stood at just 1.7% in January, highlighting the significant increase, largely driven by energy costs. Services inflation also picked up, rising to 3.5%. In response, markets have already begun to price in a 25 bps (0.25%) rate hike when the European Central Bank (ECB) meets next Thursday.
In the UK, political drama has continued to take centre stage following the publication of documents relating to Lord Mandelson’s appointment as British ambassador to the US. While over 1,000 pages were released, several key takeaways emerged, including critical remarks about Starmer and his government, suggesting a need for a complete overhaul. The documents also revealed Mandelson urged ministers to adopt a more “Trumpian,” risk-taking, and daredevil approach to counter mounting pressure from Reform, alongside highlighting significant vetting concerns only undertaken in an attempt to avoid potential issues with Washington. This episode remains a blemish for Prime Minister Starmer, who acknowledged that appointing Mandelson was a mistake, compounded by revelations that he uses auto-deleting messages.
The political pressure continues to mount, as Andy Burnham announced this week his intention to replace Starmer as Prime Minister, contingent on winning his by-election in a couple of weeks’ time. However, his path to the top is far from straightforward, with Burnham’s run as the Labour candidate in Makerfield being strongly contested by the Reform Party. It has also emerged that former Health Secretary Wes Streeting has launched a leadership bid, further intensifying the pressure within the party.
Away from politics we have seen continued focus on the artificial intelligence narrative within stock markets. We have witnessed meteoric rises in share prices, with the US technology sector rising over 40% over April and May, while the semiconductor sector rose a staggering 66%. Semiconductor companies are currently the main beneficiaries of the capex boom from the hyperscalers, and they have seen their earnings explode.
Narrow market leadership can present challenges for diversified approaches; however, we have been pleased that recent portfolio changes have increased exposure to the US technology sector. While we are mindful of the sector’s strong performance in recent weeks, we remain disciplined and are always open to taking profits following such moves.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
In this edition of Monthly Market Commentary, our European Strategist, Jeremy Batstone-Carr, examines the continued Persian Gulf conflict and its impact on energy supplies, price pressures, and how pessimism in the bond markets contrasts with optimism in the stock market.
The oil market has responded to each shift in developments, often sharply. Brent crude fell to around $92.67 a barrel and US West Texas Intermediate to about $87.64 on Friday morning, leaving Brent down roughly 10.5% on the week and WTI down 9.2%, the steepest weekly declines since early April. That looks like a clean directional signal, but the path to it was anything but: crude fell on deal hopes, rose on military exchanges, and fell again on the late-Thursday ceasefire report. This matters well beyond the petrol pump. The energy shock from this conflict has been the single largest driver of inflation in 2026, and the unwind in prices is the most material market move of the week. It is also conditional on a deal that has not yet been signed.
That backdrop sets up the week’s most important data. In the US, the Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures (PCE) index, which strips out volatile food and energy prices, rose 3.3% in the year to April. The headline measure, which includes them, ran hotter at 3.8%, underlining how strongly energy costs have been feeding through to prices. The monthly figures, however, were softer than feared, suggesting the burst in prices from the energy shock is starting to ease. Elsewhere, the second estimate of first-quarter growth was revised down to an annualised 1.6%, from 2.0% first reported, reflecting softer investment and consumer spending. The American consumer also appears more cautious: the Conference Board’s measure of confidence dipped to 93.1 in May, with the present-situation component falling more sharply. Firmer prices, slower growth, and a more wary consumer make for an uncomfortable mix, and one we are watching closely.
Responsibility for navigating that mix now sits with a new Federal Reserve chair. Kevin Warsh, sworn in on 22 May as Jerome Powell’s successor, used his first speech to promise a “reform-oriented” central bank, arguing that inflation can be brought down without sacrificing growth. That stance may soon be tested. Other policymakers are leaning more hawkish: Governor Christopher Waller has called for removing the “easing bias” from the policy statement, while futures markets imply roughly an 11% chance of a rate rise in July, up from under 1% a month ago. Warsh’s first meeting as chair comes in June and will offer an early indication of how he balances above-target inflation against a clearly cooling economy.
Equity markets, for now, appear largely untroubled. The S&P 500 closed at a record 7,520 on Wednesday, while the Dow Jones Industrial Average and the Nasdaq Composite also reached fresh highs. The S&P has now risen for eight consecutive weeks, its longest run since 2023. Strength is not confined to the US. Japan’s Nikkei 225 pushed through 65,000 for the first time on Monday, led by companies exposed to artificial intelligence, and Asian markets surged again on Friday morning, with Tokyo, Seoul and Taipei all gaining more than 2% on the ceasefire-extension news. The striking feature is how little of the broader macro tension is reflected in index levels.
Closer to home, attention turns to the Makerfield by-election on 18 June, widely seen as a test of Prime Minister Sir Keir Starmer’s position. Greater Manchester mayor Sir Andy Burnham has been confirmed as the Labour candidate, with Reform UK’s Robert Kenyon the main challenger; an early Survation poll put Labour narrowly ahead at 43% to 40%, within the margin of error. Markets are sensitive to the outcome because gilts and sterling have moved on questions of fiscal discipline and political stability. With Iran-related risk easing on the latest reports, the 10-year gilt yield drifted down to around 4.85%, its lowest since late April, and investors trimmed their expectations for Bank of England rate rises this year.
Taken together, the picture is a familiar one. Equity markets sit at or near record highs, but on foundations that have been visibly shifting all week, with headlines from the Gulf pulling oil, bonds, and equities in opposite directions on consecutive days. The week ends on a more constructive note, with a ceasefire extension reportedly agreed and oil sharply lower, but in the absence of a signed framework, it would be premature to draw firm conclusions. The focus from here is on whether the deal is finalised, on the path of inflation, and on the June Federal Reserve meeting. We are positioning portfolios accordingly in what remains a volatile and delicately balanced environment.
Mark Wilson, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.
The dominant question for markets this week was whether the Iran conflict, which has driven Brent crude up roughly 50% since late February and rewired every major central bank’s reaction function, might be approaching an end. By Wednesday, President Donald Trump was describing negotiations as being in the “final stages”, Brent crude had fallen 5.6% in a single session to close at $105.02 per barrel, and reports indicated that three supertankers had transited the Strait of Hormuz for the first time in weeks. WTI fell below $100. Markets, having spent most of the year pricing for the war to drag on, began to permit themselves a degree of cautious optimism, although the broader repricing of central bank expectations has barely begun to unwind.
Beginning with the UK, the dominant domestic release was Tuesday’s headline inflation print for April, which came in materially below expectations. Headline CPI fell to 2.8% from 3.3% in March, and the mechanical driver was straightforward: the 7% cut to the Ofgem energy price cap that took effect on 1st April fed directly into household electricity bills, which are now lower than a year ago for the first time in some while. The underlying picture is messier. Motor fuel prices rose sharply as the conflict pushed pump prices up, while food inflation, in the Governor’s words on Wednesday, was “surprisingly benign”. The Bank of England has guided that inflation is likely to sit between 3% and 3.5% through the second and third quarters, so April may prove the trough rather than the new direction of travel.
Turning to the labour market, Monday’s data offered fewer comforts. UK unemployment rose to 5.0% in the three months to March, up from 4.5% a year earlier, and the more timely payrolled employee data showed a fall of around 100,000 in April alone. Vacancies dropped to their lowest level since early 2021. Wages are still growing faster than prices, just barely, leaving real pay growth close to flat. The labour market is cooling more quickly than the inflation data alone would suggest, and that matters for what the Monetary Policy Committee does next.
That tension was the central theme of Andrew Bailey’s appearance before the Treasury Select Committee on Wednesday afternoon. The Governor told MPs that, but for the Iran war, the Bank would probably have cut rates once or twice this year, and that inflation might have reached its 2% target last month. He described the conflict as the dominating change in the landscape for the British economy. In effect, Bailey argued, policy has been tightened by the simple act of removing the cuts the market had previously expected. He was careful not to commit either way ahead of the 18th June meeting.
In the US, the news was, if anything, more striking. The FOMC’s April 28th to 29th minutes, released on Wednesday evening, revealed the largest dissent at a single meeting since October 1992. The committee held the federal funds target range at 3.5% to 3.75% on an 8-4 vote. Three regional Fed presidents (Hammack, Kashkari and Logan) objected to retaining language that hinted at easing, while outgoing Governor Stephen Miran dissented in favour of a 25bps (0.25%) cut. Most participants flagged that some additional tightening would become appropriate if inflation continued to run persistently above target. Futures markets have responded by pricing the odds of a rate hike by December roughly level with a hold.
Linked to all of this, the meeting in question was Jerome Powell’s last as Chair. Kevin Warsh was confirmed as the new Federal Reserve Chair by a Senate vote of 54-45 on 13th May, the narrowest margin in the modern era, with Powell remaining on the Board as a Governor (an unusual arrangement; the last time a Fed Chair stayed on was nearly eighty years ago). Warsh, who has called for a different policy posture and a fresh approach to the Fed’s framework, chairs his first meeting on 16th to 17th June.
Away from the central banks, the most arresting story of the week was in long-dated government bonds. On Friday last week, Japan’s 30-year JGB yield broke 4% for the first time since the tenor began trading in 1999, with the 20-year at its highest since 1996 and the 40-year at a record. By Monday, the US 30-year Treasury yield was at its highest in nearly a year, the UK 30-year gilt yield at its highest since March 1998, and the German 10-year Bund at its highest since May 2011. The move reflects two related anxieties: that inflation will prove stickier than central banks had hoped, and that government finances around the world will need ever more long-duration paper to fund themselves.
In a similar vein, the People’s Bank of China kept its Loan Prime Rates unchanged on Wednesday, leaving the one-year rate at 3.0% and the five-year at 3.5% for a twelfth consecutive month. With Chinese first-quarter GDP coming in at 5.0%, at the top of Beijing’s target range, and energy-driven price pressures rising, the case for easing is weaker than it looked at the start of the year.
UK retail sales released this morning declined by 1.3% month-on-month, a worse outcome than expected. On top of weak retail sales UK public sector net borrowing was higher than anticipated. Typically, this may have led to a sell off in government bonds, however, positive comments from Andy Burnham around sticking to fiscal rules and acknowledging “there needs to be a plan to get debt down” has supported UK bonds, leading to falling yields.
Looking across the week as a whole, bond markets remain under pressure, with long-end yields in Japan, the UK, the US, and Germany all at levels not seen for years and, in several cases, decades. Headline inflation in the UK has eased, but the underlying picture remains tightly bound to the conflict and the oil price. Equity markets have held up better than the move in yields might suggest. The variable we continue to monitor most closely within portfolios is the duration and resolution of the Middle East conflict, which still sets the tone for everything else.
Mark Wilson, Investment Analyst
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