We begin this week with the story that has driven markets all year: the war between the United States and Iran, and the fragile, on-again-off-again effort to reopen the Strait of Hormuz, the waterway through which around a fifth of the world’s seaborne oil normally passes. The week opened with optimism, after President Trump said on Saturday that an agreement to reopen the strait had been “largely negotiated” and would be announced shortly. By Monday that optimism had soured; US Central Command confirmed “self-defence” strikes on Iranian missile launch sites and vessels near the strait, and on Thursday Iran said it had attacked a US air base in retaliation, with the President describing Tehran as “negotiating on fumes”. Yet by Thursday evening Reuters reported that the two sides had agreed to extend the ceasefire and lift restrictions on shipping through the strait, though the agreement is yet to be confirmed by the US side. A ceasefire of sorts has held since 8th April, but the term is used loosely.
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
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