A stronger-than-expected US jobs report shattered nine weeks of equity gains, triggering a violent rotation out of semiconductors and forcing markets to reprice the Federal Reserve’s (Fed) policy path higher.

In fixed income, yields rose sharply across developed markets while credit proved resilient, with default rates remaining well below long-term averages. The dollar extended its advance on widening rate differentials, whilst gold paused, awaiting geopolitical clarity before resuming its structural uptrend.

Macroeconomics

The US economy offered its own verdict ahead of any formal peace agreement. ISM manufacturing climbed to 54.0 in May, its highest reading since early 2022, with gains broad-based across components, suggesting the move reflects genuine demand rather than inventory distortion. Services reinforced the picture: new orders surged, lifting the composite from 53.6 to 54.5, though prices paid hit their highest reading of the year, a reminder that inflationary pressures from energy costs, supply-chain disruptions, and tariffs have not dissipated.

In parallel, labour market data challenged the low-hire, low-fire thesis that has prevailed in recent months and which is gaining momentum. US non-farm payrolls rose by 172,000 in May against a consensus of 88,000, with prior months revised up by a combined 93,000; the unemployment rate held steady at 4.3% while the wage-inflation threat looks contained: unit labour costs grew just 1.8% (annualised) in Q1 and 0.5% over the past four quarters, with productivity absorbing much of the compensation pressure.

In the eurozone, stagflationary pressures are building, even if the full diagnosis remains premature. Services PMIs were revised fractionally higher and remain in contraction; April retail sales fell 0.4% and Q1 gross domestic product (GDP) was revised down from 0.2% to -0.1%, while May’s flash consumer price index (CPI) showed core inflation accelerating to 2.5% from 2.2%. The services component drove the move, particularly transport and accommodation, categories that tend to respond quickly to energy costs and where pass-through effects are plausibly at work.

The European Central Bank (ECB) meets this week and is widely expected to raise its rates. The more interesting question is what the incoming data, a core acceleration, consecutive Purchasing Managers’ Index (PMI) contractions, and a retail miss, imply for the pace beyond this meeting. In the US, the May CPI print will test how much of the energy shock has passed through to consumer prices, whilst our scenario predicts that inflation still has room to accelerate further. The National Federation of Independent Business (NFIB) small business and University of Michigan sentiment surveys will offer a parallel read on whether confidence is stabilising at weak levels or beginning to recover.

Equities

Global equities snapped a run of gains last week (MSCI ACWI total return -2.2%) as a violent rotation out of semiconductors at the end of the week rippled across chip- and technology-heavy markets including the US (S&P 500 -2.5%, Nasdaq Composite -4.7%) and emerging markets (MSCI Emerging Markets -1.9%), in particular South Korea and Taiwan.

The KOSPI fell over 5.5% in its 5 June session with heavy losses continuing at the start of this week (-8.3%), while Taiwan’s main exchange has fallen almost 5% over the two-day period. In the US, equities registered their first losing week in ten, with the Nasdaq suffering its largest one-day drop since April 2025. Europe proved comparatively resilient as the STOXX Europe 600 slipped just 0.5% last week, underscoring the artificial intelligence (AI)-specific nature of the drawdown.

Two principal forces drove investor nervousness. First, Broadcom’s failure to raise its AI chip outlook punctured the semiconductor narrative that has powered markets globally year to date. Second, a far stronger-than-expected US jobs print reignited higher-for-longer interest rate concerns, pushing long-term yields sharply higher, reducing market expectations of a Federal Reserve cut and weighing on equity valuations. The lack of progress towards a peace deal between the US and Iran also acted as an overhang during the week.

Market internals told a rotation story: the Dow Jones closed at a record high on Thursday and was the least affected over the week (-0.2%), with capital moving from crowded growth into value (S&P 500 Value -0.7% last week vs. S&P 500 Growth -4.1%). With the ECB poised to raise rates and the Fed's easing path in question, concentration risk in mega-cap AI remains the market’s defining vulnerability in the near term, with upcoming mega-cap IPOs also testing market appetite for additional equity supply.

Equities snapped a nine-week winning streak as a semiconductor sell-off and hawkish jobs data rattled AI-heavy markets.

Fixed income

Yields rose and curves bear-flattened (short-dated yields rising faster than long-dated ones) across developed markets, with the front end leading as a strong May employment report and the most hawkish Fed commentary in over a year forced a repricing of the policy path. US two-year yields rose 14 bps to 4.15% and ten-years 9 bps to 4.53%; Bunds rose 16 bps and 10 bps to 2.69% and 3.04%, respectively; gilts rose 13 bps and 9 bps to 4.34% and 4.90%, respectively, with the moves continuing on Monday following the exchange of missile attacks between Israel and Iran.

The labour market was the principal driver (covered here in the Macroeconomics section), challenging the low-hire, low-fire thesis that had taken hold in recent months. With the unemployment rate stable for a year and real GDP averaging close to 2.5% over the same period, the question of whether policy is restrictive at all is now a live one, and the money market curve has begun to reflect it, with futures now leaning towards a hike by year-end. This is not our base scenario; we will find out more following the first meeting under new Chair Kevin Warsh on 16–17 June.

Credit was quiet by comparison. Spreads were broadly rangebound, investment grade (IG) unchanged, high yield (HY) marginally wider, and both additional tier 1 (AT1s) and emerging markets (EM) a touch tighter, leaving rates to do the damage, with Treasuries returning -0.4%, IG -0.5%, HY -0.4%, and AT1s and EM each -0.2%.

The default picture continued to improve. May saw no payment defaults or liability management exercises, the first clean month since August 2018. Year-to-date, there have been nine payment defaults totalling USD 12 billion and eight distressed transactions totalling USD 7 billion, running some 8% behind last year’s pace. Including distressed exchanges, the par-weighted US high-yield bond and leveraged loan default rates fell 18 bps and 19 bps on the month to 2.02% and 2.62%, respectively, both comfortably below their 25-year averages of 3.2% and 2.9%, and only modestly above the 2.3% post-GFC norm.

This week, the focus is on any further flare-up in the Iran conflict and the outcome of the ECB meeting, where the bank is expected to raise rates, having last moved them lower in June 2025.

Strong payrolls forced a hawkish repricing; yields rose sharply whilst credit remained resilient.

Forex & Commodities

The US dollar strengthened following the publication of better-than-expected US non-farm payroll data (172,000). The print pushed the overnight index swap (OIS) market to price in a 25-bp Fed rate hike by Q1 2027. We believe rates should remain on hold at current levels; however, the market move has shifted interest rate differentials in the dollar’s favour, particularly against the euro, yen and Swedish krona. The principal near-term risk is this week’s US CPI release, expected to print at 4.2% year-on-year (headline) and 2.9% year-on-year (core). A stronger-than-expected core reading should support the dollar. The dollar retains the upper hand in the near term.

The European Central Bank meets on Thursday and is expected to raise its deposit rate by 25 bps, taking it to 2.25%. The move is priced in with 97% probability. ECB commentary has skewed hawkish in recent weeks, and the accompanying statement is likely to strike a cautiously hawkish tone. The euro is unlikely to benefit materially from the rate hike, given recent growth disappointments (PMI data) and the terms-of-trade shock caused by rising oil prices. A non-committal press conference could see the EUR/USD break towards lower levels.

The Bank of Canada (BoC) also meets this week and is expected to keep rates on hold at 2.25%. Better-than-expected labour market data for May have firmed rate expectations, with markets pricing out further easing and tentatively pricing in rate hikes for next year. The BoC statement should maintain a balanced outlook, stressing the need for patience amid elevated uncertainty. Against this backdrop, the prospects for sustained Canadian dollar appreciation remain limited in the near term, and we maintain our expectation of a rangebound USD/CAD exchange rate.

Gold edged lower last week to around USD 4,300 per ounce, reflecting the rise in front-end yields. A sustained move higher will require more time. Markets will need to see the reopening of the Strait of Hormuz and contained second-round inflation effects before a more sustained uptrend can resume. Positioning data remain largely unchanged, pointing to limited retail interest.

The dollar strengthened on rate differentials; gold edged lower as rising yields and geopolitical uncertainty capped upside.

The opinions expressed herein are correct as at 8 June 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.