Global markets are entering a more balanced phase, where higher‑for‑longer rates, renewed energy pressures and sticky inflation are starting to test an artificial intelligence (AI)‑driven equity rally rather than abruptly reversing it.

Equities are pausing after strong gains, bond yields have moved up towards one‑year highs and cyclical foreign exchange (FX), such as the EUR and GBP, looks more vulnerable at the margin, while gold has corrected on higher yields but is still benefiting from intact demand drivers and ongoing geopolitical uncertainty.

Macroeconomics

While the geopolitical situation remained unclear, the main concerns last week came from US inflation. The US Consumer Price Index (CPI) was up by 0.6% month-on-month (m/m) (3.8% year-on-year (y/y)) due to renewed rises in energy, and worries came from higher-than-expected core inflation (up by 0.4% m/m and 2.8% y/y), with some pass-through from oil to services via the transport sector. PPI was also higher than expected (up by 1.4% m/m), due to higher energy and transport services.

The rise in inflation has not yet destroyed US demand, as revealed by retail sales in April continuing to be sustained (0.5% m/m after 1.6% m/m). On the supply side, business sentiment rebounded strongly on the New York Empire index, and industrial production was firmer thanks to the natural gas and manufacturing sectors.

In the UK, Q1 gross domestic product (GDP) was firmer than expected (up by 0.6%) thanks to still relatively strong consumption and private capital expenditure (capex). In the eurozone, inflation was confirmed as being higher in April due to rises in energy and services: in France it was up by 2.5% y/y, in Italy by 2.8% y/y, and in Germany by 2.9% y/y.

This week, the focus will be on new flash Purchasing Managers’ Indexes (PMI) in developed markets; the key question will be whether the US remains on a positive trend versus the eurozone, after the eurozone showed weakening demand in services.

In the UK, retail sales are expected to be weak, the labour market to remain on a soft trend, and April CPI to show a sustained monthly rise (1% m/m expected) related to energy, but on a still-contained yearly trend around 3% y/y. In the eurozone, the final April CPI should confirm the 3% y/y trend, while flash consumer confidence should weaken further.

In the US, a range of data on housing and consumer confidence will be released; the publication of the Federal Reserve’s (Fed) minutes will reveal the different camps among governors concerning inflation just ahead of the arrival of the new Fed chairman, Kevin Warsh.

In China, monthly activity indicators should point to renewed weakness in domestic activity. In Japan, Q1 GDP is expected to have been resilient (up by 0.4% q/q) thanks to exports and consumption. Japanese inflation is expected to rise to 1.6% y/y, while core inflation should stabilise above 2.0%.

Equities

Global equities took a breather last week (MSCI ACWI total return -0.5%), while US equities extended their winning streak for the seventh consecutive week, albeit modestly (S&P 500 +0.2%). A technology-led, risk-on appetite prevailed for most of the week, with markets brushing off negative macro developments, including rising inflation readings, oil prices and long-term yields, as investors focused on AI-related earnings and an initial public offering (Cerebras Systems).

Sentiment soured on Friday, however, with no breakthrough emerging from the US-China summit on the Iran conflict, and US 10-year Treasury yields breaking past the 4.5% threshold to their highest level in a year. Equities retreated as a result, paring back earlier gains.

As the Q1 earnings season is now mostly behind us, macro developments are set to take centre stage in determining equity markets’ direction in the near term. Rising long-term yields globally represent a new headwind for the asset class, particularly given the recent V-shaped recovery (global equities +12.6% since the start of April), and signs of froth emerging in certain sub-sectors and investment styles.

With the recent rise in interest rates reflecting market expectations of a higher-for-longer inflation regime, a continued upward move may force equity markets to recalibrate valuations, even if underlying corporate earnings fundamentals remain healthy. In the week ahead, geopolitical developments, macro readings and results from technology heavyweight Nvidia will be the key focal points for investors.

Rising long-term yields and a higher-for-longer inflation regime are emerging as a new headwind for equities.

Fixed income

Yields in developed markets sold off sharply last week, with broad-based losses across all segments: Treasuries and investment grade (IG) returned -0.7%, high yield (HY) -0.5%, additional tier 1 (AT1s) -0.6%, and emerging markets (EM) -1.1%. The sell-off was driven by a renewed surge in energy prices amid inconclusive headlines on the Middle East from the Trump-Xi summit, a spike in UK political uncertainty, and firm inflation prints.

In rates, the US 10-year rose 24 bps to 4.60%, the highest level in a year, while the 2-year climbed 18 bps to 4.07%. Gilts led the sell-off, with the 10-year up 26 bps to 5.17%, a level last seen in 2008; the UK underperformance reflects the combined weight of elevated energy cost pass-through, the Labour leadership crisis, and hawkish Bank of England (BoE) repricing. Bunds were comparatively better behaved but still weaker, with the 10-year up 16 bps to 3.17%. 

Current pricing looks stretched, given that there have been no significant new developments in the Middle East beyond the Trump Xi summit rhetoric, but it is undeniable that the longer the Strait of Hormuz stays closed, the deeper the impact on energy markets and inflation, placing continued upward pressure on rates.

Amid all the rate volatility, spreads were abnormally quiet, with IG, HY, and EM narrowing incrementally. The familiar drivers were at play: higher yields, high gross but low net supply, strong inflows, and solid corporate earnings. With earnings season now more than 90% complete, however, this catalyst will fade, and the potential for supply and mergers & acquisitions (M&A) activity should pick up as companies emerge from blackout windows.

Turning to the Fed, Jerome Powell's term as Chair came to an end on Friday, though he will remain on the Board for a period, with Warsh stepping into the role, confirmed by a 54–45 vote on Wednesday (the most partisan for a Fed Chair in the modern era). Stephen Miran announced he would vacate his seat once Warsh is sworn in, a necessary step given there was no other open position on the seven-member Board for Warsh to fill. Warsh's first Federal Open Market Committee (FOMC) meeting is scheduled for 16–17 June, though with oil above USD 100/bbl and a Board split between hawks and doves, it is difficult to see how he could move rates any time soon. This week, the minutes from Powell's final meeting as Chair, due on Wednesday, will be worth dissecting for any discussion about the conditions that would warrant a hike, particularly given the April inflation data that followed.

Yields sold off sharply across developed markets, as surging energy prices and sticky inflation pushed rates to their highest levels in a year.

Forex & Commodities

Against the backdrop of higher yields and persistent inflation pressures, the coming week carries increasing downside risks for the EUR/USD. The publication of the FOMC minutes from the latest Federal Reserve meeting should confirm the removal of any further policy accommodation in the near term. PMI data later in the week are likely to illustrate downside growth risks in the eurozone, and markets could move to price out potential European Central Bank (ECB) rate hikes (70 bps priced in by year-end). Two-year spreads have moved to lower levels in recent weeks, suggesting that the EUR/USD now faces greater downside risks in the short term.

The GBP is set to remain under pressure in the near term, with UK domestic political risks to the fore. UK gilt yields are likely to face further upside pressure on any hint of a move towards further tax rises or spending increases. UK yield/GBP correlations are similar to those seen during emerging market crises. The main events over the coming week are the publication of UK CPI data and unemployment data for March. The CPI data will be a touch lower due to base effects, but the key will be whether any rise in month-on-month data emerges, which could indicate an increase in contemporaneous inflation pressures. Overall, the stance on the GBP remains cautious, and the EUR/GBP is expected to trade towards higher levels.

The CNY traded flat at 6.80, following a brief decline to below 6.80 last week. Chinese data were mixed, with industrial production data weaker than expected, and retail sales data stagnant. The industrial production miss suggests that spillovers from the Iran conflict are affecting supply chain orders. A constructive stance on the CNY is being maintained, given its compelling valuation profile and higher domestic inflation prints.

Gold traded lower to around USD 4,550 per oz, reflecting the rise in front-end nominal and real yields. Positioning is largely unchanged, and the catalyst for a resumption of gold’s upward move will be greater clarity on the situation in the Middle East. All the demand drivers from earlier this year remain firmly in place, which supports further upside over time.

FX remains vulnerable, while gold’s underlying demand drivers continue to support further upside over time.

The opinions expressed herein are correct as at 18 May 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.