Markets were driven by shifting rate expectations and geopolitical developments, with US–Iran tensions adding volatility.

Fixed income rallied as softer inflation and central bank signals reinforced a more cautious policy outlook. Equities remained resilient, supported by strong earnings, particularly in technology names. The US dollar stayed firm on the back of a relatively hawkish Federal Reserve (Fed), while weaker European data weighed on the euro. Overall, rate expectations continue to dominate cross-asset performances.

Macroeconomics

Almost three months in, the outcome of the current conflict in the Middle East remains uncertain; price data, by contrast, are unambiguous, as US firms are determined to defend their margins. Across manufacturing and services, input and output price inflation has accelerated to its fastest pace since 2022, according to the latest Purchasing Managers’ Index (PMI) surveys.

The pressure is highest in manufacturing, where input prices surged, supplier delivery times lengthened, and purchase volumes remained high, some of which is probably precautionary demand. The manufacturing PMI duly rose from 54.5 to 55.3, offsetting a marginally softer services reading (51.0 to 50.9, held down by weaker hiring), while the composite held steady at 51.7. Households are also expecting prices to rise. The University of Michigan’s consumer sentiment index was revised to an all-time low of 44.8, while long-term inflation expectations were revised up to 3.9%.

Given the inflationary pressures reflected in business sentiment, it is no surprise that the latest Federal Open Market Committee (FOMC) minutes pointed to removing the easing bias. A ‘majority thought some policy firming would become appropriate if inflation were to continue to run persistently above 2%.’

Across the Atlantic, the Middle East conflict is biting harder. Eurozone PMIs fell again in May, with manufacturing at 51.4 and services at 46.4. Services are bearing the brunt: the conflict-driven cost-of-living surge, transmitted through higher energy prices, is weighing on demand. Input and output price inflation still rose, but marginally more slowly than in April, a sign that firms may be losing the power to pass costs on.

The UK proved no more resilient: services sentiment fell sharply in May from 51.7 to 47.9, and a softening labour market compounded the weakness as unemployment drifted up to 5.5%. With slack now building, the second-round wage pressure that would usually worry the Bank of England (BoE) looks unlikely, and so, in turn, does a near-term rate rise.

This week, US consumer confidence will show how households are absorbing higher inflation, while the core personal consumption expenditures (PCE) price index and a second estimate of first-quarter GDP are due. Flash consumer price index (CPI) prints from Germany, France, Italy, and Spain will gauge eurozone price pressures in May.

Equities

Global equities rose last week (MSCI ACWI total return +1.3%), with US equities (S&P 500 +0.9%) continuing their winning streak for an eighth consecutive week, their longest stretch since late 2023.

While the week got off to a shaky start as long-term yields and energy prices initially pushed higher, risk appetite was renewed mid-week after President Trump said the US administration was in the ‘final stages’ of negotiations with Iran. The comment boosted appetite for European equities (STOXX Europe 600 +3.2% over the week), which are perceived to be among the worst affected by the conflict. As yields retreated, interest rate-sensitive sectors also outperformed, including global utilities (+2.7%) and real estate (+1.4%), with cyclicals also catching a bid (financials +1.9%)

Despite shares in Nvidia ending the week lower (-4.4%) following better-than-expected results, the rally in global technology stocks continued (+2.0% over the week, +34.7% since the start of April), as the chipmaker signalled continued support for artificial intelligence (AI)-related investments; SpaceX also announced its June initial public offering (IPO).

With AI-related infrastructure spending providing significant support to the global economy and corporate results (S&P 500 Q1 earnings per share (EPS) growth +29.0% as at 22 May versus +14.4% expected, of which approximately 68% was driven by the technology sector/Magnificent 7), rising bond yields remain a temporary headwind for equities but may not be enough to completely derail the asset class, which remains earnings-driven.
In the week ahead, geopolitical developments (US–Iran) will be a key focal point for investors, in addition to macroeconomic data.

Earnings still driving equities, despite higher yields.

Fixed income

Last week, all fixed income segments delivered positive performances in a week dominated by rate moves, with investor sentiment swinging on developments in the US–Iran negotiations and hopes that the Strait of Hormuz would reopen. Treasuries, additional tier 1 (AT1s), and emerging markets (EM) were up by 0.1%; investment grade (IG) returned 0.2%; high yield (HY) 0.3%. Credit spreads were broadly stable across the board. Performances were stronger in euro terms given the larger move in European rates, with euro-denominated government bonds adding 0.5% over the week.

Against this backdrop, rates broadly rallied through the week, led by a sharp move in gilts following a materially softer-than-expected UK inflation print. April CPI came in at 2.8% against a consensus of 3.0% and down from 3.3% in March, with the deceleration driven principally by housing. 10-year gilt yields fell 27 bps to 4.90%, offering the BoE meaningful relief as markets repriced expected BoE rate hikes this year from approximately 2.6 to 1.6 – a notable reversal given that, prior to the Iran conflict, markets had been pricing in around two cuts.

Bunds also rallied sharply mid-week, with 10-year yields breaking below 3% after Trump remarked that a memorandum of understanding had been ‘largely negotiated’. That said, Iran’s stance remains contested: reports emerged that Iran’s Supreme Leader had ordered near-weapons-grade uranium to remain in the country, partially reversing the move. In the US, 10-year Treasury yields peaked at close to 4.70% mid-week before retracing towards 4.50% later on.

The April FOMC minutes revealed the most fractured vote since 1992, with four dissenters pulling in opposite directions: Miran was in favour of a cut, while Logan, Kashkari, and Hammack voted against retaining the easing bias, preferring a two-sided formulation that would have explicitly kept rate hikes on the table. The Committee also toughened its language on inflation, upgrading it from ‘somewhat elevated’ to ‘elevated’, and explicitly acknowledged that higher energy prices are already feeding through. Kevin Warsh thus inherits a Committee where three members were already pushing to drop the easing bias before he had taken the Chair, a starting point that makes the framing of the 16–17 June statement a more important signal than the rate decision itself, which is widely expected to keep things on hold. Notably, the new Fed Chair has signalled a preference for less frequent public guidance on policy. If sustained, a less communicative Fed could reduce the degree of forward pricing markets have grown accustomed to, introducing additional uncertainty around turning points in the rate cycle.

In EM, Moody’s cut Mexico’s sovereign rating to Baa3 from Baa2, reflecting sustained fiscal weakness and continued financial support for Pemex, with the government having channelled approximately USD 35 billion into it in 2025 alone and with a further USD 14 billion budgeted for 2026. On the positive side, S&P raised Nigeria’s sovereign rating to B, now in line with Fitch and Moody's following their own upgrades in 2025, driven by higher oil production, expanded domestic refining capacity, and the decision to liberalise the country’s exchange rate.

Rates rallied across the board, driven by softer inflation and shifting expectations.

Forex & Commodities

Last week, the USD traded in a tight range against the majority of G10 currencies. The FOMC minutes revealed a desire to remove the Fed’s easing bias from its communication framework, meaning that the bar is now quite high for a resumption of rate cuts. The main event risk over the coming week will be the publication of US PCE inflation data. Consensus expectations are for a print of 3.9% y/y (April), well above the March print of 3.5% y/y. The data should underline the Fed’s less accommodative stance, with the upshot being that the USD should continue to grind higher over the course of the week.

European PMI data came in well below expectations, showing a contraction in activity. The data illustrate that growth is likely to come in below expectations in Q2, which poses a problem for the European Central Bank (ECB), as it will inevitably lead markets to question its ability to raise rates in line with current market expectations. We have reduced our EUR/USD forecast to reflect these developments.

The GBP traded in a tight range and was largely unaffected by the publication of much worse-than-expected PMI data. The BoE’s Monetary Policy Committee (MPC) members addressed the UK Treasury Select Committee last week and noted that the tightening in financial conditions may reduce the need to implement further rate hikes in the near term. This poses a depreciation risk for sterling, as markets could move to price out BoE rate hike expectations.

Gold edged higher to just below USD 4,600 per oz following news that the US and Iran were set to extend their ceasefire by another 60 days and to reopen the Strait of Hormuz. An extended ceasefire and a normalisation of oil flow dynamics pose downside risks to gold, as they would reduce front-end rate hike expectations.

A more hawkish Fed is supporting the USD, while weak European data are weighing on the euro.

The opinions expressed herein are correct as at 26 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.