Market Review 26th May 2026

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Markets hold firm despite ongoing US-Iran tensions

Summary

• US launches new ‘self-defence’ strikes in southern Iran despite apparent progress in peace talks between the two nations

• Key sticking points remain unresolved, including control of both the enriched uranium and the Strait of Hormuz

• Last week, US Treasury market yields initially rose before retracing, while UK gilts outperformed amid falling oil prices and weaker UK data

• Equities remained resilient, with US indices extending gains for an eighth consecutive week and trading around record highs

• The US Federal Reserve (Fed) minutes struck a more aggressive tone, signalling policymakers remain willing to tighten further if inflation persists and pushing back expectations for rate cuts

• Kevin Warsh was sworn in as Fed Chair, with markets expecting pressure from him to a somewhat looser rate policy, a reduced balance sheet and less reliance on forward guidance.

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Market Review

Volatility continues in the Middle East

Tensions in the Middle East remain elevated, with US strikes on Iranian targets overnight. In response, the Iranian leadership has warned the US will no longer have a ‘safe haven’ in the region. Despite this, peace negotiations continue in Qatar with President Trump saying talks are going ‘nicely’. The uncertainty is feeding through to energy markets; Brent crude opened up around 3% amid concerns over supply disruption and the timing of any deal to reopen flows through the Strait of Hormuz.

Rates divergence

The uncertainty is causing persistent volatility across the markets. US borrowing costs spiked last week: 30-year US treasury yields hit at a 19-year-high with the 10-year at its highest yield in over a year. Both then fell on Friday as positive signals emerged in US-Iran peace talks.

UK gilt yields, which had increased in recent weeks due to persistent inflation concerns and expectations of further interest rate rises, moved lower. This reflected falling oil prices and softer UK economic data, which led markets to scale back expectations for any further increases in interest rates by the Bank of England (BoE). The biggest change happened in short-term bonds, which are more sensitive to interest rate expectations, with yields falling as markets reduced the likelihood of further rate rises.

Subsequently, the gap between US and UK 10-year yields narrowed to around 35 basis points, reducing the relative income advantage previously offered by gilts.

Meanwhile, the Fed signalled that it is prepared to keep interest rates higher for longer if inflation remains persistent. However, incoming Fed Chair Kevin Warsh, a President Trump appointee, is expected to show a bias towards rate cuts, despite committing to lead the central bank independently. At the swearing-in ceremony, President Trump told guests: ‘I want Kevin to be totally independent. Don’t look at me. Don’t look at anybody.’

A tale of two economies

US data was resilient last week, with initial jobless claims holding near multi-year lows. The flash manufacturing Purchasing Managers’ Index (PMI) surged to a four-year high of 55.3, likely driven by pre-emptive stockpiling ahead of anticipated price uncertainty.

The UK picture was notably weaker. Unemployment rose unexpectedly to 5%, while payrolls fell by 100k in April, the largest decrease since the start of COVID-19. Inflation also came in below expectations, with headline Consumer Price Index at 2.8% versus 3.0% forecast.

Activity indicators softened: The services PMI fell into contraction at 47.9, and retail sales declined by 1.3% month-on-month (MoM), worse than expected.

This comes against a more uncertain political backdrop. Keir Starmer faces growing pressure ahead of the 18 June Makerfield by-election, which some see as a potential trigger for a leadership challenge.

This shift in UK data is important for policy expectations. A services sector moving into contraction materially weakens the case for further interest rate rises and raises the probability that the BoE remains on hold. This has supported shorter-dated UK gilts and suggests scope for further gains should growth concerns persist.

Equities resilience and earnings

Equity markets remained robust last week. US stocks traded weakly in the early part of the week, weighed down by a pullback in some technology names, before recovering from Wednesday onwards, supported by growing hopes of a resolution to the Middle East tensions. US small caps outperformed large caps, rising around three times as much as the broader market although still underperforming over the month.

Nvidia was the standout earnings story, reporting its latest quarterly revenues to end-Apri of $81.6bn, up 85% year-on-year (YoY) and ahead of the $79.2bn consensus. The company also announced an additional $80bn share buyback and raised its quarterly dividend. Despite the numbers, the stock fell in a classic sell-the-news reaction following a significant pre-earnings run-up, ending the week down around 4.4%.

UK and European equities had a strong week, with the latter posting their best weekly gain in over a month.

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The week ahead

Economically, this week is dominated by US data releases on Thursday, when Personal Consumption Expenditures (PCE), the second estimate of Q1 Gross Domestic Product (GDP), durable goods orders and initial jobless claims are all released. Core PCE is expected to tick up to 3.3% YoY from 3.2%, Q1 GDP second estimate is expected to be unrevised at 2.0% annualised and durable goods orders are forecast to jump sharply to +3.9% MoM from +0.8% as firms continue to manage inventories against cost uncertainty.

Overarching all of this is the Iran situation. A US-Iran deal, if announced, would be the single most significant macro event of the week, materially affecting the oil price backdrop against which PCE and bond markets are interpreted. However, with the overnight strikes it seems that uncertainty is prevailing.

UK data is light, with the May British Retail Consortium shop price index, already released at 1.2%, the underwhelming highlight. This Friday, flash German CPI for May is expected to hold at 2.9% YoY although a higher-than-expected print may reinforce the case for a European Central Bank June hike which is currently 90% priced in.

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