Macro
The main macro development this week was the sharp reduction in geopolitical risk following the interim US-Iran agreement. The deal established a 60-day negotiation period, reopened the Strait of Hormuz, lifted naval blockades, and temporarily allowed Iran to resume oil exports. With roughly 160 million barrels of crude previously trapped in the Gulf expected to re-enter global markets, investors rapidly repriced the risk of a prolonged energy shock. Beyond energy markets, the reopening of Hormuz reduces risks to global shipping, fertiliser markets, manufacturing supply chains, and food prices, interrupting the transmission mechanism through which an energy shock could have evolved into broader demand destruction.
The agreement provides Iran with meaningful economic incentives, including sanctions relief, access to frozen assets, and participation in regional investment initiatives. Despite renewed tensions in Lebanon and threats to close the Strait of Hormuz again, both sides remain incentivised to continue negotiations. Markets continue to view a sustained reopening of Gulf energy flows as the most likely outcome despite periodic setbacks.
The G7 Summit in France produced a surprisingly coordinated outcome. Leaders broadly endorsed the Iran framework, pledged additional support for Ukraine, tightened sanctions on Russia, committed to strengthening critical-minerals supply chains, and renewed pressure on China over industrial overcapacity and export dumping. The summit marked a rare period of alignment between the US and its major allies after months of geopolitical tensions.
Geopolitical risks nevertheless remain elevated. Israel has yet to formally endorse key elements of the agreement, while Iran has asserted sovereignty over shipping through the Strait of Hormuz and signalled that future tolling arrangements remain under consideration. Tehran also appears keen to exploit emerging tensions between Washington and Israel while strengthening its negotiating position ahead of talks on its nuclear program. The next phase of negotiations is likely to remain volatile, though the economic incentives embedded in the agreement make a complete collapse of the process a lower-probability outcome.
The Federal Reserve maintained rates unchanged but delivered a cautious message on inflation, reinforcing the view that policymakers remain focused on price stability despite easing energy prices and improving supply-side conditions. More broadly, major central banks continue to prioritise inflation management over growth support, suggesting policymakers remain reluctant to pivot toward easing despite recent improvements in the inflation outlook.
US consumer sentiment improved materially in June. The University of Michigan sentiment index rose to 48.9 from 44.8, while both short- and long-term inflation expectations declined. The 5-10-year inflation expectation measure fell to 3.4% from 3.9%, suggesting consumers are becoming less concerned about persistent inflation despite recent volatility in energy markets.
The labour market continued to surprise on the upside. May payrolls rose 172k while prior months were revised higher by 93k. Hiring broadened beyond healthcare into more cyclical sectors, suggesting the 2025 hiring slowdown may be ending, while wage growth remained contained at 3.5% YoY.
US economic data remained broadly resilient. Industrial production accelerated to 1.7% YoY in May from 1.4%, manufacturing output improved to 1.4% YoY, and retail sales rose 0.9% MoM, above expectations and up from 0.4% in April. The control group measure, which feeds directly into GDP calculations, increased by 0.7%, while core sales, excluding autos and gasoline, rose by 0.5%. The Philadelphia Fed manufacturing index improved sharply from -0.4 to +10.3, with new orders, employment, and shipments all returning to expansion territory. Firms reported limited pass-through of higher energy costs, supporting the view that the recent inflation shock remains largely energy-driven rather than broad-based.
The broader economy continues to be supported by stable employment, strong household balance sheets, supportive financial conditions, rising equity wealth, and continued AI-related capital expenditure. Consumer spending remains stronger than income growth, however. Real disposable income has declined in six of the last seven months, while spending has been supported by lower savings and rising equity wealth. With household equity holdings approaching three times annual disposable income, the wealth effect is increasingly supporting consumption, leaving spending more exposed to future asset-price weakness.
Housing remains the clearest area of weakness. Elevated mortgage rates continue to suppress transaction volumes through a lock-in effect that limits mobility, affordability, and housing-related spending.
Europe’s economic picture remained mixed but showed signs of stabilisation. Eurozone inflation accelerated to 3.2% from 3.0%, while business sentiment improved sharply. The Eurozone ZEW Economic Sentiment Index rose from -9.1 to +9.5, while Germany’s reading jumped from -10.2 to +10.5. Industrial production also returned to positive territory after contracting in March, suggesting the region may be emerging from its recent slowdown.
China’s May activity data surprised to the downside. Retail sales contracted, fixed asset investment declined again, and home prices continued to weaken. Industrial production remained supported by exports and demand for AI-related manufacturing, reinforcing the growing divergence between weak domestic demand and resilient external activity. China’s recovery remains heavily reliant on manufacturing, technology investment, and exports, while consumers remain constrained by weak property markets, subdued wage growth, and limited confidence. This increases the risk that excess industrial capacity continues to be exported abroad, potentially exacerbating global trade tensions.
Political uncertainty increased in the UK following mounting pressure on Prime Minister Keir Starmer after Labour’s by-election setback. Manchester Mayor Andy Burnham is increasingly viewed as a potential successor, raising questions about the future direction of fiscal and economic policy should a leadership transition occur.
Japan continued to demonstrate economic resilience. Inflation increased to 1.5%, machinery orders rebounded 8.7% MoM, and exports rose 17% YoY, reinforcing expectations that Japan’s gradual economic normalisation remains intact.
Oil markets experienced the most significant macro repricing of the week. WTI fell to $76.75/bbl and Brent to $79.88/bbl as traders shifted their focus from supply-disruption risks to the prospect of additional Gulf exports and a potential crude surplus. The rapid decline in oil prices has materially eased near-term inflation concerns and improved the global growth outlook. However, a full normalisation of energy markets is likely to take longer. While crude exports could recover within months, shipping companies remain cautious, and disruptions to regional gas production, petrochemicals, and related supply chains may continue to influence inflation dynamics into 2027 and beyond. Container freight rates also remain elevated, reflecting the lingering effects of the conflict on global shipping networks.
While the decline in oil prices has reduced the risk of a more severe stagflationary outcome, inflation is still expected to remain above target through 2026, with US inflation likely to remain more persistent than in Europe. Growth is expected to slow but remain positive, with the Eurozone likely avoiding recession despite ongoing industrial and energy-related headwinds. Falling energy prices should reduce pressure on governments to provide additional fiscal support, but policymakers are likely to remain cautious in declaring victory over inflation.
More broadly, the Iran conflict and the ongoing AI investment boom are increasingly emerging as the two dominant macro forces shaping the global outlook. The reversal of the energy shock has reduced immediate recession risks, but inflation pressures remain supported by tariffs, resilient consumer demand, accommodative financial conditions, and unprecedented AI-related capital expenditure. The global economy therefore remains characterised by resilient US growth, weak Chinese domestic demand, persistent inflation pressures, and a higher-for-longer policy backdrop across most developed markets.
Looking ahead, markets will focus on US May PCE inflation, flash June PMIs, durable goods orders, personal income and spending data, Chinese policy decisions, Tokyo CPI, and European business surveys. With geopolitical risks temporarily contained, investor attention is likely to shift back toward growth, inflation, and the outlook for monetary policy.
Rates
Rate markets were dominated by the first FOMC meeting under new Fed Chair Kevin Warsh, which delivered a significantly more hawkish message than investors had anticipated. While the Fed left rates unchanged at 3.50%-3.75%, policymakers removed the prior easing bias and shifted focus back to inflation risks. Nine of eighteen FOMC participants projected at least one rate hike in 2026, including six expecting two hikes, while the median policy-rate projection for 2026 increased from 3.38% in March to 3.75%. The 2-year Treasury yield surged by as much as 16 bps following the meeting, as investors sharply repriced the path of monetary policy.
The Fed’s updated economic projections reinforced the hawkish shift. Headline PCE inflation forecasts for 2026 were revised up from 2.7% to 3.6%, while core PCE was increased from 2.7% to 3.3%. Policymakers also revised unemployment forecasts modestly lower, reflecting confidence that labour market conditions remain sufficiently resilient to prioritise inflation risks over growth concerns. The committee now views the balance of risks as skewed toward higher inflation, despite easing energy prices and improving supply conditions.
Warsh’s first meeting marked more than a policy shift; it signalled the beginning of a broader institutional transformation at the Fed. The policy statement was shortened substantially, forward guidance was largely abandoned, and Warsh reiterated that the Fed’s 2% inflation target remains non-negotiable. He declined to submit his own rate forecast and repeatedly downplayed the significance of the dot plot, while announcing five task forces focused on communications policy, balance-sheet management, alternative data sources, AI’s impact on productivity and employment, and the Fed’s inflation framework. Collectively, these moves suggest a transition away from the highly transparent Bernanke-Yellen-Powell era toward a more reactive and less prescriptive policy framework. While this may restore flexibility, it is also likely to increase market uncertainty and rate volatility.
The policy debate increasingly centres on whether inflation remains primarily a supply-side problem or whether stronger demand dynamics require tighter policy. Hawkish officials point to resilient employment growth, signs of wage acceleration, and strong investment activity, particularly in AI infrastructure and data-centre construction. Others argue that underlying inflation remains considerably more benign, with trimmed-mean inflation near 2.3% and inflation expectations remaining anchored around 2%, suggesting that much of the inflation pressure still reflects energy and supply shocks rather than excessive demand.
An increasingly important policy question under Warsh may be the role of AI-driven investment. One camp views AI as a future productivity boom that will eventually expand economic capacity and reduce inflation pressures. The opposing view is that AI investment is already pulling forward demand for semiconductors, power generation, skilled labour and construction capacity, creating near-term inflationary pressures before productivity gains fully materialise. This debate is likely to become a key driver of Fed thinking over the coming quarters.
Markets ended the week balancing the Fed’s hawkish repricing against a rapidly improving energy backdrop. The US and Iran reached an interim agreement to end hostilities, leading to a sharp decline in oil prices and materially reducing near-term inflation concerns. Oil prices have fallen dramatically from recent highs, while gasoline prices have also moved lower, creating downside risks to the Fed’s recently revised inflation forecasts. Falling energy prices should ease transportation and production costs, support real household incomes and reduce the risk of energy-driven inflation spilling into wages and services inflation.
In Europe, policymakers increasingly appear to view recent core inflation strength as concentrated in a handful of energy-adjacent categories, particularly airfares and package holidays, rather than evidence of broad-based inflation contagion. This interpretation, combined with lower energy prices and improving supply conditions, substantially reduces the probability of additional ECB tightening in the near term, although policymakers remain cautious about second-round inflation effects should growth and sentiment recover more quickly than expected.
Perhaps the most constructive signal for fixed income came from sovereign bond markets. Despite elevated inflation concerns and a hawkish Fed, government debt auctions across major developed markets cleared at meaningfully lower yields than previous offerings. The US sold 20-year bonds at 4.93%, down from 5.12% previously. Germany’s 5-year, 20-year and 30-year auctions cleared at 2.64%, 3.40% and 3.49%, respectively, all below prior levels. France sold an 8-year bond at 3.45% versus 3.61%, while the UK sold 10-year gilts at 4.86% compared with 5.03% previously. The broad decline in auction yields suggests investors increasingly believe the worst inflationary effects of the energy shock may be passing and that geopolitical risk premia are beginning to normalise.
Nevertheless, long-end yields continue to face important structural headwinds. Persistent fiscal deficits, heavy Treasury refinancing requirements, substantial corporate issuance pipelines and enormous capital demands associated with AI infrastructure investment continue to support term premia. Notably, while long-term inflation expectations eased following the US-Iran agreement and the sharp decline in oil prices, 10-year real yields remained largely unchanged. This suggests investors are becoming less concerned about inflation itself but remain focused on deficits, Treasury supply, elevated term premia and the possibility that a Warsh-led Fed maintains a structurally tighter policy stance. These forces help explain why long-duration bonds have not rallied more aggressively despite lower oil prices and improving geopolitical conditions.
Outside the US, major central banks generally reinforced the higher-for-longer narrative. The Bank of Japan raised rates by 25bps to 1.0%, continuing its gradual normalisation process. The Bank of England voted 7-2 to keep rates unchanged at 3.75%, with two members favouring a hike. While weakening labour-market conditions and softer demand have reduced the immediate pressure to tighten, policymakers remain focused on inflation risks. The ECB’s recent move to 2.40%, the Bank of Canada’s hold at 2.25%, and the RBA’s decision to remain on hold further highlight that major central banks are no longer actively discussing easing cycles and remain focused on inflation persistence.
Credit
Credit markets remained resilient despite a more hawkish Fed and higher front-end rates. The dominant theme was the continued financing of AI infrastructure, with investor demand easily absorbing record issuance and keeping spreads near cycle tights.
Nvidia issued $25bn of investment-grade bonds, attracting roughly $85bn of orders, while SpaceX is reportedly preparing a $20bn bond sale only one week after raising $85bn in its IPO. The scale of issuance reinforces the view that AI infrastructure spending has become a multi-year financing cycle spanning public credit, private credit, project finance and equity markets.
Technicals remain exceptionally supportive. U.S. leveraged loan funds recorded a tenth consecutive week of inflows, while demand for investment-grade credit continues to be driven by attractive all-in yields and strong corporate fundamentals. Goldman Sachs noted that spreads now account for only ~14% of total investment-grade yield, meaning returns are increasingly driven by rates rather than spread compression. Credit remains primarily a carry and income story.
The key risk is no longer access to capital but the cost of capital. Higher-for-longer rates are creating a growing divide between issuers that can comfortably refinance and those facing materially higher interest expense. Refinancing risk is increasingly concentrated in lower-rated borrowers, leveraged loans and companies that relied on ultra-cheap financing during the prior cycle.
AI is also creating future credit dispersion. While hyperscalers and infrastructure providers generally remain high-quality borrowers, the magnitude of planned capex raises questions around leverage, free cash flow generation and ultimate returns on invested capital. Investors are increasingly distinguishing between contracted cash flows and projected AI demand.
Software credit appears particularly vulnerable. Many businesses financed during the low-rate era relied on assumptions of persistent growth, stable recurring revenue and easy refinancing. Higher borrowing costs, combined with potential AI-driven pressure on pricing power, customer retention, and product differentiation, could create meaningful divergence between mission-critical software providers and weaker issuers.
Within below-investment-grade markets, fundamentals remain broadly healthy and high single-digit yields continue to attract capital. However, managers such as Oaktree are maintaining elevated liquidity and positioning for opportunities around the 2027–2028 refinancing wall, where a larger set of borrowers may face materially tighter financing conditions.
A growing area of focus is the intersection of private credit, private ratings and insurance balance sheets. Regulators are increasingly scrutinising privately rated assets held by insurers, particularly within PE-owned insurance platforms. While current risks appear manageable, changes to capital treatment or rating methodologies could become an important medium-term driver of private credit flows and risk premiums.
Finally, capital demand continues to accelerate across Treasury issuance, corporate refinancing, AI infrastructure, power generation, reindustrialisation and defence spending. Markets continue to absorb supply, but the cumulative effect is contributing to a structurally higher cost of capital. Strong borrowers remain well-funded, while weaker issuers are increasingly paying for capital through wider spreads, tighter terms, and reduced financial flexibility.
Overall, credit remains supported by strong technicals, healthy fundamentals and substantial demand for income. The most important themes for investors are the AI financing cycle, refinancing risk under higher-for-longer rates, growing dispersion within software and leveraged credit, and regulatory scrutiny of private credit structures.
Equities
US equities extended their advance, with the Dow (+0.71%) and Russell 2000 (+1.22%) reaching fresh record highs. The S&P 500 (+0.93%) gained for the 11th time in the last 12 weeks and finished within ~1.4% of its 2 June record close. The Nasdaq (+2.43%) led major indices, supported by a sharp rebound in semiconductors (SOX +7.3%) and memory-related stocks, with DRAM prices rising 18% during the week. Market leadership remained concentrated in AI and technology, although cyclical and reopening-sensitive sectors also participated in the rally.
Sector performance was mixed. Technology (+3.06%), Industrials (+2.64%), and Communication Services (+1.08%) outperformed. Laggards included Energy (-6.57%), Real Estate (-3.45%), Healthcare (-2.95%), Consumer Staples (-2.86%), and Materials (-0.40%), while Financials (+0.39%), Utilities (+0.50%), and Consumer Discretionary (+0.80%) delivered modest gains. Beneath the surface, machinery, engineering & construction firms, airlines, homebuilders (XHB +3.2%), and investment banks outperformed, while energy, insurance, regional banks, industrial metals, discount retailers, media, and China technology stocks lagged. Industrials continued to benefit from both AI infrastructure spending and broader reindustrialisation trends, with investors increasingly focused on defence manufacturing, power infrastructure, grid investment, automation, and supply-chain resilience.
The primary catalyst was the US-Iran peace agreement and the accompanying memorandum of understanding, which reopened the Strait of Hormuz. The agreement allows Iran to immediately resume oil exports while the US grants sanctions waivers, significantly reducing concerns around global energy supply. Some estimates suggest Iran could increase production by roughly 1 million barrels per day above pre-conflict levels over the next two to three years if sanctions are fully removed. The resulting decline in oil prices weighed heavily on energy equities while supporting broader risk sentiment. The sharp fall in oil accelerated sector rotation into airlines, transportation, industrials, and consumer-facing businesses through improving margin expectations, while energy equities shifted from a scarcity-driven narrative toward a volume-versus-price debate as additional Iranian supply became increasingly likely.
AI remained the dominant market theme. Investor optimism was supported by Morgan Stanley price target increases across HDD and storage-related names, positive earnings expectations ahead of Micron’s results (+15.5%), and constructive commentary from Jabil (+3.4%). At the same time, investors continued to debate the longer-term implications of increasingly capable Chinese open-source AI models, particularly after reports that Microsoft (-2.9%) was evaluating offering DeepSeek as a lower-cost enterprise AI solution. Additional support for equities came from continued upward revisions to S&P 500 targets, with Wells Fargo raising its year-end target to 7,950 from 7,300, which improved sentiment and positioning dynamics and eased concerns about Middle East geopolitical risks. However, scrutiny around rising equity issuance, increasing financing costs for leveraged equity positions, and elevated semiconductor concentration risk remained notable discussion points.
A key development beneath the surface was the growing distinction between AI beneficiaries and AI spenders. Semiconductors, memory, networking, power, cooling, and data-centre infrastructure companies continued to attract the strongest flows, while investors increasingly focused on whether hyperscalers and software companies can ultimately generate attractive returns on unprecedented AI-related capital expenditure. The debate is gradually shifting from AI adoption toward AI monetisation.
Software remained a relative laggard as investors weighed both higher discount rates and the disruptive potential of AI agents. Markets increasingly distinguish between mission-critical platforms and application-layer software vulnerable to automation, bundling, or replacement, challenging the historical assumption that recurring software revenues are inherently defensive.
AI-related corporate developments continued to dominate headlines. Intel (+7.6%) announced the start of production for its most advanced process node, 18A-P. Apple (+2.4%) indicated it would increase prices to offset higher memory costs, while reports suggested Apple and Intel would collaborate on future chip design and manufacturing initiatives. Amazon (+2.5%) was reported to be exploring sales of its internally developed custom AI chips to third parties. Qualcomm (+6.8%) was reported to be in discussions to acquire Tenstorrent to strengthen its AI semiconductor capabilities. SpaceX CEO Elon Musk stated he would be surprised if the company’s revenue did not exceed $1 trillion by 2031, and the company also confirmed the acquisition of the AI coding platform Cursor for $60 billion. Anthropic continued to face regulatory and policy scrutiny following discussions with White House officials regarding its Mythos platform.
Outside AI, several notable corporate developments drove individual stock performance. Netflix (-3.7%) denied reports that it was considering an acquisition of Lionsgate (+8.2%). CME Group (-8.6%) announced that CEO Terry Duffy would step down in March 2027. Take-Two Interactive (+13.0%) announced a pre-release date for GTA6, supporting shares. M&A activity also accelerated, with Fox (+20.7%) agreeing to acquire Roku (-3.9%), Yum! Brands (-1.5%) announcing the sale of Pizza Hut for $2.7 billion, and Olin (+12.4%) and Huntsman (+23.3%) agreeing to merge in an all-stock transaction.
The reopening of the Strait of Hormuz removed a major macro overhang and supported a broadening of market participation beyond mega-cap technology. However, market leadership remains concentrated in AI infrastructure beneficiaries, while software and other long-duration assets face increasing scrutiny. At the same time, investors continue to debate whether the next phase of the AI investment cycle may be constrained by capital availability, as government deficits, Treasury issuance, corporate financing needs, and AI infrastructure spending increasingly compete for the same pool of savings.
The key question for investors is whether the rally can transition from geopolitical relief and AI-driven capital expenditure into durable, broad-based earnings growth capable of supporting current valuations.