Geopolitical tensions in the Middle East intensified last week, leading to an almost 2% rise in Brent Crude to $95.46 per barrel midweek as traders feared the return to a wider conflict, before settling back down as the prospect of an agreement gathered pace.
Another commodity feeling the effects of the ongoing tensions is Gold, which last Thursday dropped to a six-month low at $4,022 per ounce – more than 20% below where it was at the start of the conflict. The war has forced several central banks to sell gold reserves to support their currencies, but it has also scared off a number of speculative buyers who had hopped on the gold-buying trend late last year. While gold has traditionally been seen as a ‘safe haven’ asset by investors, used to preserve wealth in times of market volatility and instability, the growing expectation of US interest rate hikes has also been a major drag on performance, sharply driving up the opportunity cost of holding gold versus income-yielding assets
US Equity Market:
SpaceX, Elon Musk’s rockets-to-AI group, made its public market debut on Friday in what was the biggest initial public offering (“IPO”) on record. As a reminder, the company is selling less than 5% of its equity and hoping to raise $86 billion at $135 per share – assigning the company a total valuation of $1.78 trillion.
Joining AI peers SpaceX and Anthropic in the race to go public is OpenAI, who last Monday confirmed it had filed with the US securities regulator the necessary documentation for its own IPO. Coming exactly one week after Anthropic’s IPO announcement, it reemphasised the vast need for cash that these companies have to fund their AI investment, as well as the desperate competitive fear to not be left behind by one another. With the prospective issuance of all these new shares hitting the US stock market, Goldman Sachs estimates that the net supply of equity in the US – that is, the number of new shares entering the market minus the number of shares that are bought back by companies or taken private – will be flat for 2026. This would mark the first year in the last 23 where the supply of shares has not decreased – and has worried some analysts that Wall Street’s tech-led rally may finally run out of steam without falling share counts to keep prices elevated.
Against this backdrop and the continued uncertainty in the Middle East, the S&P500 closed the period to Friday up 0.66%.
UK Equity Market:
Politics dominated UK headlines again last week, following defence secretary John Healey’s resignation over the spending plan – touting his concerns regarding defence plans falling heavily short of what is required to protect the nation from global threats. The resignation came after Chancellor Rachel Reeves indicated that the Government may be willing to raise taxes to support defence spending. Sticking with the government, they launched a major consultation last Wednesday to finalise the framework that will allow defined-benefit pension schemes to release billions in surplus cash, in a move that would allow companies that pay into pension schemes access to surplus cash as a new avenue for funding.
Markets-wise, WH Smith shares fell 19% as the retailer announced a raise of £100 million alongside a warning on their profit expectations, citing the impact of the Iran war on its travel-related business segments. The Federation of Small Businesses issued a warning that Small and Medium Enterprise (SMEs) cash flows are being seriously drained by high fuel prices, heavy tax burdens and elevated borrowing costs. The FTSE 100 fell last Tuesday, pulled down by Standard Chartered, HSBC and Prudential amidst worries about the impact of China’s new regulations on mainland residents making direct international investments. It was also weighed on by the tit-for-tat strikes exchanged between Iran and US forces. The FTSE 100 closed up 1% over the week to Friday.
Inflation, Interest Rates and Bond Markets:
The US’ Bureau of Labour Statistics announced last Wednesday that US inflation had jumped to a three-year high of 4.2% in May, as Americans are now feeling the inflationary effects of the war. This compares to 2.4% in February, just prior to the conflict, and is underpinned by fuel prices which have themselves risen around 50% over the period. The inflationary effects of the conflict have also spilled over into other parts of the economy, however – most notably food prices. The dollar and treasury yields were largely unchanged in response to the release, and markets continue to price in a 25-basis point increase in the Federal Reserve’s interest rate by the end of 2026.
Elsewhere, the European Central Bank raised its interest rate by 25 basis points to 2.25% last Thursday – becoming the first G7 central bank to do so, in response to the Middle East energy shock. This marks the ECB’s first rate rise since 2023, though it was widely expected, with the region expecting a headline inflation of 3% this year, or 4% in its ‘adverse’ scenario.
What’s on the horizon
Continuing the key news area of recent months, global investors will continue to watch developments in the Middle East.
A week dominated by interest rates will be on the agenda with the Bank of England, the Federal Reserve, the Swiss National Bank and the Bank of Japan all set to announce their decisions. In the UK, the CPI print for May will be released, followed by the eurozone CPI shortly after; these datapoints affect monetary policy expectations for both central banks. In the US, the other data point to look out for is the retail sales data for May, an important measure for consumer spending that influences inflation and helps calibrate interest rate expectations.
This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.
Past performance is not a guide to future performance.
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Source of financial market data: MorningstarDirect.