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23 Jun 2026 | 3 minutes to read
(All equity data is MSCI; all data in sterling unless stated)
Global equity indices ended the week higher, buoyed by easing geopolitical tensions in the Middle East. Investor sentiment improved after the US and Iran formally signed a memorandum of understanding (MoU) last week. The 14-point agreement provides a framework for negotiations, including the reopening the Strait of Hormuz, during a 60-day window for further talks. All military operations are meant to cease, while a $300bn reconstruction programme for Iran and the removal of all US sanctions are apparently also on the table. However, reaching a lasting agreement over Iran’s nuclear programme and broader regional security issues are likely to remain fundamental to any final settlement. The news helped drive oil prices to their lowest level in three months, with prices moving below $80 a barrel for the first time since early March. Lower oil and gas prices are a welcome relief for consumers and businesses. If sustained, it should see inflation expectations moderate, reducing the pressure on central banks to tighten monetary policy.
While tensions threatened to re-escalate on a couple of occasions after the signing of the MoU, the first round of talks between US and Iranian officials in Switzerland reportedly made constructive progress. The talks produced “a roadmap towards reaching a final agreement within 60-days”, measures to reduce the risk of incidents in the Strait of Hormuz and violence in Lebanon. While significant differences remain over uranium enrichment and regional proxy groups, both sides have committed to continuing negotiations. The path to a lasting agreement is unlikely to be smooth and further market volatility would not be surprising. As noted last week, it will likely take some time for the passage of oil through the Strait to return to pre-conflict levels, while inventory restoking is likely to support near-term demand.
The Bank of England (BoE) held UK interest rates at 3.75%, the fourth meeting in a row in which rates have been left unchanged. Members of the Bank’s rate setting Monetary Policy Committee (MPC) continue to wrestle with the need to address above-target inflation while economic output remains sluggish. The decision was in-line with expectations and backed by a 7-2 majority across members of the MPC. Both dissenting members cast votes to hike rates, including the BoE chief economist, Huw Pill. Despite the climbdown in the Middle East, lingering fears over the longer-run impact of higher energy prices remain.
The latest Consumer Prices Index (CPI) inflation figures for the UK did in fact show price increases unexpectedly holding steady at 2.8% in the year to May. Market expectations had been for a 3% rise. However, higher energy prices are likely to show through in headline figures with a lag. A 13% rise in the energy price cap come 1 July will likely exert a notable upward impulse. Energy and other supply chains taking time to normalise could mean that a meaningful easing in headline inflation takes several months to come through, even if the US-Iran peace deal holds. Although, with limited evidence of more entrenched second-round inflationary pressures taking hold, the rationale for rate hikes is likely reduced. While the latest UK labour market data (also released last week) provided evidence of resilience in the jobs market, there is little sigh of higher prices exerting undue upward pressure on wages. And the broader picture is one of payrolls trending down.
Despite this, and the breakthrough in US-Iran negotiations, markets still price a BoE rate hike by year end. Monetary policy cannot affect global energy prices, but it can go some way to ensuring that high inflation does not persist. If energy prices continue to moderate then debate could return to rate cuts, a softer labour market and weak growth should be beneficial as far as managing inflation is concerned, but looser monetary policy is unlikely for the remainder of the year.
Labour’s Andy Burnham secured a comprehensive victory in the Makerfield by-election, igniting his campaign to succeed prime minister Sir Keir Starmer. If successful, he will become Britain’s seventh prime minister in the past decade. Starmer initially insisted that he would fight any leadership contest, but announced a timetable for his departure on Monday of this week. A more orderly transition could limit market disruption. Burnham, who was a Treasury minister in a prior Labour administration, has sought to downplay previous comments around the need to get beyond being "in hock” to the bond markets. He suggested he would retain the current government’s fiscal rules during the by-election campaign. Burnham’s election comes as the Office for Budget Responsibility (OBR) showed a further unexpected rise in public borrowing. The UK’s budget deficit was £23.3bn last month, the highest level for May in six years, and far above the £18.9bn forecast. Spending on debt interest, public services and benefits all increased compared with last May – outweighing higher tax receipts. The reality is that room for manoeuvre remains tight for any would-be prime minister or chancellor.
The UK’s borrowing costs climbed on Friday after the result, but at around 4.84% the 10-year gilt yield is some way below the 5.17% peak in mid-May. And political developments were not the only factors weighing on gilt markets. The higher than expected UK borrowing figures and lingering uncertainty surrounding US-Iran talks also likely exerted upward pressure on yields – which move inversely to prices.
Kevin Warsh’s first meeting as Federal Reserve (Fed) Chair concluded with no change in interest rates as expected. But a more hawkish tone pointed to possible rate hikes ahead as the inflation surge poses a quandary for policymakers. The Federal Open Market Committee (FOMC) voted unanimously to keep its benchmark borrowing rate in a 3.5%-3.75% range. And the Fed’s accompanying statement described the US economy as expanding at a solid pace, supported by steady job gains, and a stable unemployment rate. However, the removal of language indicating a bias toward future rate cuts was notable. At just 132 words, compared with nearly 350 for prior release, the statement offered only a brief summary of the economic backdrop and a pledge to manage inflation.
Through their closely watched “dot plot” grid, Fed officials also removed the prior outlook for a rate cut this year, with several policymakers projecting increases later in 2026. Warsh did not make a dot plot submission himself. He has been a critic of the tool and forward guidance generally. A review of the Fed’s communication strategy and other key practices is to follow.
Warsh has previously noted that policymakers should look past supply-shock inflation. He has also suggested that productivity gains from artificial intelligence will ultimately have a disinflationary impact. However, any case for lower rates has been complicated by the length of the Middle East conflict and a resilient US labour market.
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