Global markets have turned notably more cautious through the middle of the week. While first-quarter earnings have broadly surprised to the upside, particularly across technology, financials and industrials, markets are increasingly focused on higher energy prices and the possibility that central banks may need to keep interest rates elevated for longer.
Developments involving the US and Iran continue to influence sentiment, particularly through energy markets. Oil prices moved higher after Washington rejected Tehran’s latest proposal aimed at ending the conflict, with President Trump reportedly calling the terms covering sanctions relief, reparations and greater Iranian control over the Strait of Hormuz, “totally unacceptable.”
Importantly, however, continued dialogue and a willingness on both sides to engage remain constructive, suggesting the path to a resolution is still intact, albeit likely with periods of volatility along the way.
Another major focus for investors this week is the meeting between President Donald Trump and Chinese President Xi Jinping in Beijing. Trump is scheduled to arrive in China ahead of talks expected to take place on Thursday and Friday, marking his first visit to the country since 2017. Markets view the meeting as potentially significant for the future direction of US-China relations, particularly amid rising tensions surrounding trade, technology and national security. Discussions are expected to cover tariffs, semiconductor restrictions, artificial intelligence competition and rare earth minerals. For markets, the continuation of dialogue itself is constructive, with even incremental progress likely to support broader sentiment.
Tuesday’s primary focus, however, was the April US inflation report. Annual consumer price inflation accelerated to 3.8% in April 2026, up from 3.3% in March and slightly above forecasts of 3.7%. Higher energy prices were the main driver, with the ongoing conflict involving Iran contributing to a sharp rise in oil prices and pushing energy costs 17.9% higher year-on-year. Core CPI, which excludes food and energy, rose to 2.8% from 2.6% previously.
The data has further reduced expectations that the Federal Reserve will cut interest rates this year. Attention is also turning to the leadership transition at the Fed, with Kevin Warsh expected to succeed Jerome Powell as Chair in the coming days. President Trump described the latest inflation increase as “short-term” and reiterated that preventing Iran from developing a nuclear weapon remained a strategic priority.
In the UK, politics has introduced an additional layer of near-term uncertainty. Prime Minister Keir Starmer is facing growing pressure following Labour’s heavy losses in last week’s local elections. Reports suggest that a number of Labour MPs have called for his resignation, although Starmer has remained defiant, insisting he will “get on with governing.”
Markets have reacted cautiously to the political uncertainty. Long-term UK borrowing costs have moved higher and sterling has weakened, while equities have remained broadly flat as investors assess the risk of a potential leadership challenge and the implications for fiscal policy.
However, much of this political risk now appears to be reflected in asset prices. Importantly, the government continues to function normally, and investors will have an opportunity to assess the policy agenda more closely during the State Opening of Parliament, where King Charles is expected to outline the government’s legislative programme. While headlines may remain unsettled in the near term, markets are likely to look through much of the political noise as greater policy clarity emerges and focus returns to underlying economic fundamentals.
Still to come this week, US PPI and retail sales as well as UK GDP.
Kate Mimnagh, Portfolio Economist
