So far it has been a mixed week for markets, with sentiment swinging between possible easing in geopolitical tensions in the Middle East, inflation concerns and some softer economic data.
Equities edged modestly higher amid tentative signs of progress towards a potential peace agreement between Washington and Tehran. After warning at the weekend that the “clock is ticking” for Iran to agree to a deal, US President Donald Trump said on Monday that a planned military strike had been paused following requests from leaders in Qatar, Saudi Arabia and the UAE. Trump added that “serious negotiations are now taking place,” helping calm markets after a sharp rise in geopolitical tensions over recent days.
Despite being seen as positive by markets, this largely reiterates existing rhetoric, with weeks of peace talks showing little meaningful progress. Asia-Pacific markets largely moved lower at the start of the week as investors continued to assess the possibility of further escalation in the Middle East after Trump urged Iran to “get moving, FAST” in a Truth Social post, warning that “TIME IS OF THE ESSENCE!”. Concerns over potential disruption to global oil supplies pushed crude prices higher and added pressure to global bond markets, with yields climbing as investors repriced inflation expectations.
Markets also digested Chinese retail sales and industrial production data, which highlighted a more gradual recovery. Retail sales rose just 0.2% in April, below expectations for a 2% increase and down significantly from March’s 1.7%. Industrial production growth slowed to 4.1%, below forecasts.
UK and European equities have demonstrated more resilience. UK markets extended gains into Tuesday as investors scaled back expectations for further UK rate hikes following softer labour market data. Data revealed the UK unemployment rate rose to 5.0% in the first quarter, while regular wage growth slowed to 3.4% from 3.6%. The data highlights a softening labour market, with vacancies at a five-year low
Weakness was particularly evident in the hospitality and retail sectors, suggesting firms are holding back on hiring as labour costs remain a key concern.
The softer labour market backdrop has brought the UK interest rate outlook back into focus. This could afford the Bank of England greater flexibility to keep rates on hold, helping to ease some of the recent upward pressure on gilt yields.
The FTSE 100 is set to open weaker today, as investors turn their attention to the latest inflation data. Headline inflation slowed notably to 2.8% in April 2026, down from 3.3% in March and below market expectations of 3.0%, marking the lowest reading since March last year. The moderation was primarily driven by a sharp deceleration in housing and household services inflation, following the introduction of the energy price cap by the UK’s regulator on 1 April.
While inflation has eased for now, underlying cost pressures are likely to persist, with higher input costs expected to gradually feed through into other categories, from food to airfares, over the coming months.
In response to rising prices, the government is also easing sanctions on Russian oil refined into diesel and jet fuel in third countries. However, as this measure only comes into effect today, it will not have influenced the latest inflation figures.
Attention has also turned towards Nvidia, with the US semiconductor giant due to release earnings after the close today. The results are widely viewed as an important gauge for continued momentum across the AI and broader technology sectors, with investors largely sitting on the sidelines ahead of the release.
Still to come this week, PMI data from the US, UK and across Europe. Federal Reserve meeting minutes from the last monetary policy meeting. Japan’s balance of trade. UK consumer confidence and retail sales.
Kate Mimnagh, Portfolio Economist