May recycled many of the same headlines about the conflict in the Middle East, but with arguably less financial market volatility accompanying them. Perhaps markets have become more accustomed to the pattern of White House statements about an imminent peace deal, followed by Iranian denials. The UK news cycle briefly shifted focus to domestic political tensions, before returning once again to watch for signs of movement from Tehran's leadership.
United Kingdom
Volatility in UK markets during May was triggered less by global events and more by a stuttering leadership challenge to Prime Minister Sir Keir Starmer, following poor local election results. Financial markets dislike uncertainty, and the prospect of a leadership contest delivered precisely that.
The contenders each carry their own set of market implications. Andy Burnham, widely seen as the front runner, must first navigate the Makerfield by-election on 18 June. He has previously argued that the UK should not be in a position of dependency on bond markets, which is not a message that reassures gilt investors. Angela Rayner would be seen as a move further to the left. Rachel Reeves, though unpopular in parts of the electorate, has earned credibility with bond markets for her disciplined approach to public finances. Her potential removal has itself contributed to a rise in gilt yields. Wes Streeting is perhaps the most centrist candidate but has made remarks about rejoining the EU that may not play well in a general election.
Starmer currently retains the backing of a substantial number of his MPs and looks set to contest any leadership bid. The more important consideration for investors is that, whoever leads, the pressure to maintain fiscal credibility is likely to constrain the room for manoeuvre on spending.
Against that backdrop, there was some genuinely positive economic data. GDP grew by 0.6% in the first quarter of 2026 according to the Office for National Statistics, ahead of expectations and driven by a 0.8% expansion in services output. The S&P Global UK Manufacturing PMI held steady at 53.7 in May, its highest level since May 2022. Headline inflation via the Consumer Prices Index fell to 2.8% in April, down from 3.3% in March, helped significantly by the Ofgem energy price cap introduced on 1 April. The largest upward pressure came from motor fuel, where annual price growth reached 23.0% in April, the highest figure since September 2022, with average petrol prices at 156.8 pence per litre.
The FTSE 100 closed May at 10,459. Equity markets have largely absorbed the political noise for now. The Bank of England's Monetary Policy Committee meeting on 18 June will be one of the most consequential decisions in years, as the Committee considers whether to raise rates to contain an energy-driven inflation shock of the kind last seen in 2022.
United States
US equities continued to advance through May despite the ongoing pressures from rate expectations, energy costs and geopolitical uncertainty. Both the S&P 500 and Nasdaq Composite reached fresh highs, led by semiconductor and artificial intelligence stocks. Goldman Sachs Research estimates that AI-related investment could account for approximately 40% of S&P 500 earnings-per-share growth in 2026. The concentration of sentiment around a small number of large technology companies continues to exert a heavy influence on global market returns.
Kevin Warsh was confirmed as the 17th Chair of the Federal Reserve on 22 May, in a 54 to 45 Senate vote, the closest confirmation in the modern era. He inherits a Federal Funds rate held at 3.50% to 3.75%, a committee that recorded four dissents at its most recent meeting, and inflation running above the Fed's 2% target. CME FedWatch data showed a 97% probability of no change at the June meeting, though markets expect rates to be higher by the start of 2027, as several FOMC members have continued to stress the need to keep rate-hike options open.
The Trump-Xi summit in Beijing on 14 and 15 May produced a framework for closer trade cooperation and several bilateral agreements, including a Chinese commitment to purchase more US agricultural products. Both sides agreed to establish boards of trade and investment to facilitate ongoing dialogue. However, the summit produced no structural breakthroughs on advanced chip export controls, technology transfer or Taiwan. A further schedule of meetings, Washington in September, Shenzhen in November, and the G20 in Miami in December, suggests the harder structural negotiations remain ahead. The anticipated SpaceX IPO in June continues to generate significant market interest and may catalyse further large technology listings.
Europe
European markets continued to navigate the energy shock through May. The European Central Bank held its deposit facility rate at 2.0% at its 30 April meeting. The decision was unanimous but contested, and President Lagarde confirmed the Governing Council had actively debated a rate increase. The ECB's 11 June meeting is now the central policy event for European investors.
Eurozone CPI for April came in at 3.0%, the highest level since mid-2024, driven by a 10.8% rise in energy costs. Core inflation edged down from 2.3% to 2.2%, indicating that second-round inflationary effects have not yet taken hold. Inflation accelerated in Germany, France, Italy and Spain, while easing marginally in the Netherlands. Markets are fully pricing in multiple ECB rate increases in 2026, with the first potentially arriving as early as June.
The Eurozone Manufacturing PMI dropped to 51.6 from 52.2 the previous month, slightly ahead of expectations. European equity markets finished May stronger on news of possible movement toward a resolution of the Middle East conflict. The ECB has revised its 2026 growth forecasts downward to reflect the combined impact of energy prices and geopolitical disruption.
Far East
Japan was among the most notable performers globally in May, with the Nikkei 225 reaching record highs. First quarter GDP growth of 2.1% beat expectations, driven by consumption, exports and public investment. This has reinforced confidence in the expansionary policy direction of Prime Minister Sanae Takaichi, and the Nikkei posted strong returns through the month.
China's exposure to the energy shock continued through May, with Gulf oil production cuts adding to production costs for steel, chemicals and electronics. From China's perspective, the Trump-Xi summit was managed carefully. Xi characterised the meetings as historic and described important common understandings on trade and economic cooperation. However, Beijing made no concessions on advanced technology controls or Taiwan, and Xi issued a direct warning that mishandling Taiwan risks serious conflict. The Chinese delegation declined to adopt the expansive framing used by the US side, confirming that the structural negotiations have not yet begun in earnest.
Emerging Markets
The divergence across emerging markets that established itself in March and April continued through May. Overall, the asset class performed strongly, returning approximately 9.7% for the month. The headline figure was driven by exceptional returns from South Korea and Taiwan, which continue to benefit from their central role in the global AI supply chain.
India's equity markets underperformed, reflecting its vulnerability as an energy importer, ongoing fiscal pressure from subsidy costs, and investor concern about secondary tariff threats from the US in connection with Iranian crude purchases. The strong aggregate number for emerging markets masks this meaningful divergence between individual countries. Where economies benefit from strong global fundamentals and demand for AI and semiconductor technology, performance has been excellent. Where they carry structural exposure to energy shocks, the headwind is persistent and is unlikely to ease until the Strait of Hormuz is fully reopened.
Summary
The major central banks face a materially different environment to the one they seemed to be navigating in 2025. All are signalling caution. Even if a peace agreement in the Middle East were reached in the near term, unwinding the supply disruption caused by the Strait of Hormuz closure would take many months. Logistical bottlenecks and inventory rebuilding could keep inflationary pressure elevated well into the second half of the year. Inflation is once again the principal challenge.
That said, the resilience shown by many of the world's major economies continues to exceed the expectations set at the start of the year, and the conditions for a genuine resolution to the conflict do appear to be moving in a more constructive direction. We will continue to monitor events closely and will update clients as the picture develops.
Sources: Office for National Statistics; S&P Global UK PMI; CME FedWatch; Goldman Sachs Research; ECB Governing Council statements; JP Morgan Monthly Market Review (May 2026); Trading Economics; Reuters; BBC News; The Atlantic Council.