May 2026

UK

Defensive tilt tempers gains: the UK navigated a landscape of shifting sentiment during April as geopolitical unrest and domestic inflation weighed on the outlook. Although the FTSE 100 Index closed the month higher, its defensive bias and exposure to energy stocks meant it lagged broader international markets. Over April, the FTSE 100 Index rose by 2% while the FTSE 250 Index climbed by 5.9%.

Inflationary pressures intensify: the UK’s rate of inflation rose from 3% to 3.3% year on year during March, stoked by higher fuel prices, which climbed by 4.9%. The price of Brent crude oil hit its highest level since 2022, briefly surpassing US$126 per barrel amid concerns over a fresh escalating of hostilities between the US and Iran. Looking ahead, the International Monetary Fund (IMF) expects UK inflation to average 3.2% this year, significantly ahead of the Bank of England’s (BoE’s) 2% target. 

Rates on hold: as expected, the BoE left its base rate unchanged at 3.75%, but Governor Andrew Bailey commented: “Where we go from here will depend on the size and duration of the shock to energy prices.” Elsewhere, the BoE’s Financial Policy Committee warned that the Middle East war is set to “weigh on growth, increase inflation and tighten financial conditions.” Meanwhile, the British Chambers of Commerce urged the UK government to take action to protect the UK economy from geopolitical shocks, warning: “The UK’s inadequate economic security has become a drag on growth, competitiveness and national strength.”

A blow to the growth outlook: the UK economy grew by 0.5% in February but stagnated during the final quarter of 2025. The Middle East conflict is set to deliver a particularly severe blow to UK economic growth compared with other G7 economies, according to the IMF. The IMF downgraded its forecast for UK economic growth this year from 1.3% to 0.8% but predicted that the UK will achieve growth of 1.3% in 2027, outstripping its European G7 peers. 

Geopolitical tensions fuel profit warnings: UK-listed companies issued a total of 55 profit warnings during the first quarter of 2026 – 49% of which cited geopolitical uncertainty and policy change. A quarterly study undertaken by EY found that the industry sectors with the highest number of warnings included software and computer services, industrial support services, and travel and leisure.

Global

Geopolitics drive volatility: April was marked by escalating conflict in Iran, which continued to stoke concerns around energy security and inflation. The oil price breached US$126 per barrel – its highest level since 2022 – but subsided to end the month at US$114. Meanwhile, the International Monetary Fund cut its 2026 global economic growth forecast from 3.3% to 3.1%. Despite this, equities rose overall, supported by tentative hopes of a peace deal and renewed enthusiasm for AI-related stocks.

AI optimism powers US gains: in the US, the Dow Jones Industrial Average Index rose by 7.1% during April, while AI-related optimism drove the S&P 500 Index and tech-heavy Nasdaq Index to double-digit gains and new all-time highs. However, consumer sentiment plummeted, according to the University of Michigan index, which cited concerns over rising prices and the Iran conflict. Surging energy costs pushed inflation to 3.3% in March; elsewhere, the US economy expanded by a lower-than-expected 2% year on year during the first quarter.

Fed independence remains in focus: the Federal Reserve (Fed) left the federal funds rate unchanged but retained its ‘easing bias’. Outgoing Fed Chair Jerome Powell warned that the Trump administration’s legal attacks were jeopardising policymakers’ ability to conduct monetary policy without having to consider political factors. Incoming Fed Chair Kevin Warsh insisted that President Trump had not asked him to commit to any particular interest rate decision and said that he would not agree to do so in any case. 

Slower growth in Europe: economic activity in the eurozone showed signs of a slowdown in the first three months of 2026 compared with the final quarter of 2025, easing from 0.2% to 0.1%. The European Central Bank left interest rates unchanged at 2% but refused to rule out an increase if policymakers consider it necessary to achieve their 2% inflation target. Germany’s Dax Index rose by 7.1% over April, lifted partly by enthusiasm for technology-related stocks. 

Nikkei hits new highs: Bank of Japan policymakers voted by six to three in favour of maintaining interest rates at “around” 0.75%; nevertheless, the central bank is expected to resume tightening as early as June. Although economic growth is expected to decelerate in the current fiscal year, inflationary pressures are set to intensify. The Nikkei 225 Index rose by 16.1% over April and hit a new high, boosted by yen weakness.