Please see the below article from Tatton Investment Management discussing geopolitics, interest rates and market moves received this morning – 05/05/2026
Markets making the best of it
Oil prices spiked back above $120pb last week and have remained close to that level as the US-Iran ceasefire frays. But the equity market casualties have been UK and European stocks, while the US has gained. Asian trading is essentially paused for “Golden Week”. Thus, global stocks show a slight aggregate gain. Equity investors don’t think the oil shock is insurmountable but falling bond prices say different.
Washington’s blockade on Hormuz is no TACO; the White House is effectively telling everyone to stomach oil prices until Iran relents. Reports suggest that could happen within weeks, as Iranian storage reaches capacity or Tehran runs out of funds. Things could come to a head at the Trump-Xi summit later this month, as the block on Iranian oil now impacts China. Long-term oil pricing has barely moved – helped by the UAE’s exit from OPEC. It’s a reminder that the previous global oversupply is still there if trade reopens.
Interest rate expectations have moved up but, acknowledging that they can’t influence the oil shock, central banks kept rates steady last week. However, Australia has raised rates today to 4.35% and the BoE and ECB have signalled they will follow in June. Despite economic weakness, neither can afford to let inflation become embedded. The Fed seems minded to see the price shock as temporary (objections from some members notwithstanding) but the resilient US economy should arguably make policymakers nervous. Incoming Fed chair Warsh, picked by Trump to cut rates, has a tough few months ahead.
US mega-cap stocks revealed stellar profit growth and more AI spending. Worryingly, that spend is more about higher costs than expansion – hurting Meta’s stock. Our measure of earnings acceleration is actually coming down, suggesting that the AI spending spree is plateauing, albeit not coming down. That won’t help tech valuations.
Last week was a microcosm of the last two months: US-Iran tensions rose, but patient central banks and resilient earnings saw markets through. It can’t always be like this. If oil prices and bond yields stay high, a week without supportive growth news will hurt markets.
Emerging markets keep emerging
Despite global headwinds, Emerging Market (EM) stocks have comfortably outperformed Developed Markets (DMs) over the last year. MSCI’s EM index has gained 46.7% since April 2025’s “Liberation Day”. That is almost entirely down to three AI chipmakers: TSMC (+144%), Samsung (+289%) and SK Hynix (+604%). Taking those out, EMs only slightly outperform MSCI’s all-world index (28.6% versus 27.5%). Still, the fact three stocks have done so well doesn’t mean the rest have done badly – especially considering China’s economic struggles. Underlying EM earnings growth is outpacing DMs, even for markets without tech dominance, like Brazil.
That’s largely down to the weaker US dollar. A weaker dollar doesn’t help EM exporters, but deglobalisation is benefitting domestic-focussed EMs by forcing countries to build domestic consumption. A few months ago, we wrote that Trump-era regionalisation is a boost for EM currencies because it pushes them closer to purchasing power parity (PPP) levels (by equalising production and reducing asset risk differentials).
It’s not an economic story per se. Historically, high growth economies like China and India have struggled to turn growth into equity performance. Part of the positivity for EM assets is that this last roadblock is clearing.
EMs are becoming more like DMs, moving up the value chain and decreasing export dependence. They even have the same big tech dominance! Local-currency EM bonds have grown dramatically, which we take as less of a risk signal and more of a signal of deeper, financially mature asset markets. Many EMs are looking to get reclassified as DMs (Greece is confirmed, Korea is rumoured). That requires corporate governance improvements but opens those markets up to more capital. Changing your MSCI label might help individual EMs, but the point isn’t that some players are joining the big leagues. Rather, it’s that EMs overall are maturing. Emerging markets are emerging.
Bond yield moves expose structural weakness
Sharply higher oil prices pushed up bond yields everywhere – but nowhere more than the UK. 10-year UK government bond yields (gilts) are now above 5%. This isn’t just about inflation. The 10-year forward yield (a synthetic construct measuring the last 10 years of a 20-year bond to current 10-years) rose, driven by higher real yields, both in the UK and US. The long-term real yield increase should indicate higher growth, but that’s not what happened here. Rather, it was a rise in the term premium – the extra amount investors demand for long-term lending. This reflects a stronger cash preference, particularly in the gilt market.
People standardly point to perceived government failure to explain gilt troubles. That doesn’t match up with gilt investors past approval of the government’s “fiscal rules”, but perhaps the worry is those will change after local elections. We prefer to think about it structurally. The gilt market is severely imbalanced, with a high proportion of inflation-linkers (making gilts more sensitive to inflation) and a higher average maturity than nations. The maturity issue is due to historic pension fund demand, which dropped away once regulation changed. That set the scene for the Liz Truss episode and it hasn’t gone away.
Outstanding gilts are skewed to the long-term, and investors are less keen on long-term debt. We said that gilt yields were attractive when they sold off last month and they have risen again; the 10-year forward yield is around 6.5% on our count. Why aren’t investors buying in? In primary bond auctions, they are. But the demand in secondary markets is fragile and fickle – as the gilt market struggles to recoup the stable, institutional demand that used to come from pension funds. Shocks and political dramas therefore have an outsized effect on gilts. That doesn’t change the fact that long-term yields are attractive.
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Marcus Blenkinsop
5th May 2026