The Cambridge Weekly – 26 May

With most shipments that departed the region prior to the escalation now delivered, the full impacts of the disruption are expected to intensify in the coming weeks. Global oil inventories declined by 246 million barrels across March and April, the steepest drawdown on record, prompting IEA executive director Fatih Birol to warn of the biggest energy crisis in history, should matters not resolve soon. However, with three Asia-bound super tankers journeying through the Strait last Wednesday – which sent brent crude prices down nearly 6% – investors are hopeful that this will signal a broader reopening of the Strait. Shipping analysts have cautioned against interpreting this development too optimistically, however.

Elsewhere, the largest European office deal in years collapsed last week, when the prospective buyer of the $850 million Frankfurt OpernTurm tower block failed to raise necessary funds – a signal of economic uncertainty feeding through to real estate. Meanwhile, South Korea’s stocks continue to defy the broader market mood, with its KOSPI index now up over 80% year-to-date, and more than tripling in the last 18 months.

US Equity Market:
The world’s most valuable company, Nvidia, reported strong first quarter earnings last Wednesday. The company posted revenues up 85% year-on-year, with net income more than tripling to $58.3 billion. It also forecasted sales in the region of $91 billion for Q2, comfortably above expectations of $86 billion, but shy of the most bullish predictions. Despite this, investors were left largely unphased; the company’s share price slipped 0.3% in last Thursday pre-market trading.

San Francisco-based AI group, Anthropic, is set to deliver its first profitable quarter, notably before rival OpenAI. The company informed investors that second quarter 2026 revenue is forecast to be $10.9 billion – more than double the $4.8 billion reported for Q1. Analysts believe that this could propel the group to a $559 million operating profit for the period and hand it the edge as it vies with peers to go public this year.

Last week also saw Elon Musk’s SpaceX reveal official plans for the largest initial public offering in history as the company filed its prospectus with the US securities regulators on Wednesday. While not officially disclosed, the rocket maker has previously discussed raising $75 billion at a $1.75 trillion valuation, with Musk aiming to list shares as early as June this year. Against this broadly constructive backdrop, the S&P500 closed the period to Friday up 0.9%.

UK Equity Market:
There were several developments on the political front in the UK last week. A new trade deal between the UK and certain Gulf states was signed by the UK Prime Minister, a deal which is estimated to boost the UK economy by c.£3.7bn a year via reduced tariffs on food exports and medical equipment. Later in the week, Chancellor Rachel Reeves announced a series of measures, coined the “Great Summer Savings Scheme”, aimed at alleviating recent price pressures on UK households. These measures include temporary VAT reductions over the school holidays on children’s attractions (such as zoos and museums) as well as across the hospitality sector, including restaurants and cinemas.

Economic data was weaker, with April marking the first contraction in UK business activity in over a year. The S&P Global Flash UK PMI composite output index, a measure of private manufacturing and services sector activity in the UK, came in below expectations. Economists have attributed the fall to the increased uncertainty in the UK economy driven by both the Middle East war and heightened domestic political uncertainty from local elections.

Off the back of positive inflation news, the FTSE 100 index recorded a strong week, rising 2.75% over the week to Friday. Sterling now trades at around 1.35 against the US Dollar.

Inflation, Interest Rates and Bond Markets:
The Office for National Statistics (ONS) announced last Wednesday that UK CPI fell to 2.8% in the 12 months to April, below market expectations of 3.0% and down from 3.3% in March. This was largely attributed to reduced housing and household service costs following the introduction of Ofgem’s reduced energy price cap at the start of April. Core inflation also eased from 3.1% to 2.5%, providing relief to policymakers. The 2-year gilt yield dropped 15 basis points to 4.37% on the news but remain well above its pre-conflict level of 3.52%.

The Federal Reserve’s April meeting minutes were also released last Wednesday and indicated an increasingly hawkish shift among US policymakers – the committee indicated rates may need to hold firm should inflation remain persistently above its 2% target. Markets now price in a near 60% chance of a rate hike by 2027. The 2-year treasury yield also edged over 4.1% during the period, above the Fed’s current target range; a signal interpreted by some that the policy rate is insufficiently containing inflation.

Global bonds continued to sell off last week in response to increased inflation concerns. Japan has been a particular point of focus, with its 10-year government bond yield rising above 2.8% to reach its highest level since 1996, while the 30-year reached a record 4.17% for the first time since its issue in 1999. Analysts attribute these moves to growing expectations for an interest rate hike.

What’s on the horizon
Market focus will remain fixated on developments in the Middle East, whether any resolution to resume tanker traffic flow through the Strait of Hormuz can be reached, and what this means for energy prices and risk assets.

This week brings an influx of inflation data, none more material than the US Core Personal Consumption Expenditure Index reading on Thursday – the Federal Reserve’s preferred gauge of underlying inflation in the US economy. Investor eyes will be peeled for further sign of acceleration against the current energy-driven inflationary backdrop, given the release of Wednesday’s hawkish FOMC minutes. The data point will serve as a key input to market pricing of the trajectory of US rates under incoming chair, Kevin Warsh, and will also be accompanied by GDP growth estimates.

France, Germany and Italy will round off the week with their year-on-year inflation preliminaries – providing an early read on price pressures across the Eurozone’s three largest economies – and informing the ECB’s monetary policy through the second half of the year.

This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.

Past performance is not a guide to future performance.

The value of your investments can go down as well as up and you may get back less than you originally invested.

Source of financial market data: MorningstarDirect.