Resilient to bubbles and bullets

Shock, adjust, continue

The Iran war started more than three months ago now. Investors spent a lot of time in March trying to define different scenarios and predict how the global economy and financial markets would react to a quick conflict; a prolonged one; or a total breakdown of functioning energy markets. 

Three months on, where are we? Dated Brent - the main benchmark for crude oil - is currently trading at under $100 per barrel. It has averaged roughly $94 per barrel since the war started – double the average of the preceding three-month period. 

That has been enough to send retail and wholesale energy prices higher, evidenced in inflation data across numerous economies. It has also been responsible for a move in forward interest rates – one-year; one-year forward US dollar and sterling rates (i.e. expectations for one-year rates in a year’s time) are 80-90 basis points higher than they were on 27 February; in the euro market the increase has been 60-70bp.

Stunning returns

None of this is new though. Most of the market re-pricing happened quickly. The expectation has increasingly become that a deal will be done to end the conflict, even if one has not yet been reached. 

Since the end of March, returns have been positive. Fixed income assets have registered positive total returns, except US Treasuries and Japanese government bonds. Holding emerging market debt, subordinated and sub-investment grade credit and even long-duration European government bonds and gilts has been rewarded. 

Interest rate expectations have even eased back. It looks as though the European Central Bank will raise rates at its 11 June meeting, but the US Federal Reserve and the Bank of England are expected to remain on hold this month.

Equity performance has been stunning. Technology stocks have led the way. The US SOX semiconductor index has achieved a total return of 79.6% since 31 March. The AI theme has become even stronger, with technology and semiconductor companies reporting strong revenues and market enthusiasm for such stocks undiminished. 

That will be tested in the coming days and weeks by the success or otherwise of anticipated initial public offerings from SpaceX, OpenAI and Anthropic. Media speculation suggests that, along with Alphabet looking to raise $80 billion in new equity, these deals could raise more than $200 billion.

The AI theme has overwhelmed the Iran war’s potential negative risks. Those risks remain but markets are betting a deal to end the conflict and allow energy markets to start rebalancing is imminent. 

Market based volatility indicators like the VIX and the equivalent measure of option volatility in the US Treasury market (the MOVE index) have been well behaved since mid-April. 

Credit spreads are within touching distance of late February levels. In the currency markets, the dollar is trading about 1.5% stronger versus the euro and at a similar rate against sterling. Markets have been extremely resilient. 

As I noted in this column two weeks ago, the concerns about long-term government bonds have not been borne out by recent performance. For all the hysteria about gilts, the over 10-year index delivered a total return of 1.53% between the end of March and the end of May, with 73bp of that coming from income. 

Gilt market performance might change after the Makerfield parliamentary by-election on 18 June, but higher yields are an enticing element of return for investors.

Deals, deals, deals

Market resilience is down to two factors; a deal to end the Iran conflict always seems to be close to hand; and the AI trade and its continued call for investors to allocate more capital.

Meanwhile, the global economy stutters on, with the latest round of purchasing manager surveys suggesting we are far from a sharp downturn in global activity. 

Indeed, the US ISM manufacturing index hit a four-year high in May, driven by strength in new orders which reflects all the kit being made to build data centres and the associated infrastructure. 

FIFA peace deal

I suspect President Trump would like a deal with Iran agreed before the World Cup starts next week (remember, Iran is supposed to participate). Global attention will be on the US, and the optics would be much better if Washington could tout a peace deal before Mexico and South Africa get the competition underway.

The amount of global investment capital being dedicated to AI is mind-boggling and it is not surprising that many are questioning whether it is a bubble. Certainly, public equity markets are going to be even more concentrated in technology stocks once this mega-IPO round settles. Some disruption to equity prices is possible as these re-allocations take place to accommodate this record level of new equity issuance.

This week’s news from Broadcom – revenue forecasts underwhelmed the market – reminds us that not all players can be winners. At the same time, the world can’t make enough chips, and capital expenditure continues to drive growth (especially in the US).

And the winner is…

We said at the beginning of the year that resilience was a key investment theme. So far, the global economy has remained resilient. Markets have too. Yields have reset higher but there has been no wave of defaults in credit, nor any market dislocations from investors assigning higher risk premiums to government debt. 

The valuations of the AI companies planning to float, once they have gone public, will be a real test of whether this resilience persists for the rest of 2026.

And finally, the World Cup. Only once has a European nation won the competition when it has been held in the Western hemisphere. That makes me question Spain and France being the bookies’ favourites. 

I don’t think England will end 60 years of hurt either. So, I am tempted to go with Argentina to retain its crown – though only Brazil and Italy have managed that before. 

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, BNP Paribas AM, as of 4 June 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.