May was dominated by events in the Middle East, with fears of further escalation between the US and Iran giving way to growing optimism around a potential ceasefire. In the UK, inflation came in lower than expected, raising hopes that interest rates could continue to fall over time, while continued enthusiasm for Artificial Intelligence (AI) helped drive stock markets to fresh highs.
Once again, events in the Middle East continued to dominate headlines, driven by the ongoing conflict between the US and Iran, although the outlook improved materially as May progressed. Early in the month, concerns over further escalation pushed oil prices sharply higher. However, those concerns began to ease as ceasefire negotiations progressed. Towards the end of May, reports emerged that negotiators had drafted a tentative 60-day memorandum of understanding, which would extend the current ceasefire and begin nuclear talks. That said, the agreement has yet to be signed and still requires President Trump's approval. In fairness, the delay may simply reflect the need for someone to explain exactly what a "memorandum of understanding" actually means.
After briefly trading above $110 per barrel in early May, the price of Brent crude oil declined sharply to finish the month in the low $90s. Although this provided some relief, oil prices remain well above their pre-conflict levels.
In the UK, the latest inflation figure came in much lower than expected (hooray!), but interest rates were kept unchanged (boo!). While the fall in inflation was welcome, the Bank of England remains cautious given persistent underlying price pressures and the risk that ongoing tensions in the Middle East could push energy prices higher once again.
Even so, the inflation data was encouraging enough to boost confidence that rates could continue to move lower over time, helping to reduce yields on UK government debt, effectively lowering the UK's borrowing costs. Nevertheless, yields remain at levels not seen since before the Global Financial Crisis, which is less than ideal for government finances.
Despite the best efforts of the world's political elites, stock markets continued to gain in May. The main US index reached another all-time high, supported by continued enthusiasm for all things Artificial Intelligence (AI), with the theme also helping to drive the technology-heavy markets of Asia, particularly South Korea and Taiwan. There are certainly reasons for the excitement, but nobody knows how much further this trend can run. Suspiciously, when I asked ChatGPT, it told me to mind my own business.
Bottom Line
Whilst tensions between the US and Iran appear to be easing, it remains a distinct possibility they could flare up again. Furthermore, with the gains already seen in stock markets and enthusiasm forAI showing little sign of slowing, expectations are buoyant, to say the least. Whilst we don't want to be the ones stopping the punch being spiked and confiscating all the cigarettes, we are mindful the rest of the year could still prove eventful.
Q&A
What’s on your mind?
What happened at the US and China chats?
In mid-May, the leaders of the US and China, widely regarded as the world’s two leading superpowers, gathered in Beijing for a timely two-day summit. The meeting took place against a backdrop of continued conflict in the Middle East, where China’s ties with Iran have added further strain to relations with Washington. Many believed the war could strengthen China’s negotiating position, with US military and diplomatic attention increasingly diverted away from the South China Sea and, in particular, Taiwan. Taiwan remains a key concern for investors, given its central role in global semiconductor manufacturing at a time when demand for AI technology continues to accelerate. Discussions during the summit focused heavily on trade, technology and regional security, with Iran and Taiwan among the main areas of tension. China warned against greater US involvement around Taiwan, describing the issue as a potential source of conflict between the two nations. Despite the significance of the meeting, there was a notable lack of tangible outcomes, although both sides commented positively on the discussions.
Out of this world or another 2001: Space Odyssey? A summary of SpaceX’s IPO.
Elon Musk's SpaceX is expected to launch the largest IPO (initial public offering) in history this June, with a reported valuation of around $1.75 trillion. To put that into perspective, the current record holder, Saudi Aramco, raised $29.4 billion when it listed in 2019. In fact, even if you combined the four largest IPOs in history, SpaceX would still be around 17 times larger. So, what are investors so excited about? While the company is best known for launching rockets into space, many are more interested in the ecosystem built around the core business. This includes Starlink, government and defence contracts, artificial intelligence ambitions and longer-term lunar and Martian exploration projects. As a result, investors increasingly view SpaceX as a technology and communications business with a space programme attached. Elon Musk's ventures have long enjoyed enthusiastic support from investors. In June, SpaceX may take that phenomenon to a new frontier in what could prove to be one of the defining market events of the year.
What has been the impact of the UK political turmoil?
The past month has been a difficult one for Sir Keir Starmer and the Labour Party, to say the least. Local election results saw Labour lose seats across the UK, leading to renewed criticism of the Prime Minister and increased speculation over his leadership. The impact of this political uncertainty was most apparent in the bond market, where UK government bond prices fell (yields rose) sharply earlier in the month. This was partly driven by concerns that disruption to global energy markets could keep inflation higher for longer, prompting investors to rethink the outlook for interest rates. However, uncertainty over the political outlook also played a role, with some concern that a change in leadership could lead to higher government spending and place further pressure on the UK's finances. The market response served as a reminder that investors want reassurance that government finances will remain under control. Bond prices recovered somewhat as the month progressed, helped by more encouraging inflation data and growing confidence that interest rates could continue to move lower over time.
