In a strong week for markets, with record equity highs and falling bond yields, driven by lower oil prices and improving inflation signals, optimism is building but it's still not secure.
Read this article to understand:
- What drove positive momentum in bonds and equities this week
- The impact of oil prices on inflation and interest rate expectations
- Why uncertainty in geopolitical developments can quickly reverse markets’ optimism
It has been an unseasonably hot week across Europe, and markets have been running just as warm. Equity markets continued their upward march, notching fresh all-time highs as investors embraced a more positive backdrop. That optimism was fuelled by renewed hopes of a resolution in the Middle East, which helped push oil lower, eased pressure on inflation, and in turn supported risk assets. The result was a clear market pattern through the week: equities pushing higher, bond yields drifting lower, and energy prices falling, all reflecting growing confidence that the outlook could be improving.
The week started calmly. With the US and UK closed on Monday, European equities led the charge. Italian equities reached a notable milestone, as Italy’s FTSE MIB Index broke above its previous all-time high set in 2000. The reason was investors’ growing optimism that the conflict between the US and Iran might be nearing an end, helping push Brent crude lower, to roughly five per cent below the previous week’s close. Bond markets responded quickly to this signal from oil, with the US ten-year yield easing to around 4.5 per cent and German yields falling more sharply.
By Tuesday, that positive momentum had spread to the US, where the S&P 500 continued its rise. It hit a new record high, with gains now close to ten per cent year to date, driven by a powerful surge in technology stocks. Semiconductor names stood out, with Micron rising by 19.3 per cent in a single session, part of an extraordinary run over the past year.1 Bond yields continued to fall, reflecting expectations that interest rates may not need to rise as much as previously feared.
By mid-week, markets experienced a sharp change in tone as fresh military developments emerged. Oil prices reversed sharply, rising by nearly four per cent, to around $98, after reports of renewed military action and tougher sanctions. Equity markets struggled to hold onto their gains, even as they sat near record levels. This rapid reversal highlighted how closely markets are tracking energy prices and how quickly sentiment can change when the geopolitical backdrop shifts.
By Thursday, sentiment had shifted firmly back to positive. Reports emerged that the US and Iran were close to agreeing a 60-day ceasefire extension, which would allow shipping to resume through the Strait of Hormuz. This triggered a broad rally across asset classes. Oil prices fell sharply again, with Brent down to around $92.4 by Friday morning, leaving it more than 18 per cent lower than at the start of May, in its steepest decline since 2020. US equities climbed again, clocking yet another record high, while US treasury yields dropped further to around 4.43 per cent. Fresh inflation data reinforced this move, with US price pressures coming in slightly below expectations, easing concerns that interest rates might need to rise further.
This week, falling oil prices and softer inflation data pointed clearly in the right direction, supporting both equities and bonds. However, the path remains uncertain. Much of the optimism rests on geopolitical developments and, as we saw this week, these developments can change extremely quickly.2
Past performance is not a reliable indicator of future results.
References
- The companies mentioned are for illustrative purposes only and do not constitute an investment recommendation.
- Source of all the data for this article: Aviva Investors and Bloomberg. Data as of 29 May 2026.
