Equity markets surged to record highs on strong tech momentum this week. But rising bond yields, higher inflation and continued geopolitical risks signalled growing concerns lingering beneath the surface.
Read this article to understand:
- How political concerns in the UK impacted gilts and the sterling
- The effect of oil prices on inflation expectations and bonds
- What underpinned the continued rise in US equities
Political instability in the UK set the tone early in the week, with mounting pressure on Prime Minister Keir Starmer spilling directly into markets. Ten-year UK gilt yields rose to levels not seen in decades, moving to above five per cent, as investors priced in the risk of looser fiscal policy under a new leadership. The situation became more fluid as resignations and leadership speculation intensified, but the key development was a potential path for Greater Manchester Mayor Andy Burnham to return to Parliament via a by-election. If successful, he would have a credible platform for a leadership challenge. His past comments about not wanting the UK to be “in hock to the bond markets” unsettled investors and weighed on the sterling, although he has since partly rowed back on this position.
Alongside this, geopolitical tensions in the Middle East continued to build. Oil remained high throughout the week, holding above $105 per barrel. By Friday morning, it was trading higher again at over $107 per barrel. After weeks of relative calm following the April ceasefire, fresh skirmishes and growing talk around renewed US protection measures in the Strait of Hormuz suggested the situation may be deteriorating again.
Despite this backdrop, equity markets showed strong resilience. US equities continued to push higher, with the S&P 500 briefly trading above 7,500 for the first time in its history. The gains, however, were concentrated in a small number of large technology companies. Enthusiasm around artificial intelligence remained a major driver, with semiconductor stocks delivering exceptional returns and leading the market higher. The market gauge for semiconductor stocks was up by over eight per cent in the past five days, sending the index up by more than 70 per cent so far in 2026. The recent rally in equities has been powerful but narrow, relying heavily on continued confidence in a small group of names.
Adding to the more constructive tone during the middle of the week was President Trump’s visit to China. His meeting with President Xi was closely watched and broadly constructive in tone. While there were no major policy announcements, both sides signalled a willingness to improve relations. This helped underpin risk sentiment and supported equities at a time when other parts of the macro picture were becoming more uncertain.
That challenge became clearer as inflation data surprised to the upside. US consumer prices showed continued strength, and producer prices rose sharply, with a 1.4 per cent monthly increase, the largest in several years. Importantly, the pressure was broader than just energy, pointing to more persistent price increases across the economy. Bond markets reflected this shift, with the US ten-year yield rising towards 4.5 per cent, and longer-dated yields moving to above five per cent with markets increasingly pricing in a longer period of high interest rates.
Markets began Friday 15 May on a more cautious note, with overnight comments from President Trump suggesting that the United States does not need the Strait of Hormuz to reopen. This triggered a fresh rise in oil prices and an immediate reassessment of risk. Asian equities fell on the news, with European and UK markets also opening lower.
Overall, this was a week where strong equity returns masked a more fragile backdrop. Record highs in US markets sit alongside rising oil prices, more persistent inflation and growing political risk. The rally continues, but the foundations are possibly becoming less stable.1
Past performance is not a reliable indicator of future results.
References
- Source of all the data for this article: Aviva Investors and Bloomberg. Data as of May 15, 2026.
