Markets pressed higher through geopolitical noise
Iran remained at the center of attention also in May, however markets once again proved willing to look past the uncertainty. As in the previous month, frequently shifting headlines made it difficult to gauge where the situation truly stood. Late in May optimism briefly picked up after comments suggesting a deal was close, only to fade as tensions escalated again shortly afterwards. By month-end, there was no material change in the escalating situation. Even so, equity markets performed strongly, with most major indices moving higher, in particular by continued strength in AI and semiconductor-related stocks.
What stands out is that this happened against a fairly challenging backdrop. Bond yields continued to rise, and the gains in equities were once again driven by a relatively small group of large technology names. At the same time, concerns around the cost and scalability of AI infrastructure have not gone away, and the global energy situation remains strained. Despite all this, investor sentiment has held up well, and markets have shown a remarkable ability to absorb negative news.
However, early June has already provided a reminder of how fragile sentiment can be. On June 5, the Nasdaq recorded its sharpest single-day decline of the year, led by weakness in technology and semiconductor stocks that had previously driven the rally. While this pullback does not yet alter the broader upward trend, it does highlight how sensitive valuations have become, particularly in crowded AI-related trades. Corrections in such an environment can unfold quickly.
Risk appetite remains clearly intact. Investors seem increasingly focused on future opportunities rather than current risks, as illustrated by strong interest in high-profile names such as SpaceX. In essence, markets are weighing two narratives: on the one hand, higher inflation risks, rising government debt, and tighter financial conditions; on the other, the potential for easing geopolitical tensions and a continued AI-driven growth cycle. For now, the more positive narrative is dominating.
Global Economy
USA
At the start of June, positive economic data turned negative for markets: stronger labour conditions reduced the likelihood of rate cuts, pushed yields up, and triggered a sharp correction led by declines in tech stocks. With roughly 172,000 new jobs added and far exceeding forecasts, investors anticipated that the Federal Reserve would keep rates elevated for longer or possibly even raise them further, driving Treasury yields higher.
Price pressures remained noticeable in May, driven in part by elevated energy costs and some firmer inflation readings, including an increase in April’s core CPI. Recent data offers a mixed picture: one measure suggests inflation is still far above the Federal Reserve’s 2% target, while another indicates it is close to that goal. The Commerce Department reported that core consumer inflation, which excludes volatile food and energy prices, stood at 3.3% year over year. In contrast, the less commonly cited “trimmed mean” inflation gauge, which removes extreme price fluctuations, came in at just 2.3%. During his April confirmation hearing, Fed Chairman Kevin Warsh argued that policymakers should place greater emphasis on measures like the trimmed mean, elevating what had largely been a technical debate into a central policy issue. He has signaled a preference for interpreting inflation differently from many of his predecessors at the Fed.
At the same time, there is growing concern that artificial intelligence will replace human jobs. However, the reality in the United States so far looks different: companies are actively recruiting specialists to deploy AI, while the rapid expansion of data centers is driving up wages for skilled workers and increasing demand and costs for semiconductors, equipment, and energy.
As a result, the surge in AI investment is supporting both job growth and inflation, which could push nonfarm payroll figures for May well above the consensus estimate of 95,000. In effect, this is a clear example of Jevons paradox: as technology becomes more efficient and accessible, it stimulates greater demand, ultimately leading to more employment rather than less.
Europe
While geopolitical risk premiums have somewhat moderated, the broader macroeconomic picture across Europe has continued to weaken since oil prices remain high and inflationary effects are slowly creeping into the economy. Recent data points underscore a clear loss of momentum: both Eurozone and UK flash PMIs have slipped further into contraction territory, signaling that economic activity is not just slowing but actively shrinking across key sectors. At the same time, the European Commission has revised its outlook, lowering its 2026 growth projections while simultaneously raising its inflation forecasts. It is an uneasy combination that highlights the lack of a clear path to recovery.
Against this backdrop, policymakers are increasingly acknowledging that the region is facing a stagflationary environment, where weak growth coexists with persistent inflationary pressures. This dynamic complicates the policy response significantly, as measures to stimulate growth risk exacerbating inflation, while tightening policies to control prices could deepen the economic slowdown. In effect, even as headline geopolitical risks have eased, the fundamental economic challenges in Europe have become more entrenched, leaving both markets and policymakers grappling with a difficult and uncertain outlook.
Asia
As in many parts of the global economy, macro conditions across Asia showed increasing strain. In China, momentum continued to soften as external demand weakened and domestic consumption remained fragile, with manufacturing activity hovering around contraction levels and the property sector still acting as a drag on growth. Policymakers have maintained targeted support measures, but the overall recovery remains uneven and increasingly reliant on exports and state-backed investment.
In Japan, inflation pressures persisted, with headline and core measures edging higher amid elevated energy costs linked to geopolitical tensions and sustained oil prices. At the same time, economic growth remained subdued, with only modest expansion and a still-fragile outlook as higher import prices weighed on real incomes and corporate profitability. Nevertheless, fiscal support and strong global demand for AI- and semiconductor-related sectors continued to underpin equity market performance, even as volatility increased. In contrast, Indonesia emerged as a focal point of financial stress in the region. Markets sold off sharply, led by a steep decline in sovereign bonds after government efforts to stabilize the currency failed to reassure investors. The 10‑year bond yield surged to its highest level in over a year, while the rupiah weakened further, having already lost more than 8% year‑to‑date. At the same time, the benchmark equity index fell and foreign investors withdrew a net USD 3.6 billion from local stocks, reflecting growing concerns about fiscal policy, rising deficits, and increasing intervention in economic management. Policymakers pledged measures to stabilize the currency and attract capital inflows, but confidence remains fragile.
Shares
The most recent S&P 500 earnings season showed exceptionally strong results with overall profits growing roughly 25–27% year over year. Around 84% of companies beat earnings expectations and more than 80% exceeded revenue forecasts above historical averages. Growth was heavily driven by large technology firms benefiting from AI-related demand, while most other sectors saw more moderate gains. Despite the strong performance, earnings remain concentrated in a few major companies and margins are near highs, leaving markets vulnerable if growth slows.
Dow Jones, S&P 500, and Nasdaq indices closed May at new record highs, mostly supported by sustained momentum in AI-related themes. Strong demand for computing power, alongside aggressive capital expenditure plans from major technology companies, continued to provide powerful tailwinds for equities. Semiconductor and memory stocks continued to build on their strong year‑to‑date momentum, with Micron (+29.3%) emerging as the latest company to surpass the $1 trillion market‑capitalization threshold and reflecting the powerful rally across the memory segment. At the same time, the software sector extended its rebound with the IGV ETF gaining 21.15%, which highlighted improving sentiment and renewed investor appetite for growth‑oriented technology names.
European equities recorded moderate gains in May despite a volatile backdrop marked by geopolitical tensions linked to the Iran conflict, weakening macroeconomic data, and political uncertainty in the UK. The month began with Brent crude trading near $115/bbl and the Stoxx 600 still below pre-conflict levels, but sentiment improved as oil prices retraced toward $90/bbl and AI-driven optimism fueled renewed leadership in the Technology sector. While regional indices advanced overall, they lagged the strong performance seen in U.S. markets, with Italy’s FTSE MIB and Germany’s DAX outperforming (both rising more than 3%), while the UK FTSE 100 and France’s CAC 40 underperformed.
Sector-wise, Technology led the gains, supported by continued enthusiasm around AI and semiconductor momentum, reinforced by strong guidance from Nvidia, which drove capital rotation into AI infrastructure and hardware plays. Travel & Leisure also performed well, benefiting from lower fuel costs as oil prices declined and demand remained resilient. Basic Resources contributed positively, supported by elevated base metal prices—particularly copper—and supply concerns linked to disruptions around the Strait of Hormuz. Notably, a small group of European AI-linked companies delivered outsized gains year-to-date, as investors sought exposure to the global AI investment cycle in a region traditionally lacking large-scale tech leaders. Standout performers within the Stoxx Europe 600 included STMicroelectronics (more than doubling), Aixtron (+168%), BE Semiconductor Industries (+87%), and Nokia. Reflecting this trend, the Stoxx Europe Total Market Semiconductors index surged by roughly 80% year-to-date, significantly outperforming the broader Stoxx Europe 600, which gained only about 2% over the same period.
Bonds
The U.S. Treasury market saw further upward pressure on yields through May and into early June, showing a shift in expectations around growth and monetary policy. The 10‑year yield moved higher, and ended May at 4.44%, briefly pushing above 4.5% during the first week of June. The 30‑year yield followed same path, approaching the 5% level. Volatility remained elevated, driven by stronger‑than‑expected economic data and on particularly labour market resilience, alongside persistent inflation concerns and rising term premia amid heavy Treasury issuance. Markets increasingly priced out near‑term rate cuts, resulting in a steeper repricing at the front and intermediate segments of the curve. Although Kevin Warsh has acknowledged the challenges posed by persistent inflation, his emphasis on forward‑looking indicators and alternative inflation measures suggests a more flexible interpretation of price dynamics. In the near term, however, the Fed remains constrained by strong labour market data and elevated inflation expectations, limiting its ability to pivot quickly. As a result, markets face a policy environment characterized by tension between political pressure for easing and the central bank’s mandate to maintain price stability, leaving yields elevated and volatility likely to persist.
European government bond markets remained under pressure, though the upward move in yields became more uneven across countries. German 10‑year Bund yields traded in a volatile range but broadly held near the 3.0–3.1% level, while French 10‑year yields edged higher toward roughly 3.7–3.8%, reflecting ongoing fiscal concerns and persistent inflation pressures. Peripheral spreads remained elevated, with Italian yields continuing to trade at a premium amid concerns over debt sustainability and slower growth momentum. The shift has been driven by a combination of still‑elevated energy prices, which are keeping euro‑area inflation above target, and a gradual repricing of European Central Bank policy expectations toward a “higher for longer” stance, even as growth indicators deteriorate.
In the UK, market dynamics remained particularly fragile, reinforcing the focus on the so‑called “BIFs” – Britain, Italy, and France – as the most vulnerable sovereign issuers. UK gilt yields stayed elevated, with the 10‑year hovering around multi‑year highs, as investors continued to demand higher risk premia in response to persistent inflation, fiscal uncertainty, and political instability. Concerns over the credibility of fiscal policy and the sustainability of government spending plans have weighed heavily on investor sentiment, while the Bank of England’s constrained policy position of balancing stubborn inflation against weakening growth has limited its ability to provide a clear anchor for yields. As a result, UK assets have faced intermittent selling pressure, with gilts particularly sensitive to shifts in global rate expectations and domestic policy signals.
Commodities & Currencies
Gold prices weakened, extending a broader correction from earlier record highs and trading around the $4,500/oz range by early June. The decline was primarily driven by rising U.S. Treasury yields and a strengthening dollar, as persistent inflation and stronger economic data pushed expectations toward a “higher-for-longer” interest rate environment. Higher yields increased the opportunity cost of holding non‑yielding assets like gold, while a firmer U.S. dollar reduced international demand. These pressures intensified in early June after a strong U.S. jobs report triggered a sharp sell‑off, reinforcing expectations of potential Federal Reserve tightening. Looking ahead, gold faces continued short‑term headwinds from elevated yields and dollar strength, but longer‑term support remains in place due to ongoing geopolitical risks, inflation uncertainty, and sustained central bank demand, which creates a balance between cyclical weakness and structural resilience. The recent strength in the U.S. dollar has been clearly reflected in the EUR/USD exchange rate, which peaked at around 1.1797 before reversing and falling to approximately 1.1525 at the start of June. This move was driven by stronger U.S. economic data and a shift in interest rate expectations, as markets began to price in a “higher‑for‑longer” Federal Reserve policy stance. Rising Treasury yields and renewed demand for dollar‑denominated assets have supported the greenback, while relatively weaker economic momentum in Europe has added further downward pressure on the euro. A similar dynamic was visible in the USD/CHF exchange rate, where the Swiss franc initially remained relatively strong but gradually weakened against the dollar as U.S. yields moved higher. Over the same period, USD/CHF moved towards to 0.80 as the dollar strengthened, reflecting the widening interest rate differential between the U.S. and Switzerland. The Swiss franc remains an attractive hedge against growing concerns over public finances amid rising interest rates. Given Switzerland’s very low level of government debt and minimal fiscal deficits, the currency is well positioned to benefit from these concerns. In addition, the franc continues to serve as a reliable safe‑haven asset during periods of risk aversion, which we expect to persist over the coming months and quarters.
Source: www.bendura.li
Aleksei Andrievskii | Advisory Board Member, Bendura Bank AG | Liechtenstein