May Monthly Market Review

2 days ago
4 min read

Global markets advanced in May, supported by renewed strength in technology and AI-related sectors, with semiconductor-heavy markets such as Korea, Taiwan and the Netherlands leading gains. However, the backdrop became more complex as inflation pressures re-emerged, driven largely by higher energy costs linked to Middle East tensions. Central banks remained cautious, reinforcing a higher-for-longer stance, while bond markets came under pressure from rising yields. Overall, the month highlighted the continued strength of innovation-led equities, but also the importance of diversification as inflation, geopolitics and narrow market leadership remain key risks.

Equities Advance on AI Strength as Inflation Pressures Reignite

Central banks maintain a cautious stance, with inflation re‑accelerating
Equity markets pushed higher, led by technology and semiconductor sectors, with Korea, Taiwan and the Netherlands leading
Bond markets struggled, as rising yields weighed on returns

In-line with broader markets, the Balanced portfolio benchmark returned 2.80% in May, reflecting renewed optimism in Ai related names.

Inflation and Interest Rates.

UK.

In May 2026, UK monetary policy paused amid rising uncertainty. The Bank of England held rates at 3.75% following its April decision, adopting a wait‑and‑see stance as the Iran‑driven energy shock clouded the outlook; Governor Bailey signalled no urgency to hike despite above‑target inflation.

Inflation had fallen to 2.80% in April (from 3.30% in March), but remained volatile, with higher energy costs expected to push it up again.

Forward-looking indicators were mixed: firms’ price expectations eased slightly in May, yet stayed elevated around 4.00%, reflecting lingering cost pressures.

U.S. Federal Reserve.

In May 2026, the Federal Reserve held rates at 3.75%, but the narrative shifted decisively toward “higher for longer.” Policymakers signalled that rate hikes could be required later in 2026, while markets largely priced out cuts amid resilient growth and rising price pressures.

Inflation re-accelerated, driven by energy shocks, with headline CPI expected around 4.2% YoY, it’s fastest pace in three years. This renewed inflation impulse, largely linked to Middle East–driven oil disruption, has kept price growth well above target and tightened the Fed’s policy stance.

European Central Bank (ECB).

The ECB’s policy stance turned more hawkish in May 2026, with markets increasingly pricing near-term rate hikes as inflation re-accelerated above target. Euro area CPI rose to ~3.2% (vs. 2% target), driven primarily by energy shocks linked to geopolitical tensions, notably elevated oil and gas prices. Crucially, policymakers flagged rising persistence: services and core inflation firmed, signalling second-round effects and broadening price pressures. ECB officials emphasised vigilance and readiness to act “sooner rather than later,” reinforcing a data-dependent but tightening bias as inflation risks skewed to the upside.

Market performance.

Developed markets.

The Netherlands was the strongest performer, rising +10.10% and clearly leading the group. This reflects the influence of large, globally significant companies, particularly in semiconductors and technology, alongside internationally exposed industrial names, which tend to benefit when global growth expectations and tech sentiment improve.

At the other end, Portugal was the weakest market, falling ‑1.83%. The market is relatively small and concentrated, with heavier exposure to utilities, banks, and domestic-facing companies, and very limited representation in high-growth sectors, such as technology, which helps explain the underperformance versus more globally driven peers.

Emerging Markets.

Emerging markets performance was notably dispersed, with North Asia leading gains. MSCI Korea was the strongest performer, returning 36.37%, driven by its concentrated exposure to global technology leaders, particularly memory semiconductors, which benefitted from improving AI-related demand and pricing recovery. MSCI Taiwan also delivered robust returns of 17.47%, reflecting strength in its dominant semiconductor sector.

At the weaker end, MSCI Indonesia lagged significantly, falling -12.19%, as foreign outflows and currency weakness weighed on its commodity-heavy and domestically sensitive sectors. MSCI Brazil (-8.41%) and MSCI Turkey (-7.66%) also underperformed, reflecting fiscal concerns, policy uncertainty, and inflation pressures.

Sector performance.

Technology & Technology Innovation was the strongest performer, returning 18.81%, significantly ahead of peers. This outperformance reflects the sector’s heavy concentration in large-cap US technology names, where AI-driven earnings upgrades and sustained capital expenditure have supported both sentiment and valuations.

At the opposite end, Latin America was the weakest performer, declining -1.26%. This underperformance reflects a combination of commodity price volatility, which remains a key driver for regional equity markets, and idiosyncratic political and currency pressures across major constituents such as Brazil and Mexico.

Source: FE FundInfo, 10/06/26

Summary.

Global markets delivered a resilient performance, supported by strong equity returns, although renewed inflation pressures, driven by higher energy costs linked to Middle East tensions, created a more challenging backdrop. Central banks held rates steady, reinforcing a “higher for longer” stance while remaining responsive to evolving inflation dynamics.

Equity gains were led by technology and AI‑related sectors, with strength in North Asia and globally exposed developed markets, while more commodity‑focused regions lagged. Fixed income, by contrast, faced headwinds as rising yields weighed on returns.

Overall, the environment remains constructive, with growth and innovation continuing to underpin performance. However, persistent inflation, geopolitical uncertainty, and narrow market leadership suggest a more balanced outlook, with diversification once again proving to be key.

Sources.

The ‘Balanced portfolio benchmark’ is the UT Mixed Investment 20-60% Shares Sector.

Bank of England's Bailey Signals No Need to Move Quickly to Curb Inflation Jump – By William Schomberg, Reuters (via U.S. News), 29 May 2026

Bank of England holds rates as inflation complicates outlook – AIC Financial (summary of Reuters/BoE reporting), May 2026

Inflation and price indices: April 2026 – Office for National Statistics (ONS), published 20 May 2026

Inflation: Key Economic Indicators – By Daniel Harari, UK House of Commons Library, 22 May 2026

UK firms plan smaller price rises than in April, BoE survey shows – By Suban Abdulla, Reuters, 5 June 2026

Fed to hold rates this year, cut calls fade as war inflation persists, economists say: Reuters poll — Indradip Ghosh, Reuters, June 9, 2026

Fed officials see rate hike ahead if inflation stays elevated, minutes show — Jeff Cox, CNBC, May 20, 2026

Higher gasoline prices likely pushed up US consumer inflation again in May — Lucia Mutikani, Reuters, June 10, 2026

US public's inflation expectations largely unchanged in May, New York Fed survey shows — Michael S. Derby, Reuters, June 8, 2026

Inflation hits 3.2% in the euro zone as energy costs climb higher, Chloe Taylor, CNBC, June 2, 2026.

Inflation hits 3.2%, highest since 2023: Are ECB rate hikes inevitable?, Piero Cingari, Euronews, June 2, 2026.

Interview with Reuters – Isabel Schnabel, Balázs Korányi & Reinhard Becker, European Central Bank, May 26, 2026.

ECB’s Pereira says inflation requires action sooner rather than later, Simon Mugo (Reuters/Yahoo Finance), May 30, 2026.

Tradingeconomics.com, March 2026 https://www.istockphoto.com/