Investment Commentary - June 2026

Financial markets recovered strongly during the second quarter of 2026, reversing much of the weakness experienced in March. Although geopolitical tensions remained elevated throughout the period, investor sentiment improved steadily as hopes grew that conflict in the Middle East would not result in a prolonged disruption to global energy supplies. As negotiations between the United States and Iran progressed, oil prices retreated sharply from their April highs, easing inflation concerns and allowing investors to refocus on the strength of corporate earnings and continued investment in artificial intelligence (AI). The resulting improvement in risk appetite helped drive broad gains across global equity markets, while bond markets also benefited from moderating inflation expectations despite an increasingly hawkish tone from several major central banks.

Global equity markets produced impressive gains over the quarter, supported by resilient economic data and renewed enthusiasm for technology companies. In the United States, the S&P 500 returned +15.2% during the quarter despite declining -1.0% in June, more than recovering the losses recorded during the first quarter. The technology sector once again led the advance, with the Nasdaq rising +21.6% over the quarter as investor confidence in the long-term AI investment cycle continued to strengthen. Semiconductor manufacturers were among the strongest performers, benefiting from continued increases in capital expenditure by the world's largest technology companies as demand for AI infrastructure remained exceptionally robust.

European markets also delivered strong returns. The STOXX 600 gained +11.9% during the quarter after rising +2.7% in June, representing its strongest quarterly performance since the post-pandemic recovery in 2020. Financial stocks outperformed particularly strongly, with the STOXX 600 Banks Index advancing +23.7% over the quarter. Germany's DAX rose +10.2%, while Italy's FTSE MIB gained +19.4%, reflecting improving investor confidence as concerns over energy shortages eased.

The UK equity market participated in the recovery, although it lagged many international markets. The FTSE 100 rose +4.0% over the quarter following a modest +1.0% gain in June. The index's relatively defensive composition and significant exposure to commodity producers limited performance as oil and precious metal prices fell sharply during the period.

Asian markets delivered some of the strongest returns globally. Japan's Nikkei surged +37.3% over the quarter, while South Korea's technology-heavy market was the standout performer, driven by exceptional gains in semiconductor companies. Emerging market equities also enjoyed an outstanding quarter, with the MSCI Emerging Markets Index advancing +24.1%, supported by the improving outlook for global technology demand and easing geopolitical risks.

Bond markets experienced a more constructive quarter than the opening three months of the year as falling oil prices reduced concerns that higher energy costs would lead to persistently elevated inflation. Government bond markets generally recovered some of the losses sustained during the first quarter, although central bank policy remained an important influence on market sentiment.

UK gilts gained +2.1% over the quarter, comfortably recovering the declines experienced during the energy-driven sell-off in March. Softer domestic economic data and lower inflation expectations supported UK government bonds despite continued uncertainty surrounding the outlook for Bank of England policy.

US Treasuries generated a modest positive return of +0.4% over the quarter. While bond prices benefited from easing inflation concerns, gains were limited by a more hawkish Federal Reserve. Under new Chair Kevin Warsh, policymakers indicated that stronger economic data and a resilient labour market could justify further monetary tightening, with markets moving from pricing modest rate cuts at the beginning of the quarter to anticipating further rate increases by its conclusion.

European government bonds also performed well. Eurozone sovereign bonds returned +1.9%, supported by declining energy prices despite the European Central Bank delivering its first interest rate increase since 2023. Credit markets also improved as tighter spreads reflected stronger corporate fundamentals and reduced concerns over economic growth. High yield bonds outperformed investment grade debt across both Europe and the United States, while emerging market debt recovered as investor confidence returned.

Commodity markets experienced a dramatic reversal from the first quarter. Energy prices, which had surged following the escalation of conflict in the Middle East, declined sharply as diplomatic progress reduced fears of prolonged supply disruptions. Brent crude oil fell -38.4% during the quarter, its largest quarterly decline since the early stages of the pandemic in 2020, although it remained almost 20% higher for the year as a whole. WTI crude also recorded a substantial quarterly decline of -31.4%.

Precious metals also weakened considerably as safe-haven demand faded. Gold declined -14.1% over the quarter, ending a run of five consecutive quarterly gains, while silver fell an even steeper -22.0%. In contrast, industrial metals proved more resilient. Copper advanced +10.3% during the quarter, supported by continued demand linked to AI infrastructure investment and broader technology spending.

Currency markets were comparatively subdued during the quarter. The US dollar strengthened modestly, with the Dollar Index rising +1.2%, marking its fourth consecutive quarterly gain. Sterling finished broadly unchanged against the dollar over the quarter despite weakening -1.4% during June, while the euro declined -1.1%. The Japanese yen remained under pressure, falling to its weakest level against the US dollar since the mid-1980s following the Bank of Japan's latest interest rate increase. Emerging market currencies recovered from the weakness experienced during the first quarter but finished the period with only modest gains overall as the stronger US dollar continued to provide a headwind.

Richard Batty, CFA 

Senior Portfolio Manager