Market drop in - June 2026

UK Politics and Market Implications

Following Prime Minister, Keir Starmer's planned departure and Andy Burnham's anticipated arrival as Prime Minister, the initial view is that the impact on UK markets will be limited. Although Burnham is seen as slightly to the left of Starmer, bond markets care more about fiscal discipline than political labels. The UK's constrained fiscal position leaves little room for any government to pursue expansionary policy without unsettling gilts.

Some reassurance comes from Burnham's reported choice of economic advisers, including former BoE Chief Economist Andy Haldane, former OBR Chair Richard Hughes, and former Goldman Sachs economist Jim O'Neill. These appointments suggest a pragmatic, credible approach rather than a radical shift.

The bigger challenge remains the UK's weak productivity and lacklustre growth. Greater regional devolution may improve local decision-making, but London and the South East remain by far the most productive regions, so spending elsewhere often delivers social and political benefits rather than strong economic returns. Markets will also keep watching tax policy, especially capital gains. Proposals to raise it significantly have historically been tempered by concerns over lost revenue and weaker investment.

Geopolitical developments and market impact

The month's key development was the signing of a US–Iran memorandum of understanding. Though partly anticipated, confirmation has supported risk assets and eased concerns over energy supply, with investors now expecting Iran to expand oil exports into an already well-supplied market. Combined with shifting OPEC dynamics and greater production flexibility among major producers, this points to a more sustained period of abundant oil supply and keeps prices under pressure over the medium term.

Oil prices and inflation expectations

Falling oil prices are one of the most important macro developments this month. Prices have dropped sharply, back toward levels seen before recent geopolitical tensions, as markets focus on the longer-term rise in supply over any temporary demand pickup.

Lower energy costs feed through into transport, manufacturing and consumer prices, easing inflationary pressure. While headline inflation in the UK and US still looks elevated, this largely reflects past conditions rather than recent moves in energy markets, and forward-looking, market-based inflation expectations have already started to fall, with investors growing more confident that inflation will keep moderating over the next two years. This improves the backdrop for central banks: rate cuts are unlikely in the near term, but the odds of easing during 2027 have risen.

Global equity markets

Equities performed strongly through June, helped by easing geopolitical risk and improving inflation expectations. US equities remain a key driver, but leadership is broadening. Japan, South Korea and Taiwan have all performed well on semiconductor and tech exposure, a healthy shift after early-year returns were concentrated in a small group of US names.

Europe is the exception: growth remains subdued, fiscal stimulus has arrived more slowly than expected, and governments remain reluctant to spend despite earlier commitments, leaving European equities lagging the US and Asia.

Fixed income markets

Bonds have also benefited from the improving backdrop, recovering as energy prices and inflation expectations ease. Higher-yielding credit continues to outperform, with spreads contained and investors comfortable taking measured risk for income. Convertible bonds have been among the strongest performers given their equity sensitivity, though this also makes them more volatile than traditional bonds. Within portfolios, high-yield credit still offers an attractive balance of income and risk.

Interest rates and monetary policy

Despite the improved inflation outlook, central banks remain cautious. Recent Fed communication suggests no imminent pivot. Rate expectations have actually moved modestly higher in the US recently, supporting the dollar and weighing on assets that had benefited from expected rate cuts. Even so, the overall direction for inflation looks more favourable than earlier in the year, which should give policymakers more room to cut rates over the medium term.

Technology, AI and market concentration

AI remains a dominant investment theme. Semiconductor, data centre and AI infrastructure names, including Micron and other tech leaders, continue to report strong earnings on the back of record investment. The largest tech companies are expected to spend close to $1 trillion annually on AI infrastructure (data centres, chips, power generation, cooling and logistics), supporting not just tech earnings but broader economic growth. While concentration risk and elevated valuations in some areas remain a concern, the underlying earnings growth has not weakened.

Portfolio positioning and risk considerations

Pockets of speculative behaviour are emerging, notably in South Korea, where retail use of leverage and options has driven volatility well above US levels. Positioning has been adjusted accordingly, trimming exposure to the most stretched areas. Diversification remains key: AI and tech offer compelling growth prospects, but portfolios should also accommodate short-term volatility and corrections.

Outlook

The overall environment remains favourable. Easing geopolitical tensions, falling oil prices, and moderating inflation expectations are supporting both equities and bonds, and broadening market leadership beyond US tech, with Asia benefiting from exposure to semiconductors and AI infrastructure, is an encouraging sign. Risks remain around policy, concentration and global growth, but the fundamental backdrop looks stronger than it did just a few months ago, with lower inflation, resilient earnings and continued tech investment providing a supportive foundation for the second half of the year.

Fahad Hassan, CIO, Albemarle Street Partners