July monthly market update - Reflections on June 2026

What does the Iran deal mean for global markets?

Global markets rallied after the US and Iran agreed a framework deal aimed at bringing the war to an end. Relief over the tentative agreement sent US and European stock indices to record highs, while oil prices fell sharply. The FTSE 100 also climbed to a two-month peak as investors welcomed the breakthrough in the Middle East conflict.

Government bonds rallied too, as investors scaled back expectations for how quickly major central banks would raise interest rates. This signalled growing confidence that a sustained period of higher inflation could be avoided.

In the weeks that followed, oil prices dropped sharply, nearing pre-war levels, as the fragile truce and ongoing diplomatic efforts raised hopes of a lasting resolution to the conflict. Commodity strategists warned, however, that prices may have reflected excessive optimism, with markets underestimating the scale of persistent supply-side challenges.

Those warnings soon proved justified. Markets came under renewed pressure at the beginning of July after the US resumed strikes on Iran and signs emerged that peace talks had stalled. Oil prices also climbed as renewed tensions raised concerns about disruption to energy supplies.

The episode underlines that much of the earlier market relief reflected the reopening of the Strait of Hormuz, with significant geopolitical risks still remaining. Analysts argue that shipping traffic through the strait is unlikely to return quickly to pre-war levels. Although activity has picked up since the framework agreement, Tehran is expected to continue using the critical chokepoint as a source of leverage. Clearing mines and restoring normal shipping flows could take several months.

Even so, with oil prices well below their peak, inflation is still expected to ease more quickly than markets feared just a few weeks ago. This could leave central banks facing difficult decisions over how quickly to adjust interest rates if price pressures continue to moderate.

Is Europe’s recovery back on track?

Eurozone economic sentiment rose more than expected in June as selling-price expectations fell and oil prices eased during the ceasefire negotiations. The European Commission’s economic sentiment index rose to 95.0 in June, up from 93.7 in May, comfortably ahead of expectations.

The improvement was driven by stronger confidence across retail, industry, services and consumers. Household inflation expectations also cooled as tensions in the Middle East eased. Construction remained the weakest sector, while employment expectations continued to soften.

The Iran war sent oil and natural gas prices sharply higher after the Strait of Hormuz closed. Economic sentiment had been improving for much of last year before deteriorating as the conflict intensified. As a net importer of oil and gas, the eurozone remains particularly exposed to energy shocks.

According to a separate survey by S&P Global, eurozone manufacturing output completed its strongest quarter since early 2022 in June as easing costs during the US-Iran ceasefire negotiations brought relief to factories.

The European Central Bank (ECB) raised interest rates in June for the first time since 2023 after war-related energy costs pushed inflation to 3.2% in May, well above its 2% target. Inflation then fell more than expected to 2.8% in June, raising fresh questions about whether further interest rate rises will be needed. Markets currently expect another ECB rate increase in September.

Why are emerging markets doing so well?

Despite the Iran conflict and higher energy prices, emerging markets have continued to perform strongly. Last year was already a standout, with emerging market equities delivering their best returns since 2017 and outperforming developed markets by around 10%. That momentum has continued into 2026, supported by resilient growth, strong capital inflows and changing global monetary and geopolitical conditions. The MSCI Emerging Markets Index has returned more than 25% in the first half of the year, comfortably outperforming major US indices such as the S&P 500.

Emerging market equities have benefited from several supportive factors, including a weaker US dollar, continued enthusiasm for AI, calmer US-China relations and different economic cycles to Western economies. While China has dominated emerging markets in recent years, South Korea and Taiwan have become increasingly important drivers of returns through their technology sectors.

Emerging markets often follow different economic and interest-rate cycles to developed economies because they are driven more by domestic consumption and infrastructure investment. This means they can sometimes prove more resilient when developed markets are under pressure, offering useful diversification for investors.

They also tend to perform well when the US dollar is stable or weakening, reducing the burden of servicing dollar-denominated debt while making emerging market assets more attractive to international investors. Firmer commodity prices can also support many emerging economies that are major exporters.

The AI boom has also benefited emerging markets significantly. China’s DeepSeek model has boosted confidence in the country’s AI capabilities, while South Korea and Taiwan have become central to the AI hardware supply chain by producing the advanced memory chips that power the technology.

That said, risks remain. Stretched valuations across parts of the technology sector leave markets vulnerable if enthusiasm for AI fades, while any slowdown in AI infrastructure spending would hit technology-heavy markets such as South Korea and Taiwan. Higher US inflation could also strengthen the dollar by prompting further interest rate rises, putting pressure on emerging market currencies.

Looking ahead

Investors are continue to watch developments in the Middle East closely. While the framework agreement helped calm markets, renewed military action has highlighted how fragile the situation remains. Any further disruption to shipping through the Strait of Hormuz could push energy prices higher again and complicate the outlook for inflation and interest rates.

Attention is likely to also remain focused on inflation, central bank policy and corporate earnings. Markets have proved remarkably resilient despite heightened geopolitical uncertainty, supported by strong earnings and continued investment in artificial intelligence. Whether that resilience continues will depend on the balance between easing inflation, economic growth and any further escalation in geopolitical tensions.