Global Economy & Markets, Weekly Roundup 26/05/26
Brent crude oil prices have dropped below the $100 threshold on hopes of an Iran peace deal, yet the projected path remains well above pre-war estimates
Recent commentary from members of the Executive Board of the ECB, appears to open the door to a hike in policy interest rates (current Deposit Facility Rate: +2.00%) as soon as at the next meeting on June 11th. In the event, Mr. Villeroy highlighted the ECB’s readiness to act towards bringing down inflation.
More importantly, Mrs. Schnabel expressed her view that a rate hike in June is needed, judging that conditions have adversely moved far beyond the baseline scenario as per March ECB staff forecasts, which assumed a rapid normalization in prices of major international energy commodities (indicatively an average Brent crude price of $81/barrel was assumed for full year 2026).
Notably, according to Mrs. Schnabel, with the conflict in the Middle East having been far longer than projected and with high energy prices spilling into the broader economy, the ECB should raise rates in June, even if ongoing US-Iran peace talks result in a deal.
In the event, officials from involved parties have signaled diplomatic progress, suggesting that a framework of a “Memorandum of Understanding” (MoU) has been in a big part formed. Such a memorandum would be subject to finalization and approval from country leaderships and aims to serve as a basis for subsequent negotiations for a more comprehensive peace deal.
Reportedly, the MoU entails that both Iran and the US withdraw all barriers and interruptions of naval flows in the region, in the duration of the peace negotiations. Having said that, approval remains uncertain, with mixed messaging and developments on the ground (some US strikes on Iran) sustaining doubts.
In all, international prices of major energy commodities eased substantially on hopes that developments towards a gradual resolution of the acute supply disruptions in the Middle East are on the cards, albeit volatility remains. The price of Brent crude oil (futures contract for delivery in July 2026) eased by -5% in the past week, with a further -7% on Monday May 25th to $95 per barrel, a 1-month low (still at +33% versus end-February).
That development fed through to both some easing in GDP growth concerns and lower inflation expectations. The latter’s downward effect on government bond yields more than offset the former, with the German Bund’s 10-year yield down by -12 bps wow in the past week and further by -8 bps on May 25th, to 2.95%. Its US Treasury peer decreased by -2 bps in the past week (US markets were closed on May 25th due to holiday).
At the same time, risk appetite received fresh fuel. The S&P500 was up by +0.9% wow, while European bourses overperformed, with the Stoxx600 index up by +3.0% wow and further by +1.0% on Monday. Recall that many European countries are net importers of energy commodities. As a result, market estimates lean towards relatively more profound negative risks for these economies from the situation in the Middle-East and consequently for corporate profitability. Thus, in the event of a positive geopolitical outcome, European equity markets may close the performance gap versus their US peers (-9% since February 27th).
Recent commentary from members of the Executive Board of the ECB, appears to open the door to a hike in policy interest rates (current Deposit Facility Rate: +2.00%) as soon as at the next meeting on June 11th. In the event, Mr. Villeroy highlighted the ECB’s readiness to act towards bringing down inflation.
More importantly, Mrs. Schnabel expressed her view that a rate hike in June is needed, judging that conditions have adversely moved far beyond the baseline scenario as per March ECB staff forecasts, which assumed a rapid normalization in prices of major international energy commodities (indicatively an average Brent crude price of $81/barrel was assumed for full year 2026).
Notably, according to Mrs. Schnabel, with the conflict in the Middle East having been far longer than projected and with high energy prices spilling into the broader economy, the ECB should raise rates in June, even if ongoing US-Iran peace talks result in a deal.
In the event, officials from involved parties have signaled diplomatic progress, suggesting that a framework of a “Memorandum of Understanding” (MoU) has been in a big part formed. Such a memorandum would be subject to finalization and approval from country leaderships and aims to serve as a basis for subsequent negotiations for a more comprehensive peace deal.
Reportedly, the MoU entails that both Iran and the US withdraw all barriers and interruptions of naval flows in the region, in the duration of the peace negotiations. Having said that, approval remains uncertain, with mixed messaging and developments on the ground (some US strikes on Iran) sustaining doubts.
In all, international prices of major energy commodities eased substantially on hopes that developments towards a gradual resolution of the acute supply disruptions in the Middle East are on the cards, albeit volatility remains. The price of Brent crude oil (futures contract for delivery in July 2026) eased by -5% in the past week, with a further -7% on Monday May 25th to $95 per barrel, a 1-month low (still at +33% versus end-February).
That development fed through to both some easing in GDP growth concerns and lower inflation expectations. The latter’s downward effect on government bond yields more than offset the former, with the German Bund’s 10-year yield down by -12 bps wow in the past week and further by -8 bps on May 25th, to 2.95%. Its US Treasury peer decreased by -2 bps in the past week (US markets were closed on May 25th due to holiday).
At the same time, risk appetite received fresh fuel. The S&P500 was up by +0.9% wow, while European bourses overperformed, with the Stoxx600 index up by +3.0% wow and further by +1.0% on Monday. Recall that many European countries are net importers of energy commodities. As a result, market estimates lean towards relatively more profound negative risks for these economies from the situation in the Middle-East and consequently for corporate profitability. Thus, in the event of a positive geopolitical outcome, European equity markets may close the performance gap versus their US peers (-9% since February 27th).