By Teeuwe Mevissen, senior macro strategist at Rabobank

Financial markets continue to navigate an increasingly complex macro landscape, defined by the interaction of geopolitical shocks, resurgent inflation pressures, and diverging central bank responses. The key theme remains the tension between resilient risk assets—particularly equities—and a more cautious signal emanating from fixed income markets. This divergence reflects a broader uncertainty about the persistence of inflation and the implications for monetary policy and economic growth.

Meanwhile Iranian and U.S. negotiators have concluded an initial round of high-level talks in Switzerland, with both sides reporting progress. They agreed on a roadmap aiming for a final peace deal within 60 days. Key outcomes include plans to establish a mechanism to de-escalate the conflict in Lebanon and to ensure safe shipping through the Strait of Hormuz. A joint statement confirmed that further technical negotiations will continue, with some delegations staying in Switzerland. A high-level committee will oversee the next phase of discussions. Although the talks were initially tense—partly due to a social media post by U.S. President Donald Trump threatening Iran—both sides ultimately described the discussions as constructive, noting advances on multiple fronts. But it remains to be seen to what extent Iran and the US are truly converging on the more thorny issues.  

Last week’s Federal Reserve meeting saw the dropping of the easing bias narrative. The Fed held the target range for the federal funds rate at 3.50–3.75%, citing solid economic activity and still-elevated inflation pressures. At the same time, updated projections suggest only a gradual decline in inflation towards the 2% target, with core PCE inflation expected to remain above target through 2026. Importantly, the Fed acknowledged that inflation remains influenced by supply-side shocks, particularly energy prices linked to the ongoing Middle East conflict. We expect two rate cuts in April and June next year. For more information you van find the post Fed comment from Philip Marey here.

In contrast, the European Central Bank has already shifted back into tightening mode, raising policy rates by 25 basis points earlier in June. The ECB explicitly cited the inflationary effects of the energy shock and revised its inflation projections upward, now expecting headline inflation to average 3.0% in 2026. At the same time, growth forecasts were revised down—highlighting the stagflationary trade-off facing policymakers.

The global macro backdrop continues to be dominated by developments in energy markets, which remain tightly linked to geopolitical tensions in the Middle East. The disruption to shipping routes in the Strait of Hormuz earlier this year triggered a sharp spike in oil prices and significant supply dislocations, with global inventories declining at an accelerated pace. Although recent negotiations between the US and Iran have raised hopes of a partial normalization in energy flows, the adjustment process is expected to be gradual. Even under a favourable scenario, it could take months for oil production and shipping to return to pre-conflict levels.

This matters because the energy shock is transmitting broadly across the economy. Higher fuel costs are feeding into transportation, food, and industrial prices, raising headline inflation and increasing the risk of second-round effects. At the same time still elevated prices are starting to weigh on demand, with global oil consumption now projected to decline in 2026. In essence, the global economy is facing a classic adverse supply shock—one that pushes inflation higher while dampening real growth.

Despite the challenging macro backdrop, equity markets have shown remarkable resilience. US equities in particular continue to trade close to record highs, supported by strong corporate earnings and a powerful structural narrative around artificial intelligence. Earnings growth has been robust, with companies demonstrating greater pricing power than expected and benefiting from continued investment in AI-related capital expenditure. However, this strength comes with important caveats. Valuations seem elevated, and the market appears to be pricing a relatively benign macro outcome despite clear downside risks. The combination of high inflation, elevated bond yields, and geopolitical uncertainty suggests that equity markets may be underestimating the potential for volatility.

Government bond yields have risen materially. Recently long-end yields in advanced economies reached levels not seen in nearly two decades. Today rates stay close to levels seen last Friday with the10-year euro swap only 1 bp lower but still slightly above 3%. This reflects a combination of factors: Rising inflation expectations due to energy prices, increased term premia amid geopolitical uncertainty and a reassessment of central bank reaction functions The bond market’s message is clear: inflation risks remain skewed to the upside, and policy rates are likely to stay restrictive for longer than previously anticipated. This creates a challenging environment for duration assets and increases the risk of tighter financial conditions feeding back into the real economy.

In currency markets, divergence in monetary policy paths is becoming increasingly relevant. With the ECB tightening and the Fed on hold, relative rate dynamics could provide some support for the euro in the near term. However, this is counterbalanced by weaker growth prospects in the Eurozone and a higher vulnerability to energy shocks.

More broadly, cross-asset dynamics continue to be shaped by the interplay between inflation and growth expectations. The current environment is characterized by: Equity markets pricing resilience, Bond markets pricing persistent inflation and commodities reflecting geopolitical risk. This divergence suggests that markets have yet to converge on a coherent macro narrative.

Looking ahead, one of the key question for markets remains whether the current equilibrium—strong equities alongside high yields—can be sustained. Much will depend on three factors:

Finally, news just came in that Keir Starmer has resigned as prime minister and leader of the labour party. What this will mean for the future political landscape in the UK remains to be seen but it surely illustrates the current and ongoing political instability in the UK.