May 2026

Market Overview

Middle East developments again dominated investor attention in May. Mounting optimism over a potential US–Iran agreement eased fears of a prolonged conflict — and, with them, the stagflation concerns that had weighed on sentiment. Brent crude fell 19.3% over the month, its steepest monthly decline since March 2020, as the prospect of de-escalation unwound much of the war-risk premium that had accumulated since February.

Risk assets rallied in response. The S&P 500 rose 5.3% to a record high, with semiconductors leading on renewed AI enthusiasm: the Philadelphia Semiconductor Index (SOX) gained 22.2% in May, extending its year-to-date advance to 81.5%. The move was more pronounced still in South Korea, where the KOSPI surged 28.5% on the month, lifting its year-to-date gain to 102.4%. (1)

Sentiment turned more cautious in mid-May, as sovereign bond yields climbed to multi-year highs amid renewed concerns over persistent inflation and uncertainty surrounding the new Fed Chair’s policy stance. With real yields rising and inflation-hedging demand fading, gold fell 1.5% — its third consecutive monthly decline.

The Yield Spike

Since the onset of the US–Iran conflict in February, higher fuel prices have pushed up inflation expectations and government bond yields. The move accelerated sharply in mid-May, with several benchmark yields reaching their highest levels in years:

The composition of the move, however, points to a more nuanced driver. Between end-April and midMay, the roughly 30bp rise in nominal yields was matched by a roughly 27bp rise in real yields leaving breakeven inflation, and therefore long-term inflation expectations, essentially unchanged. This suggests the sell-off was driven less by oil-linked inflation than by concerns over the scale of the US fiscal deficit and uncertainty over the policy direction of Fed Chair Warsh.

Two technical signals warrant close attention: the pace of the yield increase (Chart 1) and unusually wide dispersion at the index level (Chart 2). A recent CBOE report highlights elevated single-stock dispersion beneath a relatively calm index surface; historically, an extreme gap between the VIX and its equal-weight counterpart (VIXEQ) has tended to precede short-term equity corrections.

Chart 1: Real yield vs. S&P 500 (3)

Chart 2: Divergence between stock vs. index vol (4)

Positioning

Against this backdrop, we maintain a defensive tilt while staying alert to tactical opportunities:
– Cautious on US mega-cap equities and long-duration credit, where stretched valuations and rate sensitivity leave little margin for error.
– Favour international equities, short-dated Treasury notes, and longer-tenor commodity contracts.
– Opportunistic on gold, looking to add on further weakness.

SOURCE:
1Data is obtained from Bloomberg, as of 29/5/20262
2Data is obtained from Bloomberg, as of 19/5/2026
3 Source: Bloomberg
4 Source: CBOE

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