Introduction
The two main political themes in recent updates remain, but appear to be nearing a conclusion.
We now know that we will have a new Prime Minister in 2026, and probably a new Chancellor. There has been no market panic so far, but Andy Burnham's spending plans will be closely monitored.
Markets have been buoyed by the prospect of continued peace between Iran and the US and Israel following the signing of the Islamabad Memorandum on 17th June. This dispute is far from over, and each week brings new twists and turns, but we do appear to be edging towards a more pasting peace.
UK
Since he became England's captain in 2018, Harry Kane has had five different Prime Ministers, and Andy Burnham looks set to become his sixth.
Sir Keir Starmer bowed to the relentless pressure from his own party to step down, announcing his departure once a new Party leader was found on Monday 22nd June. It is almost certain that he will not return to Downing Street in September once the parliamentary recess. It seems likely that the transition could happen sooner.
With Labour Party nominations due to open on 9th July and close on 16th July, Andy Burnham is the only candidate confirmed as certain to stand. Other names have been mentioned as considering a bid to force a public policy debate, but there is a very good chance Burnham will simply walk into Number 10 unopposed within a matter of days.
There is little doubt that he possesses better communication skills than Starmer. A quick and orderly transition will cause less political damage to the Labour Party than the Conservatives suffered with the awkward departures of Johnson and Truss. However, Burnham has not had to lay out any clear policies to date and that has caused some unrest. He is viewed by many as a more left wing politician than Starmer, and one who may not stick to Labour's election manifesto. His previous experience in Cabinet is often forgotten. He was part of Tony Blair and Gordon Brown's New Labour government, holding cabinet posts as Health Secretary, Culture Secretary, and Chief Secretary to the Treasury, and twice before ran unsuccessfully for Labour leader. Viewed as a staunch Blairite when in Cabinet, he was at the heart of the expansion of the Private Finance Initiative (PFI) which funded some significant NHS spending through a consortium of private sector banks and construction firms. PFI debt is viewed by many commentators as bad value for taxpayers, and this will undoubtedly be used against him, although it was created by John Major and continued by George Osbourne.
His speech on 29th June set out his 10 point plan, and was his most considered attempt yet to set out a vision for the UK. It prioritised politics more than economics, but he did confirm that he would stick to Labour's manifesto pledges and keep to Rachel Reeves fiscal rules. On the surface there was something for everyone in Burnham's speech. Regional devolution and shrinking the cost of central government, more houses, jobs for young people, nationalising key public services, and closing the door to rejoining the EU for now. All this without increasing income tax, National Insurance or VAT. Whilst the media noise has been about a partial relocation of government power to Manchester, many people are more concerned about how he intends to fund his policies.
It is widely understood that Burnham believes that the UK overtaxes work, but undertaxes wealth. This will put Capital Gain Tax in the spotlight again, and no doubt pensions and property will be the subject of the usual levels of pre-budget speculation. Rachel Reeves would be replaced under Burnham and Wes Streeting could be her successor. Streeting fell immediately behind Burnham's campaign rather than run his own bid, suggesting a deal may have been struck. He is regarded as politically on the right of the Labour Party, and can point to reducing NHS waiting lists as evidence of some short term success in office, albeit the long term results are yet to be proven.
Agreeing to abide by Chancellor Reeves fiscal rules and appointing a centrist Chancellor would go some way to appeasing the bond markets Burnham claims not to fear. UK equity markets have been relatively untroubled by the news so far. It was no huge surprise, and Starmer's decision to step down has avoided a protracted period of instability and uncertainty. Additionally, the US-Iran peace deal, as brittle as peace has been, has spread optimism throughout equity markets including the UK. Bond yields rose briefly when Burnham won the bi-election, but not to the extent that there was any clear correlation between Burnham and 'bond vigilantism' at this stage. Markets will continue to watch him.
The Bank of England's Monetary Policy Committee held the bank rate at 3.75% on 18th June in a 7–2 vote, with two members preferring an immediate rise to 4.00%. UK CPI held at 2.8% but services inflation rose to 3.7%. The Committee's next meeting is on 30th July, and it remains live for a possible hike.
United States
US equities finished the first half of 2026 on a positive note. The S&P 500 closed above 7,600 for the first time on 2nd June. The Nasdaq Composite and Dow also set fresh highs, as semiconductor and AI names continued to lead.
The major swings within each of the three major equity indices have been largely driven by the conflict in Iran and concerns about the long term viability of AI spending.
The month's big event was Space Exploration Technologies' (SpaceX) IPO on 12th June, the largest in stock market history. Priced at $135 a share, the offering raised around $75–86bn and closed its first day up almost 20%, valuing the company above $2 trillion and making Elon Musk the world's first trillionaire. The deal followed SpaceX's earlier acquisition of xAI, and much of the investment case rests on the build-out of AI infrastructure and compute, including new cloud-computing agreements with Anthropic and Google. Some analysts, including Cape Fear Advisors and Morningstar, have flagged the valuation as stretched, and lock-up expiries later in the year will be watched closely. Its debut is widely seen as a bellwether for further AI-linked listings. Anthropic and OpenAI announced their intention to float at some future date and they may be seen by analysts as better alternatives.
Kevin Warsh held his first meeting as Federal Reserve Chair on 16th–17th June. The Federal Open Market Committee voted 12–0 to hold the federal funds rate at 3.50%–3.75% for a fourth consecutive meeting, but the accompanying "dot plot" turned notably hawkish: the median 2026 year-end projection rose to 3.8% from 3.4% in March, with nine of eighteen participants now pencilling in at least one rate hike this year and seventeen seeing inflation risks skewed to the upside. Warsh shortened and simplified the post-meeting statement and stripped out language that had signalled an easing bias. Markets moved to price a possible hike as soon as October. The Committee cited elevated uncertainty tied to the Middle East conflict and pointed to energy-driven price pressures as a key reason inflation has proved stickier than expected.
The US and Iran took the most significant step yet toward ending their war. On 17th June, President Trump and Iranian President Masoud Pezeshkian signed the "Islamabad Memorandum" electronically at first, then physically by Trump at Versailles during the G7 summit. It extends the ceasefire for 60 days and provides for the reopening of the Strait of Hormuz and the removal of the US naval blockade.
The agreement leaves Iran's nuclear programme to further negotiation and does not fully resolve fighting in Lebanon. Israeli strikes and a fresh Iranian closure of the strait followed within days, underlining how fragile implementation remains. The G7 summit itself, hosted by President Macron in France on 15th–17th June, provided the backdrop for the signing. European leaders offered naval assets to help secure shipping through the strait. By month-end the US Navy's Joint Maritime Information Center reported a widened shipping route near Oman was operating, a sign of gradual, if contested, normalisation.
Europe
The European Central Bank delivered its first rate hike since 2023 at its 11th June meeting, raising all three key rates by 25 basis points. The deposit facility rate is now 2.25%. President Lagarde described the move as "robust across a range of scenarios," explicitly linking the decision to inflation pressure generated by the Middle East conflict. She stopped short of committing to further rate increases, though markets are pricing more than a 50% chance of another hike in September, according to LSEG data.
However, Eurozone Harmonised Index of Consumer Prices (HICP) inflation fell further than expected in June, according to figures released on 1st July. Overall inflation cooled to 2.8% for June, down from 3.2% in May. Whilst this will temper enthusiasm for further rate hikes for now, many commentators do not believe that the second round impact of the energy crisis, fertilizer shortage and recent heatwave, on food crops, have yet to filter through into the figures. As the energy crisis eases, economists remain braced for the medium term consequences on price inflation.
Eurozone business surveys pointed to a fragile but slowly improving picture. The flash Composite Purchasing Managers' Index rose to 49.5 in June from 48.5 in May. This is still below the 50 growth threshold for a third straight month. Services activity contracted at a slower pace and manufacturing growth eased to 51.4. Notably, most of the June survey responses were collected before the 17th June US-Iran signing, so the improvement does not yet capture the potential benefit of de-escalation.
With Eurozone economies vulnerable to global events, much will depend on sustainable peace in the Middle East, stable energy prices, and a more speedy recovery than economists predict in the food supply chain to help cool inflation.
Far East
The Bank of Japan raised its policy rate to 1.0% in mid-June, its highest level since 1995, delivered with a hawkish 7-1 committee split.
The Nikkei 225 absorbed the move well, extending its remarkable 2026 run: the index broke through 70,000 for the first time in its history in mid-June, a level last seen around the 1989 bubble peak in relative terms, before consolidating into month-end. The Nikkei and Topix posted gains for a third consecutive month. Support has come from AI- and semiconductor-related demand, a weaker yen aiding exporters, and confidence in Prime Minister Sanae Takaichi's growth-focused fiscal agenda, as well as easing oil prices as US-Iran talks progressed.
China's economy picked up in June, according to the China Beige Book, an independent survey of Chinese businesses. The report showed that factory activity accelerated and US exports picked up in June, although this may be a front loaded rush to get ahead of future tariff increases. On Taiwan and technology controls, Beijing has continued to hold its position: notably, SpaceX's underwriters barred Hong Kong and mainland Chinese investors from participating in its IPO on export-control and regulatory grounds, an illustration of how the broader technology rivalry continues to run alongside the diplomatic engagement seen since the Trump-Xi summit in May.
Emerging Markets
Emerging market performance in June continued to be dominated by North Asia's role in the AI supply chain. Taiwan and South Korea have both grown to overtake China as the largest single-country weights in the MSCI Emerging Markets Index, with Korea's KOSPI hitting a string of record highs on the back of Samsung and SK Hynix earnings tied to AI memory demand, and Taiwan supported by TSMC's dominance in advanced chip manufacturing. Together, Taiwan and Korea now account for over half the index by weight, a striking reversal from China's near 40% share as recently as 2021. In April, Taiwan was first to overtake China, with South Korea following suit at the turn of June.
The flip side is volatility due to an exposure to AI. June also saw swings due to sell offs and volatility in key stocks such as SK Hynix and Samsung.
India continued to lag broader emerging-market performance, weighed down by a weaker rupee, its position as a net energy importer, and investor concern that AI and automation are eroding its traditional low-cost labour advantage in IT services. The Reserve Bank of India has warned that it remains highly vulnerable Despite all this India's underlying economic growth remains among the fastest of any major emerging market economy.
Indonesia, whose troubles we have commented on before, held on to its emerging markets status for now. Global index provider MSCI decided in June to extend its review to November to assess the slate of measures rolled out by the government. This may help Indonesia but it also prolongs the uncertainty for investors.
Summary
June brought the clearest signal yet that the major central banks have shifted from a growth focussed, easing stance to active vigilance against energy-driven inflation. The ECB hiked for the first time since 2023. The Bank of Japan pushed rates to a three-decade high. In Kevin Warsh's first meeting as Chair the Fed held rates but signalled hikes are now more likely than cuts this year. The Bank of England also held rates but could increase rates in late July.
The signing of the Islamabad Memorandum between the US and Iran on 17th June marks a genuine, if incomplete, turning point. The reopening of the Strait of Hormuz and removal of the US naval blockade have begun to ease the acute phase of the energy shock, and equity markets have continued to look through geopolitical risk. But implementation of the Memorandum remains contested, with fresh flare-ups in Lebanon and a further, brief closure of the strait within days of the signing. As before, even a durable peace is likely to take months to fully unwind the damage done to global energy and shipping markets, and central banks look set to remain in a defensive, inflation-focused posture for some time yet.
And finally...
Did you know... the word "salary" is believed to have come from the Latin word "salarium," which was the allowance Roman soldiers received to buy salt, a highly valuable commodity at the time.
Sources:
https://www.bbc.co.uk/news/articles/clywzj2vk3zo
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https://en.wikipedia.org/wiki/Islamabad_Memorandum
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