(Source: Merlea Macro Matters)

Steady Growth, Tighter Boundaries

Looking across May and June, the global economy is expected to remain on a steady path, but with clearer limits than in earlier phases of the cycle. Growth is continuing, financial markets are functioning well, and policymakers are focused on managing pressures rather than responding to a crisis. The key feature of the period ahead is not acceleration or slowdown, but constraint—particularly from bond yields, fiscal capacity, and geopolitical uncertainty.

Bond yields are likely to remain elevated through early winter in the southern hemisphere. This reflects ongoing government borrowing needs, firm economic activity, and a general reluctance by central banks to ease policy too quickly. Higher yields are now an accepted part of the landscape rather than a temporary shock, and their influence will continue to shape behaviour across markets and economies. Investment decisions, valuations, and policy choices are increasingly filtered through the question of whether returns justify higher financing costs.

In the United States, economic momentum is expected to hold through June, supported by employment, public spending, and continued strength in selected sectors such as energy, defence, and advanced technology. However, higher borrowing costs are likely to weigh on housing, smaller businesses, and discretionary investment. Rather than signalling weakness, the outlook suggests a more selective expansion, with activity concentrating where capital is seen as strategically important or well protected against risk.

China’s outlook through May and June points to stability rather than stimulus. Growth is expected to remain moderate, with policymakers continuing to prioritise financial discipline, currency stability, and confidence in trade relationships. Bond yields are likely to stay relatively contained, giving authorities flexibility later in the year if conditions change. For now, China appears comfortable with steady growth that supports long‑term objectives rather than short‑term boosts.

Europe is likely to face a more cautious period over the next two months. Higher funding costs, rising public spending demands, and uneven confidence across countries suggest modest growth at best. Bond yields remain manageable but act as a constant restraint on fiscal ambition. As a result, economic policy is expected to focus on continuity and gradual adjustment rather than major new initiatives.

In emerging markets, the divergence seen earlier in the year is likely to continue. Countries with strong balance sheets, credible policy frameworks, and exposure to commodities are better positioned to manage higher global yields. Others may face ongoing pressure from capital outflows, currency weakness, or refinancing challenges. Outcomes will continue to vary widely, reinforcing the importance of country‑specific conditions.

Australia’s outlook over May and June is soft but stable. Economic growth is slowing as higher interest rates and bond yields continue to weigh on household spending, housing activity, and business confidence. Employment remains relatively firm, but momentum is easing as tighter financial conditions work through the economy.

For financial markets, May and June are likely to be shaped by a more disciplined environment. Equity markets can continue to perform, but investors are placing greater emphasis on earnings quality, cash flow, and balance‑sheet strength. Higher bond yields provide an alternative to risk assets, encouraging a more selective and measured approach rather than broad optimism. Overall, the outlook for May and June is one of continued growth within firmer boundaries.

The global economy is not losing momentum, but it is adjusting to a world where capital is more expensive, risks are more visible, and policy choices involve clearer trade‑offs. Success in this environment will depend less on chasing expansion and more on managing resilience, pricing risk appropriately, and operating within the new constraints that are now firmly in place.

Bonds – When 5% Becomes the Benchmark

Bond markets have moved into a materially different phase. As we head through May and into June, higher long‑term yields are no longer an outlier—they are becoming the reference point around which markets are adjusting. While short‑term interest rates remain largely unchanged, longer‑dated government bonds are now offering yields that would have seemed unlikely just a few years ago. This change is subtle in day‑to‑day headlines, but significant in its implications. Long‑term yields influence how capital is priced across the economy, from equities and property to infrastructure and private investment. The shift underway is reshaping valuations rather than disrupting markets outright.

A Clear Shift at the Long End

One of the most notable developments is the return of 5% yields on long‑term government bonds across major developed markets. The United States, the United Kingdom, and Australia have all seen 30‑year government bond yields trade at or above this level in recent weeks. This matters because the long end of the curve reflects investors’ views on inflation, fiscal discipline, and long‑term stability. Investors are no longer willing to accept very low returns for locking up capital for decades. Instead, they are demanding compensation for uncertainty around inflation, government borrowing, and future policy choices.

The result has been modest steepening of yield curves—not because short‑term rates are rising, but because long‑term rates are staying firm.

Australia in Focus

Australia’s bond market fits squarely within this global trend. The Australian 30‑year government bond yield, now around the mid‑5% range, is close to levels not seen for many years. Shorter‑dated yields, by contrast, have been more stable, reinforcing the view that the Reserve Bank of Australia is likely to remain on hold rather than tighten further in the near term.

This configuration suggests restraint rather than stress. Markets are not pricing a sharp slowdown, but they are taking a more realistic view of inflation persistence and fiscal limits. Higher long‑term yields also place natural discipline on borrowing and spending decisions across both the public and private sectors.

Impact on Credit Markets

Credit markets have so far handled this shift well, but the environment is becoming more selective.

Investment‑grade borrowers remain well supported. Balance sheets are generally strong; defaults are low and borrowing costs—while higher—are manageable for companies with steady cash flows. Higher government bond yields have lifted the base cost of borrowing, but spreads have remained contained, indicating confidence in credit quality.

Looking Ahead

Through May and June, bond yields are likely to remain firm but range‑bound. There is little indication of a return to the ultra‑low‑yield environment that defined much of the past decade. Instead, markets appear to be settling into a higher‑rate equilibrium in which capital is more deliberately priced, and risk is assessed more carefully.

For investors, this shift is not a warning sign—it is a reset. Bonds are once again providing meaningful income, and their role as a reference point for valuing other assets has returned.

A‑REITs: Adjusting to Higher

The Australian A‑REIT remains in a phase of consolidation rather than recovery. After a sharp rebound earlier in the year, momentum eased as bond yields remained elevated and expectations for near‑term interest‑rate relief faded. The sector is no longer repricing aggressively lower, but it is also struggling to build sustained upside without clearer support from rates.

Performance through April and early May reflected this balance. Prices recovered from March lows, but gains were uneven and often faded as bond yields pushed higher again. Investors continue to view A‑REITs as rate‑sensitive assets first and property vehicles second, keeping sentiment cautious.

Rates Remain the Anchor

Higher bond yields remain the dominant influence on A‑REIT valuations. Australian long‑dated yields have stayed near multi‑year highs, maintaining pressure on property capitalisation rates and limiting valuation re‑rating.

For May and June, the outlook for interest rates appears stable but restrictive. Markets expect the Reserve Bank of Australia to remain cautious, with inflation easing only gradually and global rates still elevated. This suggests financial conditions will stay tight, even without further rate hikes. For A‑REITs, that means valuation support is limited, but downside risks are more contained than earlier in the cycle.

Balance Sheets and Funding

Balance‑sheet strength continues to separate stronger operators from more vulnerable ones. Most large A‑REITs have manageable debt profiles, with staggered maturities and a high proportion of fixed‑rate funding. This has helped earnings remain relatively steady despite higher interest costs.

That said, refinancing remains more expensive and more selective. Lenders and investors are increasingly focused on leverage, asset quality, and tenant strength. Trusts with higher gearing or exposure to weaker property segments face tighter terms and less flexibility. Asset sales, joint ventures, and capital recycling remain common tools as management teams prioritise balance‑sheet resilience over expansion.

Sector Divergence Continues

May and June are likely to reinforce differences within the sector rather than deliver a broad‑based move.

Industrial and logistics A‑REITs remain the most resilient, supported by long leases, limited supply, and tenant demand linked to distribution and infrastructure. Retail A‑REITs show mixed performance, with neighbourhood and convenience‑based centres holding up better than discretionary retail assets. Office A‑REITs continue to lag, weighed down by weak tenant demand, incentives, and limited pricing power, particularly in CBD markets. Specialist sectors, including healthcare and selected alternatives, continue to attract interest due to defensive demand characteristics and relatively stable payout ratios.

Income Still Supports the Sector

Despite higher funding costs, income remains a key attraction. Distribution yields across the A‑REIT sector are relatively attractive compared with broader equities, even in a higher‑yield bond environment. However, investors are increasingly focused on sustainability rather than headline yield, favouring trusts with stable cash flow and modest payout ratios.

Looking through May and June, A‑REITs are likely to trade sideways with volatility, responding closely to movements in bond yields and interest‑rate expectations. The sector appears to be forming a base rather than staging a recovery.

Any sustained improvement will likely require either a clear peak—and eventual decline—in bond yields or stronger evidence that rental growth and operating performance can offset higher capital costs. Until then, returns are likely to come from income and selective positioning rather than broad price appreciation. In this environment, A‑REIT investing is less about timing a rebound and more about owning quality through a prolonged adjustment.

Australian Equities: Positioning for a Tighter World

The market remains supported by strong balance sheets, dominant incumbents, and ongoing demand for resources and income. At the same time, higher bond yields, sticky inflation, and global uncertainty are tightening the boundaries within which earnings growth and valuations can expand.

Rather than a clear bull or bear phase, the market is moving into a period of selective resilience. This aligns with the structural view that economic outcomes are increasingly shaped by energy, supply constraints, and geopolitics—factors that tend to favour real assets and pricing power over broad economic acceleration.

The Stagflation Risk in Australia

The risk facing Australia is not recession in the traditional sense, but a low‑growth, high‑cost environment. Inflation has eased from its peak but remains elevated, while higher interest rates are slowing household spending and construction activity. Wage growth and services inflation remain firm, limiting how quickly inflation can fall.

This creates the conditions for stagflation:

• Growth slows as borrowing costs remain high
• Inflation persists due to energy, rents, and supply constraints
• Policy flexibility is limited because easing too early risks reigniting inflation
• Markets are not fully pricing a stagflation outcome, but they are increasingly rewarding sectors that can absorb higher costs and maintain margins.

What This Means for the ASX

In this environment, Australian equities are likely to trade with less breadth and more concentration. Index performance may hold up, but leadership is expected to remain narrow, anchored in large, liquid names with pricing power, global revenue streams, and strong cash flow. Higher bond yields continue to cap valuation expansion, particularly for long‑duration growth stocks. As a result, earnings quality matters more than earnings growth, and balance‑sheet strength is becoming a competitive advantage.

More Resilient Sectors: Several sectors are better positioned under a stagflation‑aware framework

Resources and Energy:  Australia’s miners and energy producers remain structurally supported by global demand, supply constraints, and elevated replacement costs. These companies benefit from global pricing and act as partial inflation hedges, particularly in a world where energy security has returned as a strategic priority.

Banks: Australian banks remain resilient due to strong capital positions, oligopolistic market structure, and pricing power in loans and deposits. While credit growth may slow, margins are supported by higher rates, and bad debts remain contained for now.

Defensive Industrials and Infrastructure: Companies with regulated or contracted cash flows—such as infrastructure operators, essential services, and selected logistics assets—are better able to pass through costs and provide income stability.

Consumer Staples and Healthcare:  Defensive demand and pricing power provide relative insulation from economic slowing. These sectors tend to perform better when households trade down rather than disengage completely.

Outlook

For May and June, Australian equities are likely to remain resilient but uneven. The market is adjusting to a world where capital is more expensive, inflation is slower to fade, and global risks matter more to earnings sustainability.

Rather than broad upside, returns are likely to come from sector selection, income, and quality bias. In a stagflation‑aware environment, the goal is not maximum growth, but durable returns in a more constrained system.

The U.S. Economy: Resilient, but Under Pressure

The U.S. economy continues to grow, and corporate earnings remain strong. However, the environment has become more constrained. Elevated energy prices, a leadership transition at the Federal Reserve, and ongoing labour‑market restructuring linked to artificial intelligence are tightening the margin for error—both for policymakers and for equity markets.

Equities are still supported by earnings growth, but valuations are elevated and increasingly dependent on delivery rather than expectation.

Federal Reserve Transition: Stability, With Less Clarity

Federal Reserve Chair Jerome Powell’s term as chair concludes in mid‑May. While Powell is expected to remain on the Board of Governors for a period, the transition introduces uncertainty into Fed communication at a sensitive point in the cycle.

Policy remains on hold. Inflation has eased from peak levels, but recent energy‑driven pressures have reinforced the Fed’s cautious stance. For markets, the issue is not abrupt tightening or easing, but reduced visibility around the future path of policy. Through May and June, this argues for stability—though with heightened sensitivity to data and Fed messaging.

Gasoline Prices: A Quiet but Powerful Drag

Gasoline prices have risen sharply since late February and remain elevated heading into May, now well above $4 per gallon nationally. This rise functions like a tax on households, particularly lower‑ and middle‑income consumers. While unlikely to cause recession on its own, high fuel costs are slowing discretionary spending and weighing on sentiment. They also complicate the inflation outlook, making it more difficult for the Fed to justify near‑term rate cuts. The result is slower, more uneven growth rather than outright contraction.

Labour Market: AI Is Changing the Texture, Not Breaking It

Headline unemployment remains low, but beneath the surface the labour market is adjusting. In 2026 to date, tens of thousands of white‑collar and technology roles have been eliminated, with artificial intelligence increasingly cited as a driver.

So far, this has not resulted in broad labour‑market stress. Instead, it reflects cost discipline, the unwind of over‑hiring, and expectations of lower future labour intensity. Wage growth is cooling, which helps on inflation, but confidence in certain professional segments is being tested. This is a structural adjustment rather than a cyclical shock.

Equity Earnings Outlook: Still Strong

Despite macro headwinds, the earnings outlook remains constructive. Consensus forecasts expect S&P 500 earnings to grow approximately 12–15% in 2026, led by technology, communication services, industrials, and AI‑related investment.

Most major strategists expect mid‑single‑digit to low‑double‑digit equity returns over the next year, with gains driven almost entirely by earnings growth rather than valuation expansion.

Valuations: Supportive, but Unforgiving

The constraint on equities is valuation. The S&P 500 trades on a forward price‑to‑earnings multiple around 20–21x, above long‑run averages and with the equity risk premium relatively compressed. This pricing assumes that earnings growth materialises broadly as expected. With long‑term bond yields near 5%, equities no longer enjoy the valuation cushion of the post‑GFC era. Markets are less tolerant of disappointment—missed earnings matter more than missed stories.

What This Means for Investors:

• Earnings growth supports equity markets
• Valuations cap broad upside
• Leadership remains concentrated in high‑quality, high‑cash‑flow companies
• Volatility around data, energy prices, and Fed communication is likely

Bottom Line:

The U.S. economy is not rolling over—but it is slowing into a more constrained phase. Equity markets remain viable, but optimism now requires delivery. Growth exists, but the margin for error is thinner than it has been in years.

Europe: Stability Comes at the Cost of Growth

Europe could best be described as stable but constrained. The region has largely avoided recession, yet growth remains weak and uneven, with performance varying sharply between countries. Energy prices have come down from crisis peaks but remain structurally higher than in the United States and much of Asia, continuing to weigh on industry and household budgets. This cost disadvantage has not disappeared and remains a defining feature of Europe’s outlook.

Economic growth across the euro area is expected to hover around low single digits in 2026. Germany continues to struggle with weak industrial demand and high input costs, while France and southern European countries are doing slightly better thanks to domestic consumption and tourism. Inflation has eased materially but is still not fully back to central bank comfort zones, largely because services and wage‑linked costs remain firm. As a result, the European Central Bank is expected to move cautiously when it comes to interest‑rate cuts, keeping financial conditions relatively tight compared to past cycles.

European stock markets reflect these realities. Valuations remain lower than those in the U.S., but this discount exists for structural reasons rather than market pessimism alone. Earnings growth is modest, and leadership is narrow. Defensive sectors such as utilities, defence, infrastructure, and globally exposed consumer brands have been holding up best. Industrial and cyclical sectors remain under pressure as businesses delay investment. While European equities have stabilised and even edged higher in early 2026, most gains have been driven by select sectors rather than broad market momentum.

Governments across the region continue to lean on public spending to support activity, particularly in defence and energy transition projects. This provides a floor under economic activity but also raises long‑term fiscal questions. Europe is therefore managing through the current environment rather than positioning for a strong upswing.

The takeaway for Europe is clear. The region is not in crisis, but it lacks the energy flexibility, population growth, and corporate dynamism required for strong expansion. Investors should expect relatively modest returns driven more by income and stability than by earnings acceleration.

United Kingdom: Cheap Assets, Cautious Consumers

The United Kingdom’s economy is marked by resilience at the corporate level and continued pressure at the household level. Economic growth remains slow, with GDP expansion expected to sit near 1% for the year. Cost‑of‑living pressures remain high, particularly for housing, energy, and food, which continue to dampen consumer confidence. At the same time, tighter financial conditions have reduced borrowing and slowed credit growth across the economy.

Inflation has eased compared to recent peaks, giving the Bank of England room to consider gradual interest‑rate cuts later in the year. However, policymakers remain cautious due to elevated government borrowing costs and ongoing global uncertainty. UK bond yields remain relatively high, limiting how aggressively policy can be eased without unsettling markets.

UK equity markets tell a different story. The FTSE 100 has performed relatively well, supported by large global companies with overseas earnings, particularly in energy, banking, pharmaceuticals, and defence. These firms benefit from international exposure and strong cash flows, which helped the index outperform many peers despite weak domestic growth. Valuations remain attractive by global standards, with UK equities trading at a meaningful discount to U.S. and even European markets.

However, this strength masks weakness beneath the surface. Domestically focused companies and smaller firms continue to struggle with weak demand and high financing costs. While some investors see value opportunities in UK mid‑caps ahead of eventual rate cuts, confidence remains fragile.

Overall, the UK presents a mixed picture. It is stable, undervalued, and income‑rich, but lacks a clear growth engine. Investors are compensated through dividends and selective opportunities rather than broad earnings momentum.

Japan: Discipline Delivers Results

Japan stands out among wealthy economies in 2026 as a country that has moved forward carefully but steadily. Growth is not as fast as in other countries, but the economy is stable, prices are mostly under control, and company profits are improving. After many years shaped by falling prices and cautious behaviour, Japan is entering this period from a stronger position, not from weakness.

The current government has shown more willingness to use public spending to support the economy. Money is being directed toward household demand, defence, energy security, and key industries. This is not a big spending surge meant to spark short‑term growth. Instead, it is focused support aimed at making the economy more reliable over time. For Japan, which has usually been very careful with spending, this change is important. It shows growing confidence that the country can handle slightly higher prices and faster money growth without creating financial problems.

By mid‑2026, Japan’s economy is dealing with mixed conditions. Share prices have reached record levels, while higher global energy costs have pushed prices up at home. The long era of flat or falling prices is clearly over. Even when food and energy are excluded, prices are rising steadily. This has led the central bank to slowly move away from the ultra‑easy policies it kept in place for many years.

Financial markets have been strong. The Nikkei index climbed above 63,000 in early May 2026, helped by rising company profits and improved global sentiment. Large firms, including Sony, are forecasting record earnings, driven by strong sales in areas such as gaming and advanced computer chips. Long‑term foreign investors have also shown confidence. Berkshire Hathaway increased its ownership in several major Japanese trading companies and signalled it plans to hold these investments for many years.

The Japanese yen has been under pressure, weakening sharply against the US dollar. In response, authorities stepped into currency markets in late April and early May 2026 to support the yen. Interest rates, while still low, are expected to rise further over the year as prices continue to increase. Importantly, workers are finally seeing some relief.

Japan’s spring wage talks lifted pay 5.26% at 1,100 firms, slightly below last year but above 5% for a third year. SMEs saw 5.05%, also above 5% yet under Rengō’s 6% goal. Major manufacturers, including Toyota, agreed large hikes despite tariffs; attention now turns to smaller firms’ negotiations. Results missed targets aimed at narrowing wage gaps by company size.

Real wages, which adjust for inflation, rose for three straight months by March 2026 for the first time in several years, giving consumers more spending power. Government policy has also shifted. Prime Minister Sanae Takaichi, following a strong election win, has proposed measures to revive slow growth. These include reduced sales taxes on food and higher government spending. Growth in 2025 was only around 1%, and lifting household confidence is a clear priority.

Energy security remains a serious concern. Conflict in the Middle East has disrupted oil supplies, pushing petrol prices close to record highs before subsidies limited the impact on consumers. Japan is responding by diversifying shipping routes and deepening ties with resource‑rich partners. A new agreement with Australia aims to secure supplies of key minerals needed for modern manufacturing, reducing reliance on China. Challenges remain. Higher oil prices could force many companies to cut back operations if disruptions persist. Labour shortages are also a long‑term issue, but they are driving greater use of automation and robotics to keep productivity steady. Japan may not be growing quickly, but it is becoming more confident, more flexible, and better prepared for the years ahead.

China: Strong Output, Weak Confidence

China’s economy in 2026 continues to grow at a steady pace, though it is no longer expanding as rapidly as it once did. Official figures still show growth close to 5%, supported mainly by exports and government‑led investment. At the same time, the domestic picture is more subdued. Household spending remains soft, the property sector is still working through excesses from earlier years, and many people remain cautious with their finances. Overall, the economy is stable, but momentum is uneven.

The government’s focus remains on maintaining balance rather than pushing for faster growth at any cost. Support measures are targeted and deliberate, aimed at protecting jobs, backing priority industries, and keeping financial risks under control. Large, broad‑based stimulus has been avoided, reflecting concern about rising debt and the lessons learned from the property boom.

Clean energy made up over 10% of China’s economy in 2024, generating nearly $1.9 trillion (13.6 trillion yuan) in sales and investment, according to Carbon Brief and CREA. The sector now exceeds real estate sales and agriculture in economic contribution, placing green industries on par with those of major global economies.

China continues to benefit from its industrial scale and energy capacity, but confidence among consumers has yet to fully return.

This mixed environment is reflected in financial markets. After performing strongly in 2025, Chinese share markets have been more volatile in 2026. Prices have reacted to policy signals and changes in global conditions rather than following a clear upward trend. Companies linked to manufacturing, infrastructure, and technology have generally performed better than those dependent on consumer spending. While valuations remain relatively low, investors are selective, mindful of uncertainty around domestic demand.

By mid‑2026, strengths and weaknesses are clearly defined. High‑technology manufacturing is expanding rapidly, and a record trade surplus is supporting overall growth. These gains partially offset continued weakness in the property sector, where investment remains well below past levels. This ongoing adjustment reflects a deliberate shift away from construction‑led growth, even though it continues to weigh on local finances and related industries.

Exports remain a key support. Shipments rose sharply earlier in the year as overseas buyers increased inventories amid global uncertainty. Although trade with the United States has cooled, demand from other regions has kept factories active. At the same time, higher global energy and commodity prices have lifted costs for producers, limiting profit growth.

China continues to strike a careful balance in its stance on the war involving Iran. Publicly, Beijing calls for restraint, urging an immediate ceasefire and a return to negotiations. It presents itself as a stabilising force, emphasising respect for sovereignty and warning that further escalation risks wider regional instability.

Energy and economic security are key concerns. Disruptions to Gulf oil supplies and shipping through the Strait of Hormuz pose direct risks to China’s economy and global trade. Beijing has repeatedly urged that civilian shipping routes remain open to limit damage to supply chains.

Behind the scenes, China has remained diplomatically active. It reportedly helped encourage Iran to accept an April 2026 ceasefire and continues high‑level talks pushing for dialogue. However, Western governments question China’s neutrality, citing reports of limited strategic support for Iran and Beijing’s use of its UN Security Council veto to block measures protecting shipping.

The conflict will be a central issue during President Trump’s visit to Beijing, with tensions expected over China’s Iran ties and U.S. sanctions.

Looking ahead, China’s path is clear. The economy is settling into a slower, more controlled growth model anchored in advanced manufacturing, exports, and state‑guided investment. Property and household consumption will remain constraints rather than engines of growth. Barring an external shock, China is unlikely to face a sharp downturn, but equally unlikely to re‑accelerate meaningfully. For 2026, the outcome is a large, stable economy growing steadily below its historical pace, with policy firmly focused on control, resilience, and long‑term adjustment rather than speed.

Emerging Markets: Opportunity, But Not Everywhere

The ongoing conflict in Iran has evolved far beyond a regional standoff, triggering a massive economic reshuffle across the world’s emerging markets. At the heart of this disruption is the Strait of Hormuz. For developing nations, the war has created a sharp divide, separating those who can capitalize on the chaos from those struggling to keep the lights on.

A clear group of “winners” has emerged, led by resource-rich nations like Brazil, Colombia, and Kazakhstan. Because these countries are geographically distant from the combat zone, they have become the world’s preferred “safe-haven” energy suppliers. Their currencies have strengthened significantly as global investors pivot away from Middle Eastern risk, turning these markets into unexpected pillars of stability. Similarly, the crisis has fueled a boom for strategic logistics hubs in South Korea and China, where the demand for specialised ships to bypass traditional trade routes has reached record highs.

Conversely, the “losers” in this scenario are those caught in the “geography trap.” Major importers like India and Pakistan are facing a dual crisis: they are paying record prices for fuel while simultaneously dealing with a “fertilizer shock” that threatens their agricultural sectors. Even wealthy Gulf states like Qatar have seen their trade balances dip into the red for the first time in years, as the inability to safely move tankers through the Strait cripples their export capacity.

Governments are not standing idly by; they are deploying an aggressive “survival playbook.” In many capitals, this has meant a return to massive fuel subsidies and emergency stabilisation funds to prevent domestic inflation from triggering social unrest. Central banks have also been forced to abandon plans for lower interest rates, instead hiking them to defend their local currencies against a surging U.S. dollar. In some of the most desperate cases, nations are even negotiating direct “safe passage” fees to move vital supplies through the war zone. Global leaders prepare for high-stakes diplomacy in Beijing this week, and the world is watching to see if a path toward de-escalation can be found. Until then, the emerging world remains in a state of tactical adaptation, where the ability to secure energy and protect the value of money has become the ultimate test of national resilience.

Commodities A Challenging Second Half for 2026

The global commodity market is currently navigating a “perfect storm” that is set to redefine the economic landscape for the second half of the year. At the center of this volatility is the energy sector, where the conflict in Iran has pushed oil well past previous expectations. With the Strait of Hormuz effectively blocked, global supply has tightened significantly, sending Brent crude prices soaring above $104 per barrel. This is no longer just a temporary spike; it is a fundamental shift that is driving up the cost of everything from daily commuting to international shipping.

As investors look for ways to protect their wealth from this uncertainty, they are turning to precious metals in record numbers. Gold has established itself as the ultimate safety net, with prices currently hovering near $4,720 per ounce. Experts anticipate this climb will continue through the end of the year as central banks look for alternatives to traditional currencies. Silver has followed a similar path, breaking through long-term barriers to reach $81 per ounce, reflecting a broad lack of confidence in global stability.

El Niño is likely to return in 2026, with over a 90% probability and a 25% chance of a strong event, according to NOAA. Strong El Niños typically reduce global crop yields with a 6–12 month lag, tightening supply through 2027–28. Risks are highest for cocoa, palm oil and cotton, while coffee supply is largely unaffected despite low stocks.

 While energy and gold dominate the headlines, a quieter but equally dangerous crisis is brewing in the food sector. The closure of key shipping routes has triggered a massive fertilizer shortage, sending prices up by more than 30%. This shortage is hitting just as a powerful El Niño weather pattern begins to take hold. This combination of expensive nutrients and extreme weather is expected to devastate harvests across Asia and Africa.

Looking toward the second half of the year, the impact will likely be felt most at the grocery store. As food prices are projected to rise by up to 16%, the dual pressure of high fuel costs and smaller harvests will put immense strain on household budgets worldwide.