June Market Update

The energy shock hardens into a policy problem

Looking back at May’s dataflow and what it may mean for portfolio positioning into the second half of 2026.

Introduction

May was the month the energy shock stopped looking temporary. The Strait of Hormuz disruption passed ten weeks, oil pushed to fresh wartime highs, and inflation reaccelerated across the major economies rather than fading. At the same time, the supports under markets did not disappear. The RBA signalled it has room to pause, US core inflation showed a tentative sign of cooling beneath a hot headline, and the primary capital markets reopened in a way that points to more activity ahead.

The result is a sharper version of last month’s tension. Growth is holding and the structural investment story remains intact, but the path runs through higher energy costs, more cautious central banks, and a US fiscal position that markets are now pricing as a risk rather than a refuge.

The question is no longer whether the energy shock fades, but whether policy can hold the line on inflation without breaking demand.

What moved the dial

Supportive signals

• The RBA delivered a third consecutive 25 basis point hike to 4.35%, but Governor Bullock signalled scope to pause, and the major banks moved to confirm rates on hold for the rest of 2026.
• US core PCE rose just 0.2% for the month, below the 0.3% consensus, even as headline PCE hit 3.8% year on year. With the Fed on hold, a softer underlying pulse is constructive for duration and rate-sensitive equities.
• China held benchmark lending rates unchanged for an eleventh consecutive month. Resilient Q1 growth reduced the urgency for stimulus, and policymakers are preserving firepower for when it is needed.
• The US-China tariff truce was extended through November 2026, keeping effective rates well below earlier peaks and lowering the odds of near-term re-escalation.
• The IPO market reopened at scale. SpaceX filed its S-1 targeting a $1.75 trillion valuation, with OpenAI also signalling a listing, pointing to a pickup in activity in the second half.

Watch-outs

• The Strait of Hormuz remains the world’s most consequential chokepoint. More than ten weeks in, cumulative supply losses have exceeded one billion barrels, with estimates of 10-12 million barrels per day shut in and Brent spot touching $144 at its peak.
• Australia’s inflation problem runs deeper than fuel. The RBA forecast headline inflation peaking at 4.8% in mid-2026 and underlying inflation above 3% until mid-2027, a material drag on household confidence.
• US inflation reaccelerated to a three-year high. April CPI lifted the annual rate to 3.8%, with gasoline up 28.4% year on year. Markets priced out Fed cuts through at least the end of 2027.
• Moody’s cut the US sovereign rating from Aaa to Aa1 on 16 May, its last AAA. The 30-year Treasury yield surged to its highest since 2007.
• The One Big Beautiful Bill Act passed the House. The CBO estimates it adds $3.8 trillion to the deficit over the decade to 2034, cementing the long end as a source of volatility rather than a refuge.
• Eurozone stagflation deepened. The ECB held at 2% with inflation at 3% and Q1 growth of 0.8%, and Deutsche Bank now expects the next move to be a hike in mid-2027 rather than a cut.

Macro overview

May’s data carried one clear message: the energy shock is now feeding directly into inflation, and inflation is reshaping policy. With an estimated 10-12 million barrels day shut in and Brent at a $144 peak, higher energy costs are flowing through in real time, with US CPI back at 3.8% and Australian inflation forecast to peak near 4.8%. The nuance is that the underlying pulse has not yet broadened: US core PCE softened to 0.2% for the month, China is choosing patience over stimulus, and the RBA has signalled it can pause, so policymakers retain some room to manoeuvre.

The more consequential development was in the US bond market. The Moody’s downgrade and the deficit impact of the One Big Beautiful Bill pushed long-end yields to multi-decade highs. That matters well beyond the US: when the world’s benchmark risk-free asset reprices for fiscal risk, it lifts the cost of capital everywhere and reduces the cushion that government bonds normally provide when equities fall.

Asset class outlooks

Equities: The set-up remains a contest between a real growth impulse and a higher discount-rate regime. The AI capex story is still doing the heavy lifting, and the reopening of primary markets, led by SpaceX and a likely OpenAI listing, signals confidence in that theme. The risk is on the valuation side: with long-end yields at multi-decade highs and cuts priced out, a quality bias and a clear line between structural demand and cheap-money valuation matter more than broad index exposure.

Fixed income: This is where May was most consequential. The Moody’s downgrade and the deficit math behind the One Big Beautiful Bill pushed the US 30-year to its highest yield since 2007. The long end is repricing for fiscal and inflation risk, not growth, so the shape of rates exposure matters as much as direction, and the traditional role of long bonds as a hedge is less reliable. Australia looks more settled, with the RBA signalling a pause and underlying inflation steadier than the headline.

Alternatives and real assets: A supply-led energy shock is the classic case for real assets. With Brent at triple-digit levels and inflation expectations elevated, inflation-linked exposures and real assets can provide ballast at a point when both equities and long bonds are more vulnerable.

FX: Currency markets are likely to stay driven by relative policy expectations and energy terms of trade. The US fiscal repricing cuts both ways for the dollar, while China’s steady growth remains an important influence on commodity-linked currencies, including the Australian dollar.

Implications for asset allocation and portfolio positioning

A constructive base case still does not imply a smooth ride. The energy shock now transmits through inflation and policy rather than sentiment, the US long end has become a source of risk rather than a refuge, and cash and flexibility remain a position in their own right. The job is to stay positioned for medium-term growth while keeping enough flexibility to respond if the inflation shock turns into a demand shock.

Practical implications:

• Keep a bias to structural growth exposures that do not depend on falling rates, with AI and energy infrastructure as central themes.
• Be cautious on broad, rate-sensitive equity exposure where the valuation is doing most of the work, particularly with long-end yields rising.
• Do not rely on long bonds as the only hedge. With the US curve repricing for fiscal risk, real assets and inflation-linked exposures earn their place.
• Treat liquidity as a first-order variable. Higher oil prices pull money out of the system, so continued support from China and the US Treasury matters for market functioning.
• Expect dispersion. In a world of supply shocks and uneven inflation, quality and pricing power matter more than index-level positioning.

Scenarios and probabilities

Scenario probabilities reflect our current assessment and are reviewed as new data emerges.

Base case — 72%

The closure of the Strait of Hormuz has pushed energy prices higher and disrupted the supply of essential goods such as fertiliser and sulphuric acid. If the blockade continues, these pressures are likely to intensify, and we have responded by tilting portfolios toward companies with strong structural growth that are less exposed to supply disruptions. Importantly, we entered this period from a position of strength: healthy corporate profits, supportive government spending, relatively easy borrowing conditions, and ample oil supply before the conflict.

Inflation had been slowing before the conflict, but rising energy prices have pushed expectations higher. In the short term that is a headwind for growth and returns; if it proves persistent, the greater risk is a slowdown in consumer spending and demand destruction. Central banks face a difficult balance, and until the US Federal Reserve and the RBA signal a greater focus on supporting growth over controlling inflation, we remain cautious on the rate outlook. Liquidity also matters, as higher oil prices pull money out of the system, though continued support from China and the US Treasury underpins activity.

Looking further ahead, structural growth themes remain intact. Investment in artificial intelligence, domestic manufacturing and energy infrastructure should broaden profit growth over the medium term. Resilient earnings, government spending support and the lagged effects of last year’s rate cuts provide a reasonable foundation for markets, though within a more volatile environment than recent years.

Bear case — 14%

The key risk is a meaningful pullback in consumer spending, particularly in the United States, the primary engine of global growth. If households tighten their belts while valuations are elevated, and inflation persists or Fed support fades, both profit margins and market prices could fall together. The longer the Iran conflict continues, the more likely this becomes. A sustained oil spike of 50 to 100% above recent levels would feed straight into prices and squeeze demand, producing the kind of stagflation that is historically one of the hardest environments for both shares and bonds, with central banks unable to cut and high government debt limiting fiscal support.

China adds a further layer of risk. If its property sector weakens and stimulus fails to restore confidence, Chinese growth could slow materially, directly affecting Australian national income and earnings given our reliance on Chinese demand. In this scenario a more defensive approach would be warranted: higher cash holdings, reduced share market exposure, and a tilt toward stable sectors such as healthcare, consumer staples and utilities.

Bull case — 14%

In the most positive scenario the Iran conflict ends relatively quickly and a recovery follows. Falling energy prices, easing supply pressures and improving diplomatic relations support stronger growth while keeping inflation in check. If trade disputes also resolve, profits could grow strongly as input costs fall and consumer spending holds, with continued adoption of AI and other productivity-enhancing technologies lifting output across industries without the widespread job losses many fear.

Government spending would add further support, and strong household and business balance sheets leave both well positioned to respond. For Australia, the rate cuts that began in 2025 and relatively low public debt give policymakers room to act. If interest rates stay below inflation, conditions remain supportive for asset prices, and a growth-oriented portfolio with low cash and more exposure to economically sensitive sectors such as industrials, materials and financials would be well placed.

Closing perspective

May moved the story on. The energy shock is no longer a risk on the horizon, it is in the inflation data and is shaping what central banks can do. The supports are still there: US core inflation has not broken higher, China is holding policy in reserve, the RBA can pause, and the reopening of primary markets points to confidence in the structural growth themes. But the repricing of US government debt is a genuine change, and it lowers the protection investors have leaned on for years. Staying constructive with discipline, and being clear-eyed about which hedges still work, remains the most consistent approach with the current balance of risks.

This publication is prepared by Akambo Pty Ltd (ABN 16 123 078 900) AFSL 322056.

The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.

Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo’s Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.

Past performance is not a reliable guide to future returns.