Archax Weekly Market Update, May 05 2026

Markets continue to grind higher this week supported by renewed optimism around a potential US-Iran agreement, though underlying conditions remain fragile. US equities are holding near highs with the Nasdaq again leading on the back of AI-driven earnings momentum. At the same time oil remains elevated, with Brent still trading above $110 despite some easing, keeping the inflation narrative firmly intact.

This leaves markets in a familiar position: pricing a path toward de-escalation but not yet reflecting the full impact of prolonged disruption to global energy flows. While volatility has moderated relative to prior weeks, the backdrop remains headline driven. Developments around the Strait of Hormuz continue to dictate short-term direction, with any progress toward reopening supporting risk, and setbacks quickly feeding through to oil, rates, and equities.

Alongside this, the AI narrative continues to dominate equity markets. Productivity gains are increasingly being cited as a structural tailwind, though this is being offset in the near term by labour market adjustments, with large-scale layoffs announced across major technology firms. The result is a more mixed signal for policymakers: improving efficiency, but a softening employment backdrop.

In crypto, Bitcoin broke back above $80,000 for the first time since January, marking a key psychological level and extending its recovery from February lows. The move has been supported by improving institutional flows, including strong ETF demand, as well as broader risk sentiment stabilising.

Notably, this rally is occurring alongside persistently negative funding rates in derivatives markets, indicating that leveraged positioning remains skewed to the short side. This divergence between price action and positioning increases the potential for a squeeze higher should momentum continue. Ethereum has also moved higher, though to a lesser extent, broadly tracking the recovery in risk assets.

Political risk is beginning to show up more clearly in UK markets, particularly through FX options. While sterling has remained relatively stable spot-wise around $1.35, derivatives are signalling a more cautious tone. One-week EUR/GBP options are now the most expensive since November, with implied volatility at a one-month high reflecting hedging demand ahead of Thursday’s local elections. The skew suggests markets are more concerned about downside risks to the pound, particularly tied to domestic political uncertainty.

Recent price action has already shown sensitivity to this, with sterling weakening modestly during periods where pressure on Prime Minister Keir Starmer intensified and the elections are now being viewed as a near-term test of political stability. More broadly, this is feeding into a wider UK macro setup where rising gilt yields, renewed inflation concerns, and geopolitical risks are converging, leaving the pound vulnerable to further volatility depending on the election outcome.

Overall, the market continues to operate within a narrow band of outcomes. Optimism around a potential resolution in the Middle East is supporting risk assets, but elevated oil prices and ongoing geopolitical uncertainty continue to cap conviction. This is a market pricing gradual improvement rather than a definitive resolution. As a result, headline sensitivity is likely to persist with positioning, particularly in digital assets, creating the conditions for sharp moves in either direction.