Welcome to the Questa July marketing commentary. June ended with markets in a more confident mood than the political and economic backdrop might suggest.

The UK entered another leadership transition, central banks became more alert to inflation, and the Middle East remained unsettled. Yet major equity markets largely held their nerve, helped by hopes that lower energy disruption and continuing investment in artificial intelligence could support growth.

For investors, the difficulty is separating genuine improvements from temporary relief. Political transitions can be orderly without being economically neutral, while a ceasefire can reduce immediate risk without repairing supply chains or removing inflation pressure overnight.

What to expect

This July market commentary looks at the developments shaping diversified investment portfolios as June moved into July 2026.

It covers political change in the UK, central bank policy, energy and geopolitical risk, major equity markets, Japan, China and emerging economies. It focuses on what these developments may mean for investment risk, valuations and portfolio positioning.

It isn’t a forecast of short-term market movements or a recommendation to buy or sell a particular investment. Nor is it a substitute for reviewing whether a portfolio remains suitable for an investor’s objectives, timescale and capacity for loss.

Market commentary is also different from economic forecasting. Economic data can explain part of the environment, but asset prices reflect expectations about what happens next. Markets can therefore rise during difficult conditions if investors believe the outlook is becoming less bad.

The main themes behind markets in June

Two political themes dominated the month.

The first was the UK leadership transition following Sir Keir Starmer’s decision to resign on 22 June. At the time, Andy Burnham was viewed as the clear frontrunner to succeed him, with investors watching closely for signs that a new administration might alter tax, spending or borrowing plans. (Investing.com)

The second was the changing position in the Middle East. Hopes that disruption to energy supplies might ease helped sentiment, although the wider conflict remained unresolved and the path towards a durable settlement was far from certain.

These events mattered because energy prices, government borrowing and inflation expectations increasingly connect political developments with interest-rate decisions.

The broad picture in the supplied July market notes is therefore one of cautious optimism rather than a return to normal conditions.

UK markets face a political transition without immediate panic

The announcement of Sir Keir Starmer’s departure created uncertainty, but not the kind of disorderly market reaction that accompanied some previous changes of prime minister.

That distinction matters. Investors can usually tolerate political change when the timetable is clear and the incoming administration appears likely to respect institutional and fiscal constraints. What markets tend to dislike is uncertainty over who controls policy, how spending will be funded and whether government borrowing will rise unexpectedly.

Andy Burnham’s political appeal rests partly on his communication style and regional profile. The harder commercial question is how any future policy programme would be financed.

Commitments involving housebuilding, public services, employment support, regional devolution or nationalisation may be politically popular, but the market response depends on the numbers behind them. Investors will be watching spending plans, tax policy and adherence to the existing fiscal framework more closely than speeches about political direction.

A particular area of attention is likely to be the balance between taxes on employment and taxes on wealth. That may bring capital gains, pensions and property back into pre-Budget discussion, even where no firm proposals have been announced.

Will a new Prime Minister unsettle UK investments?

Not necessarily. Markets tend to react less to a change of personality than to an unexpected change in fiscal policy. An orderly transition, continued support for the fiscal rules and a credible Chancellor would help limit disruption. The risk would increase if new spending commitments appeared without clear funding, particularly if gilt investors believed borrowing would rise materially. For diversified investors, the policy detail matters more than the political theatre.

UK interest rates remain finely balanced

The Bank of England held Bank Rate at 3.75% in June by a vote of seven to two. The two dissenting members preferred an immediate increase to 4%. CPI inflation had fallen to 2.8%, but the Bank remained concerned that energy costs could create further price and wage pressure. (Bank of England)

That vote tells us more than the unchanged headline rate.

A sizeable majority still preferred to wait, but the presence of votes for an increase shows that the direction of travel is no longer clearly towards lower rates. The Monetary Policy Committee’s next decision is due on 30 July. (Bank of England)

For households and businesses, this means borrowing costs may remain higher for longer. For investors, it can alter the relative appeal of cash, bonds and equities.

Higher rates can support returns on deposits and newly issued bonds, but they also raise financing costs and reduce the present value investors place on distant company profits. Highly valued growth businesses can be particularly sensitive where much of the investment case depends on earnings several years into the future.

Does falling inflation mean UK interest rates will now come down?

The answer is less straightforward than the headline inflation figure suggests. Inflation has eased, but the Bank is concerned about how earlier energy disruption may feed into wages, services and business pricing. A single lower reading doesn’t settle that question. Rates may eventually fall, but the timing depends on whether inflationary pressure is genuinely fading rather than merely moving between different parts of the economy.

United States: strong markets, expensive expectations

US equities finished the first half of 2026 strongly, with technology, semiconductor and AI-related businesses continuing to lead.

The most striking event was SpaceX’s public listing. The company priced its shares at $135 and raised approximately $75 billion in the largest initial public offering on record. Its valuation approached $2 trillion as trading began. (Investing.com)

The listing matters beyond one company.

Large flotations can reveal how much risk investors are prepared to absorb. A successful debut can encourage other privately owned businesses to list, particularly in sectors such as AI, cloud infrastructure and advanced technology.

It can also expose how dependent sentiment has become on a small number of popular themes.

SpaceX combined space infrastructure, communications and AI-related expectations in one unusually large transaction. That made the listing a test of both investor enthusiasm and valuation discipline. Questions about the price weren’t necessarily questions about the quality of the business. They were questions about how much future success had already been included in the share price.

That is an important distinction for investors. A strong company can still be a poor investment if too much growth is assumed at the point of purchase.

Is the AI investment theme becoming too expensive?

Parts of it may be. Demand for computing capacity, advanced chips and data infrastructure is real, but market prices can run ahead of achievable profits. Investors need to distinguish businesses selling essential infrastructure from those whose valuations depend on optimistic assumptions about future adoption. The risk isn’t simply that AI fails. It is that it succeeds more slowly, costs more to deliver or produces lower margins than current prices imply.

The Federal Reserve has become more cautious on inflation

The US Federal Reserve held its target range at 3.5% to 3.75% at its June meeting, with the decision supported unanimously. Its accompanying language remained focused on elevated uncertainty and inflation pressure, including the effect of higher energy costs. (Federal Reserve)

This matters because financial markets had previously spent a long period anticipating easier monetary policy.

A central bank moving from an easing bias to a more defensive stance can affect equity valuations, bond yields and currencies even when it doesn’t raise rates immediately. Markets price the expected path of rates, not just the current level.

The practical consequence is that investors may need to allow for a wider range of outcomes. Rate cuts are no longer the only plausible next step. Rates could remain unchanged for longer, or rise if energy and wage pressures persist.

Middle East developments provided relief, not resolution

The prospect of reduced tension between the US and Iran gave markets some relief during June.

Any reopening of energy transport routes or reduction in military disruption can affect oil prices, shipping costs and inflation expectations quickly. That helps explain why equity markets can respond positively before the political dispute itself has been resolved.

However, the economic damage caused by conflict doesn’t disappear when negotiations begin.

Shipping schedules, insurance costs, depleted inventories and supply-chain decisions take time to normalise. Businesses may also retain contingency arrangements until they are confident that transport routes will remain open.

The investment implication is that the initial fall in risk can support markets while the inflationary after-effects continue to influence central banks for several months.

Why can markets rise when a conflict is still unresolved?

Markets respond to changes in expectations rather than waiting for complete certainty. If investors believe the chance of a severe outcome has fallen, asset prices can rise even though substantial risks remain. That doesn’t mean the conflict has ceased to matter. It means the market is assigning a lower probability to the most damaging scenario. A renewed escalation can therefore reverse part of the move quickly.

Europe: the ECB responds to energy-driven inflation

The European Central Bank raised its three key interest rates by 0.25 percentage points in June. The deposit rate increased to 2.25%, with the ECB linking its decision directly to inflation pressure created by the Middle East conflict. (European Central Bank)

By its July meeting, the ECB had left those rates unchanged, confirming that it wasn’t committing to a predetermined path. (European Central Bank)

This is a useful illustration of the challenge facing central banks.

Higher rates cannot produce oil, reopen shipping lanes or improve crop yields. They can, however, try to stop an external price shock from becoming embedded in wages, services and general inflation expectations.

Eurozone business surveys also pointed to a fragile economic environment. Manufacturing showed some resilience, while the wider economy remained close to stagnation.

That combination creates an awkward trade-off. The ECB is responding to inflation at a time when activity is already weak. Raising rates too little risks persistent inflation. Raising them too far risks adding to the slowdown.

Japan: higher rates meet a strong equity market

The Bank of Japan increased its policy rate to 1% in June, its highest level for several decades. It is expected to retain a relatively firm stance while watching inflation, the yen and energy costs. (Reuters)

Japanese equities nevertheless continued their strong 2026 performance.

This may look contradictory, but interest rates are only one influence on share prices. Japanese exporters can benefit from a weaker yen, while semiconductor and AI-related demand has supported parts of the market. Investors have also responded to expectations of business reform, investment and fiscal support.

The risk is that these positive factors are already reflected in valuations.

A weak currency can improve overseas earnings when converted into yen, but it also raises import costs. Japan remains dependent on imported energy, so a sustained increase in oil or gas prices can squeeze households and domestic businesses.

China shows signs of improvement, but familiar risks remain

Business surveys indicated some improvement in Chinese factory activity and exports during June.

Part of that strength may have represented orders being brought forward ahead of possible future tariffs. Front-loading can make current data look stronger while reducing demand later, so the figures need to be interpreted carefully.

The strategic rivalry around technology also remains important.

Restrictions involving advanced technology, investor access and export controls illustrate how commercial ties can improve in one area while becoming more restricted in another. For global businesses, this creates operational complexity rather than a clean separation between cooperation and conflict.

Investors in China therefore face several overlapping questions: the durability of domestic demand, the outlook for exports, policy support and the treatment of strategically important industries.

Emerging markets are increasingly concentrated around AI

One of the less obvious changes within emerging-market investing is the growing influence of Taiwan and South Korea.

Their importance reflects the central role of businesses such as TSMC, Samsung and SK Hynix in advanced semiconductor manufacturing and memory technology. Strong demand for AI infrastructure has therefore changed not only individual share prices but the composition and behaviour of emerging-market indices.

This creates opportunity, but it also creates concentration risk.

An investor may believe they hold a broad emerging-market fund while a significant part of its performance is being driven by a relatively narrow group of North Asian technology businesses.

That isn’t necessarily a reason to avoid the exposure. It is a reason to understand what the fund now owns and what risks are doing the work.

Practitioner point: the fund label may hide the real portfolio

Country or regional labels can become misleading as index weights change. An “emerging markets” holding may behave more like a semiconductor allocation when Taiwan and South Korea dominate performance. Investors reviewing diversification need to look through to sector and company exposure, rather than assuming the name of the fund accurately describes its economic risks.

India and Indonesia face different pressures

India continued to lag parts of the emerging-market universe despite relatively strong underlying economic growth.

Its challenges include currency weakness, reliance on imported energy and concern that AI could disrupt the traditional cost advantage of its IT services sector. These pressures don’t remove the longer-term growth case, but they can affect company profits and international investor returns in the meantime.

Indonesia faced a different issue: uncertainty over its treatment by index providers.

A possible change in market classification can matter because index-tracking funds may be required to buy or sell assets regardless of their view of individual companies. A delayed decision can prevent an immediate adjustment, but it also prolongs uncertainty for international investors.

Myth-buster: markets rising means the risks have passed

The assumption is that strong equity markets confirm that political, inflation and geopolitical problems are under control.

What is missing is the role of expectations and market concentration.

Indices can rise because investors believe conditions are improving, because a small group of large companies performs particularly well or because the worst outcomes are seen as less likely. None of those things guarantees that the underlying risks have disappeared.

Believing the myth can lead investors to increase risk after prices have already risen, without checking whether their portfolio can tolerate a reversal.

Risks, limitations and boundaries

Energy risks can reappear quickly

The market response to de-escalation may reverse if shipping routes close again or hostilities increase. Energy-sensitive economies and businesses would be affected unevenly.

Central banks may stay restrictive

Lower headline inflation doesn’t guarantee immediate rate cuts. Policymakers remain concerned about second-round effects on wages, services and business pricing.

Equity indices are increasingly concentrated

Strong headline returns can be driven by a small number of AI, semiconductor or technology businesses. This can make a diversified-looking index more vulnerable to one investment theme.

Political promises still need funding

UK markets have remained calm, but that could change when detailed tax and spending proposals emerge. The cost and funding structure of policy matter more than broad political positioning.

Currency movements can alter investor returns

A strong overseas market doesn’t automatically produce the same return for a UK investor. Changes in sterling can increase or reduce the value of international holdings.

Commentary is time-sensitive

Market prices respond continuously to new information. A sensible conclusion based on June data may need revisiting after a central-bank decision, political announcement or renewed geopolitical disruption.

How this compares with the closest alternatives

Investors generally have three broad responses to uncertain markets. None is automatically right.

The main decision isn’t whether the news sounds positive or negative. It is whether the portfolio still reflects the investor’s actual timescale, withdrawal needs and tolerance for volatility.

What the evidence still doesn’t clearly tell us

The current evidence doesn’t tell us whether the easing of Middle East tensions will become durable or merely provide a temporary pause.

It also doesn’t settle how persistent the energy shock will be. Lower oil or shipping costs can feed through quickly in some areas, while food, wage and service-sector effects may take longer to appear.

Political uncertainty in the UK has reduced as the leadership position has become clearer, but the market implications of a new administration depend on fiscal decisions that were not fully defined during June.

Finally, the scale of AI investment is visible, but its eventual returns are not. There is still considerable uncertainty over how rapidly demand will grow, which businesses will capture the profits and whether today’s valuations leave enough room for disappointment.

Frequently asked practical questions

Is now a good time to move more money into cash?

Cash may be appropriate for near-term spending or where investment risk has become unsuitable. Moving simply because the news feels uncomfortable is different. The decision needs to reflect when the money will be required, the interest available, inflation and the potential cost of missing a market recovery.

Are bonds safer now that interest rates are higher?

Higher yields can improve the prospective return from bonds held to maturity, but prices can still fall if interest-rate expectations rise further. Credit quality and maturity also matter. Short-dated government bonds behave differently from long-dated or lower-quality corporate debt, so “bonds” isn’t a single risk category.

What does political change mean for pensions and ISAs?

Existing pension and ISA rules don’t change simply because a Prime Minister or Chancellor changes. The relevant risk is future policy on taxation, allowances or reliefs. Acting on speculation can create unnecessary tax or investment consequences, so confirmed policy normally matters more than pre-Budget headlines.

How often does a portfolio need reviewing?

A review is useful when objectives, withdrawals, income needs or personal circumstances change, and after material movements have altered the intended asset mix. That doesn’t mean rebuilding the portfolio after every central-bank meeting. The purpose is to correct meaningful drift or unsuitable risk, not react to each headline.

Keep the portfolio connected to the plan

June gave investors reasons for cautious optimism, but not grounds for complacency. Political transitions appear orderly, energy risks have eased from their most acute point, and several equity markets remain strong. At the same time, inflation, high valuations and geopolitical uncertainty haven’t disappeared. The practical next step is to check whether recent market movements have changed the risks inside the portfolio, then make adjustments only where they improve the fit with the investor’s real objectives.