Market Analysis: Deal or No Deal in the Middle East
Published on 28 May 2026 by Kathleen Brooks, Research Director UK
Key Takeaways
- Oil prices are rising due to increased strikes across the Middle East.
- No indication that negotiations for a peace deal have ceased.
- Market momentum remains positive for the time being.
- Investor sentiment to "buy the dip" remains strong.
- Upcoming US PCE data may pressure the Federal Reserve to reconsider its easing bias.
- Concerns about a potential summer correction for stocks are growing.
Current Market Conditions
Recent developments in the Middle East, particularly Iran's attack on a US airbase in Kuwait and subsequent US strikes on Iran, have heightened fears regarding the stability of the ceasefire. This has led to a surge in oil prices, with Brent crude testing the $95 per barrel mark, while European indices and US futures indicate a subdued trading session for US stocks.
Negotiation Status
Despite the escalating tensions, there are no signs that negotiations for a peace deal have halted. The oil price remaining below $100 per barrel suggests that the market still anticipates a potential agreement that could reopen the Strait of Hormuz. However, the ongoing conflict serves as a reminder of the protracted nature of the situation, now marking three months since the war began.
Impact on Central Banks
Even if a deal is reached soon, it is unlikely to prevent central banks from raising interest rates as a precaution against inflation. The current elevated oil prices are expected to prompt the European Central Bank (ECB) to increase rates in the coming month, with a pause likely over the summer as the situation in the Middle East evolves.
US Economic Data and Market Sentiment
The release of the US PCE data, which is the Federal Reserve's preferred inflation measure, is anticipated to show an increase, potentially influencing the Fed to shift from a dovish to a more neutral or hawkish stance. This could negatively impact the stock market, particularly in the US and Asia, as it highlights the economic repercussions of the ongoing conflict.
Market Dynamics and Future Outlook
Despite a recent downturn in risk sentiment, the market's inclination to "buy the dip" remains robust. However, there are growing concerns regarding the sustainability of the rally, especially among AI-linked chip stocks, which may face demand destruction due to rising energy prices. Bank of America has warned of a potential summer correction, citing diverging momentum between tech stocks and the broader market.