Macro-Economic & Fixed Income
US government bond yields kept climbing through May, as inflation proved difficult to bring down. The problem was made worse by the continued closure of the Strait of Hormuz, keeping oil prices elevated. As a result, financial markets have effectively abandoned expectations of any interest rate cuts from the US Federal Reserve in 2026. The new Fed leadership steps in at a particularly delicate moment, with policymakers themselves split on the path forward.
For investors in GCC sukuk, this matters more than it might appear. The region’s currencies are pegged to the US dollar, which means local borrowing costs move closely in line with US rates, directly affecting the pricing of regional bonds and sukuk. Looking into the second half of the year, instruments that offer attractive income without taking on excessive sensitivity to further rate rises might be preferred. Practically speaking, this means focusing on bonds maturing in the 5 to 10 year range issued by high-quality GCC government-linked entities and financial institutions, names with strong balance sheets that can weather a higher-for-longer rate environment while continuing to deliver solid returns to investors. For sukuk investors, equity sentiment remains a useful read-through for credit spreads and high-yield sukuk risk appetite; the current backdrop rewards selectivity over broad beta.
Global Equities
Global equities rallied in mid-April on ceasefire optimism before renewed Hormuz tensions tempered gains. Wall Street maintains an overweight on US equities and Emerging Markets underpinned by AI-driven earnings growth, yet valuations, particularly in the S&P 500, remain rich relative to historical averages, raising the probability of near-term pullbacks. Emerging markets, especially Asian AI manufacturers and Latin American commodity exporters, offer more attractive entry points. European equities face headwinds from energy exposure. Overall, we remain positive on global equities with higher volatility as sticky inflation and geopolitics remain issues in the short to medium term.
Disclaimer: All information provided is for educational and awareness purposes only and does not constitute a recommendation or invitation to make any investment decision. Past performance is not indicative of future results. Please consult your financial advisor before making any decisions. Derayah Financial is licensed by the Capital Market Authority under license number 27-08109, dated 2008.
