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The global economy is currently being shaped by what we call “two shocks and a boom”. The first shock is inflationary: the Middle East conflict has pushed oil prices higher and impeded the supply of some commodities. The second is mildly disinflationary: “China shock 2.0”, driven by China’s surging tech and green energy exports, which are increasing global supply. The “boom” is the surge in US AI-related investment, supporting demand and activity.

These forces are creating a difficult environment for central banks and have, so far, driven a hawkish pivot. The ECB’s rate rise, despite slowing growth, is intended to reduce the risk that the energy shock lifts medium-term inflation expectations. This week, three other major central banks will decide whether to stick or twist. The Bank of Japan looks likely to hike, given its still-negative real policy rate. The Bank of England is expected to stay on hold while it monitors a weakening labour market, but it may need to hike later this year to rebuild inflation credibility.

The backdrop also makes for a challenging first meeting for the new Federal Reserve Chair, Kevin Warsh. The Fed is widely expected to keep rates unchanged and to remove any bias towards easing this year from its statement and projections. The key question is whether it validates market expectations for further tightening.

Overall, spikier inflation and a rise in hawkish central bank thinking reinforce the complicated macro landscape. While episodic volatility is a risk, supernormal profits and a manageable cost of capital mean that markets can continue performing well through the rest of 2026.

Growing resilience has been a standout feature of emerging markets recently – and it’s showing up in an improving ratings outlook for EM sovereign bonds. Positive ratings have outnumbered negative ones since early 2023, and the balance has improved this year, despite supply shocks.

That partly reflects improving fiscal and external positions in several larger EM economies. South Africa, Peru, and Chile, for example, have benefitted from supportive metal prices, which have partly offset higher energy costs. More broadly, many EM sovereigns entered this period of volatility with stronger policy frameworks and more credible fiscal management than in previous cycles.

The trend is also visible in frontier sovereigns. Several countries that faced acute stress following the 2022 commodity shock have since restructured debt, secured IMF programmes, or strengthened external financing buffers. Pakistan and Egypt, for instance, have attracted additional funding and rebuilt reserve positions.

Investment strategies with a market-cap weighting have been well-placed to benefit from the recent surge in mega-cap tech stocks. Yet the high index concentration of tech giants has sparked concern about portfolios that might look diversified but are really just large “macro” and “style” bets. One solution to this diversification headache is to take a more active approach – but the dilemma is how to achieve resilience without hurting performance.

Quantitative multi-factor strategies could be an answer. They work by weighting to ‘factors’ like quality, value, momentum, size, and low risk. This makes them responsive to changing market trends and helps avoid unintended macro and style biases. Strong technology performance has helped drive the momentum factor recently. But when market leadership broadened out in early 2026, factor strategies benefitted from the rotation in performance towards value.

Investors are increasingly asking when the enormous spending on AI infrastructure – including chips, data centres, and computing power – will generate durable economic returns. While AI adoption is spreading across industries, the payoff may lag the investment cycle for some time yet.

In the near term, AI-related capex is boosting demand for energy, hardware, and specialised labour, creating inflationary pressure. But as AI matures, cheaper production and higher productivity could have a widely beneficial disinflationary effect – a component of an upside scenario. Who benefits the most from AI-driven efficiencies? Firms with strong pricing power could see profit margins grow, while those in competitive markets may end up having to pass savings on to customers.