Weekly Markets Review

This week in summary

• Semiconductor stocks continue to drive market weakness despite broader market resilience, with over 60% of US companies delivering positive returns since the end of May
• US earnings remain exceptionally strong and broadly based, but investors are increasingly focused on the economics and sustainability of the Artificial Intelligence (AI) expansion
• Growing Chinese competition is raising questions over future AI and semiconductor profitability as lower-cost models and increased chip supply pressure incumbents
• Rising debt issuance, higher financing costs and concerns around circular financing arrangements are increasing investor scrutiny of hyperscaler AI spending
• Semiconductor fundamentals remain robust, with record earnings expectations and significantly lower valuations than last year
• This week's US employment report is expected to show a gradual cooling in labour market conditions, supporting the Federal Reserve's (Fed) decision to keep rates unchanged.

Market review

Equities resilient despite semiconductor swoon

The summer semiconductor swoon has been the defining feature of equity markets over the last two months as leadership has rotated sharply away from the tech darlings of the spring towards defensive sectors such as healthcare and consumer staples. Last week, despite its volatile nature, provided a useful case study for the current environment, highlighting several important themes: market breadth, earnings, Chinese competition and hyperscaler capex.

Market breadth: It hasn’t been unusual in recent months for most companies to gain on days where the index has fallen. Indeed, since the end of May the US market has delivered a return of -1.2%, yet more than 60% of companies have generated positive returns. This broader pattern was evident again last week as semiconductor stocks were the worst performing major industry globally while much of the broader market, particularly consumer sectors and financials, performed well. Interest rate-sensitive and cyclical sectors underperformed as bond yields rose on the back of the Fed’s reluctance to hike rates.

Earnings: About a third of the way through the Q2 reporting season, the US market remains on track for a ninth consecutive quarter of double-digit earnings growth. Corporate fundamentals, particularly in the US, remain exceptionally strong. Year-on-year earnings growth is currently running at 37%, admittedly flattered by mark-to-market gains (reported earnings looking stronger due to assets or investments rising in value on paper) driven by the strong equity market performance through the spring, but analyst expectations for Q3 and Q4 earnings are also rising. Earnings growth remains broad based, with small and mid-sized companies delivering solid results. Strong earnings within technology have largely failed to halt the rotation out of the sector as investors remain focused on the scale of investment required for the AI buildout and the potential returns that investment may ultimately generate, particularly given growing competition from China.

Chinese competition: The infamous DeepSeek question remains unanswered: how much of the AI opportunity will ultimately be captured by China? Western companies are already using lower-cost Chinese AI models, while competitive Chinese releases continue to put pressure on western providers, contributing to a rapid pace of innovation and falling assumption costs. Similar concerns are emerging across the semiconductor industry. Investors increasingly fear that Chinese competitors could cap industry profitability by expanding supply and driving down prices. Apple has reportedly been lobbying US policymakers to allow Chinese-made chips to be used in products sold outside the US, highlighting how rapidly Chinese manufacturers are advancing across the semiconductor value chain.

Hyperscaler capex: Data centre projects have been under increasing scrutiny during the summer swoon as they continue to deploy capital at an extraordinary pace. In aggregate, free cash flow has turned negative, forcing increased reliance on debt markets to fund the AI buildout. This surge in bond issuance is now beginning to show signs of investor fatigue. There are also growing concerns around circular financing arrangements, with NVIDIA providing financing to OpenAI to fund chip purchases, a significant proportion of which would ultimately flow back to NVIDIA. Taken together, these developments have raised questions about both the economics and sustainability of the current AI investment cycle.

The recent weakness in technology therefore appears less a reflection of deteriorating fundamentals (semiconductors remain strong with revenues, earnings and profit margins at record highs) and more a reassessment of the durability and economics of the AI investment cycle. Economic activity is robust, earnings growth remains broad based, and market leadership has widened beyond a narrow group of mega-cap technology companies. This shift is best reflected in the broadening trend across equity markets.

While concerns around the economics of the AI buildout are undoubtedly real, so too is the scale of capital flowing through the supply chain. The key question is not whether demand for AI infrastructure is substantial, but whether that demand proves durable enough to justify the extraordinary level of investment taking place today. The answer will depend on whether AI companies can meet their revenue forecasts and honour their compute spending commitments to the hyperscalers that are funding the buildout.

The week ahead

US employment report

Economists expect job growth to accelerate slightly in July with nonfarm payrolls reporting 80k new jobs for the month, up from 57k in June. This would still represent a slowdown from the spring. The unemployment rate is anticipated to rise marginally to 4.3% driven by a drop in labour force participation for younger age workers. The US labour market remains robust but the slowdown supports the Fed’s recent decision to hold rates rather than hike. 

Markets for the week 

 

This week in summary

• Energy markets saw a sharp resurgence in volatility as Middle East tensions re-escalated, with Brent crude briefly topping US$100 a barrel – its first move above that level since late May – before easing back under US$96 on Friday, still leaving oil up sharply on the week
• The European Central Bank (ECB) held rates unchanged at its July meeting, but with a notably hawkish tone given the inflationary risk from the energy shock; the US Federal Reserve (Fed) and Bank of England (BoE) both meet next week amid a similarly uncertain backdrop
• New Fed Chair Kevin Warsh continued to strike an unambiguously price-stability-focused tone in recent congressional testimony, raising the question of whether the Fed's dual mandate is being applied differently than under his predecessor
• A new round of US tariffs took effect this week under a different legal authority than before, though the effective rates on most countries were largely unchanged
• US equities were volatile, with a sharp Thursday sell-off in megacap tech (on disappointing Alphabet and Tesla results) partly reversed on Friday.

Market review

Energy volatility returns as Middle East conflict re-escalates

Oil markets swung sharply higher this week as the conflict between the US and Iran continued to intensify. Brent crude moved above US$100 for the first time since May, gaining c.7% in a single session. The escalation was marked: the US launched a 13th straight day of strikes on Iran, with both sides ruling out near-term talks, while tanker flows through the Strait of Hormuz have effectively stalled amid heightened security risks. Iran has reportedly asked the Houthis – an Iran-backed armed group that controls much of northern Yemen – to stand ready to close the Red Sea route if the US strikes Iranian power infrastructure, raising the prospect of both of the region's key export routes being disrupted at once. Prices eased somewhat on Friday as Houthi-related tanker attacks calmed, but the risk premium embedded in oil remains substantial, with the path from here depending heavily on whether diplomacy or further escalation wins out.

Central banks: a hold from the ECB, a hawkish tilt at the Fed

The ECB kept rates unchanged at its meeting on 23 July, with the deposit rate – the interest rate a bank pays for keeping money with them – remaining at 2.25%. The hold was widely expected, but the tone from Frankfurt was firm: with oil back above US$95 a barrel, Lagarde framed the pause as tactical rather than an end to tightening. July is a non-projection meeting, so the bar for a fresh move was always higher. The more consequential decision is likely to come in September, once new forecasts are available. The Fed and BoE both announce decisions next week – the Fed on 28–29 July and the BoE on 30 July.

Fed Chair Kevin Warsh has used his first appearances before Congress to draw a clear contrast with his predecessor. Warsh told committee members the Fed has no tolerance for persistently elevated inflation and shares a resolute commitment to restoring price stability. He has offered no indication of the dual mandate being weighed evenly between inflation and employment. Coming just as energy prices are pushing price pressures higher again, that tilt suggests markets may have priced in more tolerance for an AI-capex-driven inflation impulse than the new Fed leadership is willing to give.

Tariffs: the legal basis shifts, but effective rates hold steady

A new set of US tariffs took effect on 24 July. The temporary 10% Section 122 global surcharge, designed to address trade imbalances, expired at the same moment a new Section 301 action targeting unfair trade practices and tied to forced-labour enforcement came into force across 60 economies, including the UK and EU. For most countries, the new rate simply mirrors the outgoing rate, so effective tariff burdens are largely unchanged. The US is increasingly relying on Section 301 as its durable legal vehicle for tariff policy following successive court challenges to the executive's use of emergency powers.

Regional equity allocations - concentrated exposure and the search for genuine diversification

The Korean equity market has become the clearest illustration yet of how concentrated the artificial intelligence (AI) theme has become within ‘diversified’ regional and emerging market (EM) exposure. Return volatility on Korean equities exceeded 60% as of 20 July, nearly twice the level on Japanese equities and higher than Bitcoin's volatility over the same period. The Korea Exchange has activated circuit breakers seven times through mid-July, compared with none in 2025. Samsung Electronics and SK Hynix saw their combined weighting rise above 50% ahead of the recent pullback, meaning investors buying funds that track the broader Korean market have gained highly concentrated exposure to two semiconductor companies and the global AI investment cycle, rather than a diversified domestic equity market. The index has tumbled around 25% since its June peak, a roughly US$1trn wipeout, with the two chipmakers each losing at least 30% of their value, a sharp reversal after a rally that saw the index nearly double earlier in the year.

The pattern shows up, in a milder form, across the standard EM benchmark. The top ten constituents of the MSCI Emerging Markets Index, which tracks the performance of large and mid-sized companies across emerging markets, make up 40% of the index, with TSMC and Samsung Electronics alone accounting for nearly a quarter of it. In contrast, no single country accounts for more than 10% of the MSCI Frontier & Emerging Markets Select Index, and technology exposure across it is just 1%; returns there are driven by domestic consumption and financial services as much as by exports or resources.

There is also a valuation angle. Some genuinely under-exposed EM markets are being reframed by investors as diversifiers rather than laggards. A headline EM allocation can leave a portfolio more exposed to a single macro theme, AI hardware demand, than a domestic-facing developed-market allocation would. Markets such as the Philippines, Kenya or India offer growth drivers largely uncorrelated with the AI narrative, but only for investors who select them deliberately; standard index-tracking exposure to ‘EM’ increasingly means a leveraged bet on two or three Asian chipmakers. Gold and infrastructure told a similar story earlier this year: broad thematic and regional labels can mask very different underlying risk profiles.

The week ahead

Fed and BoE rate decisions (29 and 30 July).

Our view: Unlikely to see moves this month, but the press conference and commentary will give important signals for future movements. We expect a notable hawkish stance from both meetings – whilst an imminent rate rise is not our base case, it would not come as a huge surprise.

US Q2 GDP and June PCE inflation (30 July).

Our view: GDP should show an improvement versus Q1. Personal Consumption Expenditures (PCE) report (the Fed’s preferred gauge of inflation) will be scrutinised for early evidence of any energy-driven price pressures re-entering the read.

Big tech earnings: Microsoft and Meta report Wednesday, followed by Amazon and Apple on Thursday.

Our view: AI capex and free cash flow trends are likely to remain the key focus after last week's negative reaction to Alphabet and Tesla numbers.

Markets for the week 

 

This week in summary

• Markets were pulled in different directions last week, with encouraging economic data and robust earnings competing against rising geopolitical tensions and concerns around artificial intelligence (AI)-related investments
• Continued US-Iran hostilities kept oil prices elevated, initially pushing bond yields higher as investors worried about renewed inflation pressures
• However, weaker-than-expected US inflation figures for June later provided support for Treasuries (US government bonds), with consumer prices recording their first monthly decline in six years
• While Treasuries mostly ended the week slightly firmer, gilts (UK government bonds) and bunds (German government bonds) lagged, ending the week with higher yields
• The US's largest banks reported strong results, supported by increased trading activity and a pickup in corporate dealmaking; credit quality also remained stable, suggesting households and businesses remain in relatively good financial health
• Brent crude oil rose above US$88 per barrel as US-Iran hostilities intensified, gaining almost 16% over the course of the week
• Shares of companies linked to AI investing came under pressure as investors questioned whether the vast investment will ultimately generate enough profits to justify current valuations; these concerns intensified after a Chinese startup demonstrated competing AI capabilities underlining how quickly rival firms are closing the gap
• Investors shifted away from AI and semiconductor stocks and towards sectors such as banking, energy and consumer staples
• UK shares held up relatively well thanks to their greater exposure to financials, energy and consumer staples, while some Asian markets were hurt by their reliance on technology and semiconductor companies
• Andy Burnham is set to become UK Prime Minister today, with attention this week focusing on his policy agenda and Chancellor appointment, with Shabana Mahmood the new frontrunner.

Market review

Iran escalation: From ceasefire collapse to infrastructure strikes

The week kicked off against the backdrop of a renewed US-Iran conflict. The ceasefire agreement reached a month earlier had effectively broken down and hostilities that had resumed over the weekend intensified further as the week went on.

By Friday, the US had conducted seven consecutive nights of strikes, expanding to hit road bridges and port infrastructure. Iran responded by attacking American bases in Kuwait and Jordan and then striking Kuwaiti water and power plants later in the week. Shipping traffic through the Strait of Hormuz slumped materially across the week.

Brent crude rose sharply on Friday to around US$88 per barrel, heading for its biggest weekly advance since April. 

Inflation relief, but Warsh holds the line

The June CPI and PPI inflation data were the clearest positive macro development of the week. Monthly consumer prices fell for the first time in six years, driven in large part by a drop in gasoline prices, pulling the year-on-year rate to 3.5%.  Core PPI rose just 0.2% month-on-month, below the 0.3% consensus.

Despite the encouraging data, Chair of the US Federal Reserve (Fed) Kevin Warsh used his Congressional testimony to reiterate that restoring inflation to the Fed's 2% target remains a priority and that policymakers have "no tolerance for persistently elevated inflation".

AI theme questioned

The AI investment theme came under pressure last week after technology company IBM warned that customers were redirecting technology budgets towards AI infrastructure. This raised concerns that the benefits of the AI boom may be concentrated among a relatively small group of winners. 

At the same time, record-breaking results from AI chipmaker TSMC reinforced that demand for AI remains exceptionally strong, but also highlighted the enormous investment required to support the industry's growth.

Towards the end of the week, Chinese AI start-up Moonshot launched Kimi K3, a powerful new AI model that appeared to narrow the gap with leading US competitors. The announcement added to an AI sell-off that was already underway and reinforced concerns that advanced AI models may be becoming more widely available and less differentiated.

Focus on Number 11

Reports that Shabana Mahmood is currently the leading contender for Chancellor were generally received positively by markets. Investors view her as a right-of-centre and pragmatic figure, although the identity of the Chancellor is likely to matter less than the new government's broader approach to growth, taxation and public spending.

Attention will therefore focus on Andy Burnham's wider economic agenda in the coming weeks.

The week ahead

Andy Burnham becomes the UK Prime Minister today, with investors looking for further details on his policy agenda, Cabinet appointments and the direction of the new government's economic strategy. 

UK weekly earnings (Tuesday), UK inflation data (Wednesday) and flash S&P PMIs across the US, UK and Eurozone (Friday) are the key data releases.

The European Central Bank concludes its policy meeting on Thursday. Earnings season continues, with Tesla, Intel, Alphabet and American Express among the notable reporters next week.

Markets for the week 

 

This week in summary

• A quiet week for markets, but a busy one for sport – equity indices ended broadly unchanged and bond yields pushed higher, against a backdrop of Wimbledon and England's quarter-final success
• US–Iran ceasefire collapsed, lifting oil prices and inflation concerns, but markets stayed sceptical of a material escalation given little US appetite to be drawn back in
• The Strait of Hormuz remains closed – Iran ‘winning’ the economic war even as the US dominates militarily – so more conflict likely before a durable peace deal
• US equities recovered early losses, led by a late rebound in semiconductor and Artificial Intelligence (AI)-related shares; Europe lagged given its greater geopolitical exposure
• Heavy new issuance is the key undercurrent – demand remains robust (this week's jumbo Amazon bond deal the latest example), but growing supply is capping upside momentum, and the bar rises as the cheques get larger
• Yields higher on Middle East tension and hawkish Fed minutes (keeping interest rates higher for longer) – sticky gasoline prices, firm chip prices and signs of economic heat mean US inflation may be slow to fall, keeping the Fed on a hawkish path; money markets now look fairly priced
• UK politics were dominated by Nigel Farage's resignation and by-election stunt, and Andy Burnham securing backing to succeed Keir Starmer
• Gilts had another poor week; with fiscal risks skewed to further slippage we expect an elevated fiscal and political risk premium to persist
• The week ahead: US Consumer Price Index (CPI) (annual inflation seen easing to 3.8%, still uncomfortably high) and US retail sales (expected +0.3%, a slowdown from May but still a resilient consumer, with auto sales strong).

Market review

Sideline story: markets take a back seat to sport

Whether it was football, tennis, rugby or simply making the most of the summer weather, there was something for everyone this week. England edged their way into the World Cup semi-final, while Canaccord Wealth's own cycling team successfully completed the ‘Tour de Canaccord’ ride from London to Paris in support of our company’s charitable foundation. Against a busy sporting backdrop, financial markets were comparatively subdued, with major equity indices ending the week broadly unchanged and bond yields higher.

The week began on the back foot as the ceasefire between the US and Iran collapsed and the two sides exchanged strikes, pushing oil prices higher and elevating inflation concerns. Yet despite President Trump declaring the ceasefire "over", markets remained sceptical that a material escalation was likely, concluding that there is little appetite in Washington to be dragged back into a regional quagmire. As I commented on CNBC a few weeks ago, although the US has dominated the kinetic war, Iran is winning the economic war with the Strait of Hormuz once again closed. As both sides see themselves as ‘winning’ it’s likely more conflict is ahead of us before real progress can be made towards a sustainable peace deal.

That scepticism towards material escalation helped cap volatility, and US indices clawed back early losses as a late rebound in semiconductor and AI-related shares carried the growth-heavy benchmarks higher; Europe, more exposed to the geopolitical backdrop, fared less well.

The more interesting undercurrent, in our view, is the sheer scale of new equity and debt issuance. Demand remains robust for now – this week's jumbo Amazon corporate bond issue was simply the latest in a long line – but the volume of cash being raised is adding pressure to upside momentum, and it feels natural to expect markets to start questioning the efficiency of these gargantuan investments. For now, demand absorbs the supply, but the bar is quietly rising as the cheques get larger.

Yields pushed higher last week driven by the renewed tension in the Middle East and a somewhat hawkish set of Fed minutes. For fixed income investors, the more durable issue is that the robust AI investment dynamic makes it likely that US inflation is slow to fall as gasoline prices remain sticky despite softer crude, chip prices are firm, and with signs of economic heat we are carefully monitoring inflation risks. This should keep the Fed on a hawkish path for the time being (keeping interest rates higher for longer), and we would argue money markets are now fairly discounting the road ahead.

Closer to home, UK politics provided the drama – Nigel Farage's resignation and Clacton-on-Sea by-election stunt on one hand, and Andy Burnham securing the backing to succeed Keir Starmer on the other. Gilts had another difficult week, reacting sharply to investors’ concerns about the UK’s finances and politics.

The delicate state of the public finances appears to be dawning on Burnham and his team, and with risks still skewed towards further government borrowing, we expect gilts to maintain an elevated fiscal and political risk premium.

The week ahead

US CPI inflation

Falling gasoline prices through June is expected to have pushed month-on-month CPI into negative territory resulting in annual inflation slowing to 3.8%, still uncomfortably high for the Fed. Most economists believe that inflation has now peaked for 2026 at 4.2% in May and is on a downward trajectory towards 2% over the next three years. 

US retail sales

World cup fever has reportedly spread across America supporting an otherwise cooling trend in retail sales. Altogether retail sales data due this Thursday is expected to show 0.3% growth, a deceleration from 0.9% in May but still a reflection of a robust consumer backdrop. Particular strength in autosales is anticipated.

Markets for the week 

 

This week in summary

• Many UK investors head into the week in a celebratory mood as England progress to the World Cup quarterfinals, capping a generally constructive week for markets
• Global equities ended the week higher, despite a mid-week chipmaker selloff, driven by Artificial Intelligence (AI) overcapacity fears
• European and UK stocks outperformed, insulated from AI fears by their low technology weightings
• Early week gains rounded out an exceptionally strong quarter in many technology-led markets, despite a more mixed June performance
• Brent oil futures fell to near US$70 per barrel during the week, below their level at the start of the US-Iran conflict, as peace talks took place in Qatar
• The US nonfarm payrolls report was sharply below expectations with 57k jobs added in June, around half of consensus expectations, pushing Treasury yields lower and diminishing US Federal Reserve (Fed) rate-hike bets
• Although the unemployment rate fell to 4.2%, the improvement was largely driven by fewer people participating in the labour market.
• A softer-than-expected eurozone June Consumer Price Index (CPI) reading at 2.8% reinforced hopes that inflation pressures are easing, while the European Central Bank’s annual Sintra forum revealed diverging central bank views
• Fed Chair Kevin Warsh maintained a hawkish stance, characterising the 2% inflation target as non-negotiable
• Bank of England (BoE) Governor Andrew Bailey struck a more dovish tone, pointing to moderating price pressures and a softer labour market backdrop
• Andy Burnham, the expected next UK Prime Minister, unveiled plans to shift power away from Westminster to a new ‘Number 10 North’, alongside reforms to business rates and greater regional control of key public services, although questions remain over his fiscal policies.

Market review

Burnham and bonds

Bond markets have a long history of keeping politicians in line. In the 1990s, Bill Clinton scaled back spending plans after US Treasury yields rose sharply, prompting adviser James Carville to joke that he wanted to be reincarnated as the bond market because it could “intimidate everyone”.

Andy Burnham appears aware of that discipline. When he announced his candidacy for the Makerfield by-election in mid-May 30-year gilt yields were close to 30-year highs at 5.85%, reflecting concerns about future government borrowing. Longer-dated gilts are especially sensitive to political risk because they rely heavily on confidence in the government’s long-term finances.

He has since tried to reassure investors by backing the government’s current fiscal rules and surrounding himself with experienced economic advisers, including Andy Haldane, Richard Hughes and Jim O’Neill.

His recent speech repeated that message, with a clear commitment to not take risks with the public finances. However, the lack of detail means investors still have some unanswered questions.

Plans for devolution, council housebuilding and greater local control of public services could require significant investment, but it is too early to judge the full fiscal cost or how it would be funded.

The choice of Chancellor will also be key. Ed Miliband is currently seen as the most likely candidate, and while parts of his policy agenda, notably net zero, have raised concerns among businesses and voters, the role will be as much about reassuring markets as shaping policy.

So far, gilt markets have been cautious rather than alarmed. Thirty-year gilts sold off by 7 basis points this week, but by less than US Treasuries, and they strengthened over June. Markets appear to be giving Burnham the benefit of the doubt, although some political risk is already reflected in longer-dated gilt yields.

For clients, our view is unchanged: the extra yield on longer-dated gilts does not yet compensate for the added uncertainty. We prefer shorter-dated gilts, where we see better value and more potential benefit if the economy slows.

The broader fiscal backdrop remains challenging. A reported £5bn defence spending gap, heavy gilt issuance and the BoE’s continued reduction of its gilt holdings all mean Andy Burnham and his new Chancellor will need to tread carefully.

Sharp jobs miss eases hiking pressure

June US nonfarm payrolls rose just 57k, well short of the 113k consensus, with prior months revised lower. The unemployment rate fell to 4.2% as labour force participation dropped. The miss prompted an immediate dovish repricing with two-year Treasury yields falling around 8 basis points to near 4.1% before recovering modestly into the close while the US dollar fell more than 0.5% against sterling on the day. 

Taken together, softer labour market data and lower energy prices suggest the inflation backdrop facing central banks is becoming less challenging, offering some relief even as geopolitical tensions remain a key source of uncertainty.

Iran talks take place although situation remains fragile 

US-Iran indirect talks in Qatar delivered little tangible progress this week, although the continuation of dialogue remains a positive development and helped ease oil prices. Key sticking points remain unresolved, including shipping through the Strait of Hormuz, Iran's nuclear programme and the release of frozen assets. The contrasting rhetoric from both sides was notable, with Donald Trump claiming that the "denuclearisation of Iran is moving along very well", while Iranian officials maintained that discussions were centred on frozen assets and US compliance with June's Memorandum of Understanding.

While shipping flows through Hormuz have improved, the situation remains fragile and mine-clearing operations will continue to pose logistical challenges even if diplomatic progress is made. Talks are expected to resume after the funeral period for Ayatollah Ali Khamenei, which concludes on 9 July.

The week ahead

ISM Services Purchasing Managers Index (PMI)

On Monday this will be the first major activity read of the week and is more skewed towards larger companies than the S&P PMIs. A deterioration in services would add to the case that the recent labour market weakness seen in the data is broadening.

Federal Open Market Committee minutes

After the weak payrolls print pushed the first fully-priced hike to December, the minutes on Wednesday will reveal how divided the committee was at the June meeting and whether the hawkish framing was consensus or driven by Fed Chair Warsh.

Markets for the week 

 

This week in summary

• The Bloomberg Korea Large & Mid Cap index surged over 422% at its peak from the April 2025 tariff-related low, driven almost entirely by Samsung and SK Hynix, which together accounted for 75% of the index
• The rally left valuations looking increasingly stretched, with Korea representing the clearest example of where the AI trade has gone too far - the index fell 7% last week
• Korea's 14 million retail investors, known locally as ‘ants’, have fuelled market volatility through the rapid adoption of single-stock leveraged Exchange Traded Funds (ETF) – a fund that is designed to track the performance of just one company, rather than a pool of investments –  with recent price moves prompting the regulator to acknowledge concerns over approving these products
• Last week saw a sharp unwind, with SK Hynix falling 17% mid-week and the Korean exchange halting trade after the market dropped 9% at Friday's open
• The broader 'June Swoon' in global tech reflects two forces: inflation fears and positioning 
• US Producer Price Index (PPI) - measures the average change in prices over time that producers receive for their goods and services - is running at 6.5%
• Apple and Microsoft both raised prices last week citing an AI-driven memory chip shortage and personal consumption expenditure (PCE) inflation accelerated
• Changes in PPI reinforce fears that the Chair of the US Federal Reserve, Kevin Warsh, could deliver a more material hawkish recalibration where higher interest rates are favoured to keep inflation under control
• The AI ecosystem's durability hinges on end-user demand meeting forecasts
• Revenue projections for leading AI companies appear optimistic but not unrealistic; the mathematics becomes considerably easier if compute costs fall, which may define the next wave of the build-out.

Market review

Korea has an ant problem

For the most part, the strong performance across equity markets - and particularly in technology hardware and semiconductor manufacturing - has been driven by fundamental earnings strength rather than purely irrational exuberance, although there are certainly pockets of that. This week we focus on the clearest example of where the AI rally has gone too far: Korea. In local currency terms, the Bloomberg Korea Large & Mid Cap index has risen by over 422% (at the peak) since the April tariff-related sell-off low last year. For years before then the market had stagnated - in fact, for the four years from 9 April 2021 to 9 April 2025 the index delivered a return of -26%.

Two technology stocks have driven the market higher: Samsung and SK Hynix, both manufacturers of semiconductors that have seen demand skyrocket. SK Hynix shares peaked earlier this month having risen over 1,700% since 9 April last year. Samsung has delivered a still impressive 600% return over the same period. The two companies have become so dominant that at the start of this week they composed 75% of the Korean equity index.

South Korean retail traders, widely known locally as ‘ants’, number over 14 million individual investors and now represent about a third of the country's daily stock trading volume, significantly influencing the market. They have recently driven unprecedented retail rallies through leveraged bets on artificial intelligence and tech.

Single-stock leveraged ETFs - allowing investors to receive 2x the stock return for individual companies such as SK Hynix - have become incredibly popular with ants since being approved by the regulator only two months ago. This has created massive volatility, with daily moves of over ±10% for the two behemoths becoming the norm.

The SK Hynix leveraged ETF alone has swelled to US$10bn, while at the end of May sixteen similar leveraged single-stock products linked to chipmakers were launched in Korea. This month, weakness across global technology stocks has simultaneously caused liquidity to break down in such products, resulting in huge divergences between product performance and the underlying stock return. Earlier this month, even as SK Hynix jumped 16%, the KIM ACE SK Hynix Single Stock Leverage ETF dropped 27%. The Korean regulator is becoming increasingly concerned by the impact such instruments are having on the market, with the watchdog announcing its regret at having approved them.

Last week was particularly volatile, with Hynix stock down 17% in a little over a session mid-week, before the week ended with trading being halted on the Korean stock exchange after the market fell 9% shortly after the open on Friday.

While there are other areas of froth in the market, few are as clear as the ant frenzy in South Korea, which does not reflect the earnings-driven rally seen in April and May. That said, some of this froth coming out after such a strong prior rally is a healthy reset - and the broader June weakness across global equity markets reflects a similar dynamic, with positioning and inflation fears now driving the narrative. 

The ‘June swoon’

Equity markets have weakened in June, with technology stocks bearing the brunt. Two factors are driving the 'June Swoon': positioning and inflation fears.

Inflation fears: The US economy is showing signs of heating up, with manufacturing activity at a 49-month high, the labour market tightening, and the economic surprise index spiking. Inflationary pressures appear to be building too, particularly related to the AI build-out. PPI inflation is running at 6.5% in the US, with electronic manufacturing components well into double digits. It is clear that the AI build-out is putting upward pressure on prices - we saw this anecdotally last week with Apple raising prices across its Mac, iPad, home devices and Vision Pro lines - its most extensive price action in years - directly citing an unprecedented shortage of memory chips driven by the AI boom. Microsoft moved in lockstep, raising Xbox prices within hours of Apple's announcement, with both companies warning the crunch and its impact on consumer prices will not end anytime soon. There has been a hawkish pivot at the Fed and, with Kevin Warsh at the helm, there are fears that this 'price stability pragmatist' could oversee a more material hawkish recalibration - hiking rates further to address the fact that inflation has been above target for over five years, as evidenced last week by the acceleration in PCE inflation. The most concerning pattern is the reassertion of 2022's dynamic, where the market reacts negatively to strong economic data as it is taken as further evidence of overheat.

Positioning: It is healthy for equities to correct after a period of strong performance - an opportunity for some of the hot air to escape and positioning to normalise, better reflecting fundamentals. As we digest the AI cycle, we note how its success hinges on one thing: end-user demand. The price and demand AI companies receive for their services needs to meet forecasts in order for them to honour their commitments to the hyperscalers for compute. The hyperscaler data centre build-out is backed by the revenues of AI companies, and further down the supply chain, the companies benefitting from hyperscaler capital expenditure are themselves reliant on the hyperscalers. The AI ecosystem falls apart if expected end-user demand for AI/LLM products does not materialise, or if prices for their offerings fall sharply below expectations. Having reviewed the revenue forecasts for the leading AI companies, they appear optimistic but not necessarily unrealistic. The mathematics becomes much easier if compute costs fall and perhaps the next wave of the AI build out will be focussed on improving the efficiency of compute.

The week ahead

US employment report 

We expect June's job report, due on Thursday, to show that 200k jobs were added to the US economy (vs. 172k prior). That would be a third straight extremely strong print, with the three-month average job increase likely clocking in at 183k. For the Fed, the more important number is the unemployment rate which is anticipated to round to 4.3% - same as May - with a risk of rounding to 4.2%. Nonetheless, with June's pace of job gains significantly exceeding the Fed's estimated near-zero unemployment breakeven, we expect the report to fuel bets of imminent rate hikes.

Euro area inflation

As the European Central Bank mulls over whether to hike again, the inflation report for June, due Wednesday, will be closely watched by the markets to fine tune their expectations for the monetary policy outlook. While still above the 2% target, Consumer Price Index (CPI) inflation is expected to decelerate to 3.0% in June from 3.2% in May. Similarly, the core figure is expected to fall to 2.5% from 2.6%.

Markets for the week 

 

This week in summary

• In the UK, all eyes are on 10 Downing Street after Keir Starmer’s resignation as Prime Minister this morning
• Elsewhere… central banks US Federal Reserve (Fed) and the Bank of England (BoE) held rates; the Bank of Japan (BoJ) hiked the base rate to 1.0% (highest since 1995), with markets largely steady
• Geopolitics remain fragile but oil price eased (Brent crude around US$80), reducing near-term inflation pressure
• Fed Chair Kevin Warsh stamped authority early: stripped back guidance, simplified communication and re anchored the Fed to price stability (aiming to keep inflation low ad predictable)
• Policy shift is philosophical and pragmatic rather than outright hawkish (keeping higher interest rates to control inflation): more sceptical of forecasts, less reliance on forward guidance and a clearer institutional reset underway
• Back to basics monetary policy: Fed liquidity policy is likely to be used more cautiously
• BoE remains in easy ‘wait and see’ mode amid weak growth and political noise; focus this week shifts to US PCE (measure of inflation), expected to reinforce a firmer Fed stance and political developments in the UK
• UK Prime Minister Keir Stamer’s resignation is adding uncertainty to the domestic outlook and vulnerability to the gilt market (UK government bonds) heading into this week.

Market review

Change at the top

Keir Starmer has announced his resignation this morning as Prime Minister and leader of The Labour Party. Last week’s byelection win for Andy Burnham suggested that the markets had already priced in the resignation of Starmer with ‘The King of The North’ expected to enter number 10 unopposed.

Interest rate week: markets steady as BoE and Fed Hold

The focus last week was on three central bank meetings, with the Fed and the BoE both holding rates steady while the BoJ hiked to 1.0%, the highest level since 1995. 

Markets were steady with little change across equity and bond indices. The Iran-US pact remains intact, though on shaky ground as military action between Israel and Hezbollah continued throughout the week. The US has pressured Israel toward a ceasefire with Hezbollah, and oil prices continued to ease, with Brent closing near US$80 a barrel - the lowest since the start of the conflict.

Wash: a price stability pragmatist

As we anticipated, new Fed Chair Kevin Warsh has washed away any remaining fears over his independence, asserting himself decisively at his first Federal Open Market Committee meeting. Not only did the committee remove the language hinting at future rate cuts, but it also stripped the policy statement down almost entirely. The statement fell from around 300 words to 130, narrowly outlining present economic conditions - solid growth and energy-driven inflation - while forgoing forward guidance altogether. The stripped-down document delivered a blunt commitment to inflation control: “this committee will deliver price stability”.

Chair Warsh is not, however, ‘a hawk in dove's clothing’ as some are suggesting. His actions are entirely consistent with his long track record as a price stability pragmatist with a strong institutional reform agenda. Warsh brings genuine introspection to the Fed, announcing the appointment of five task forces covering the broad conduct of monetary policy: communications, balance sheet management, data sources, productivity and jobs in an era of transformation and the Fed's inflation framework.

On balance sheet management, Warsh resigned from the Fed in 2011 in disagreement with the Fed's use of quantitative easing (the bank buying bonds to help the economy), which he viewed as excessive and an overreach of its mandate. In this regard, the so-called ‘Fed put’ - the central bank's willingness to backstop the economy through large-scale liquidity provision - may be softer under his leadership. In Warsh's view, such intervention creates socialism for investors and capitalism for everyone else. He wants to reduce the size and influence of the Fed's balance sheet, which has ballooned since the Global Financial Crisis. While his earlier criticisms of excessive liquidity policy were well-founded, meaningfully reversing course in practice may prove impossible and the benefit of doing so is far from clear. Like reversing over something you have already hit, it will not undo the damage. At the very least, expect a more restrained use of liquidity policy and perhaps a reduced willingness to backstop the financial system to the same extent as recent predecessors in a crisis. Warsh is a ‘back to basics’ policymaker.

The removal of forward guidance is equally consistent with Warsh's long-held view that the Fed overcommunicates, providing markets with too detailed a roadmap of its intentions - a rod for its own back when circumstances change. It also risks a circular feedback loop in which markets read the Fed's guidance while the Fed interprets market pricing. Warsh notably abstained from submitting his own dot to the dot plot - the quarterly chart showing FOMC participants' interest rate expectations - and suggested the projections should be read "in pencil" given the fluidity of the current backdrop. The dramatic shift in the dot plot since March validates his point: the median projection for the federal funds rate at end-2026 has risen from 3.4% to 3.75%, while the 2027 projection has moved from 3.125% to 3.625%.

The Fed's review of data sources and methodology could also deliver improvements. Official inflation and labour market data have drawn criticism for their accuracy and timeliness, with large revisions and methodological inconsistencies wrongfooting both market participants and policymakers. When government releases lag reality by 30 to 60 days it can lead to “long and variable lags in the conduct of monetary policy”.

What, then, should we expect from the Fed going forward? The June dot plot signals a significant hawkish shift, and Warsh has acknowledged both the resilience of the US economy and the persistence of above-target inflation. His comments reflect a genuine nuance; the current policy rate is unevenly restrictive, with the burden of high interest rates falling disproportionately on certain parts of the economy and feeding a K-shaped dynamic. Warsh also sees disinflation as a potential product of technological innovation - should AI-driven productivity gains reduce inflationary pressure, the Warsh Fed would respond by cutting rates. The direction of travel under Warsh is therefore neither hawkish or dovish, but it is anchored to price stability, sceptical of its own forecasts and attentive to it asymmetric impact on the economy. How this pragmatic framework navigates an increasingly bifurcated economic landscape will be one of the defining questions of his tenure.

BoE easy 'wait and see'

As we anticipated, new Fed Chair Kevin Warsh has washed away any remaining fears over his independence, asserting himself decisively at his first Federal Open Market Committee meeting. Not only did the committee remove the language hinting at future rate cuts, but it also stripped the policy statement down almost entirely. The statement fell from around 300 words to 130, narrowly outlining present economic conditions - solid growth and energy-driven inflation - while forgoing forward guidance altogether. The stripped-down document delivered a blunt commitment to inflation control: “this committee will deliver price stability”.

The week ahead

US PCE inflation

PCE and core PCE inflation is expected to rise in May, affirming the Fed’s more hawkish stance. Bloomberg estimate the PCE price index increased 0.48% in May, raising the annual inflation reading to 4.1% from 3.8%. Core PCE inflation is expected to come in hot too at 0.35% for the month, boosting the core reading to 3.4%. Airfares, healthcare costs and portfolio management fees account for much of the monthly rise in core inflation. 

Markets for the week 

 

This week in summary

• SpaceX’s record US$75bn stock market listing, known as an IPO, highlights strong risk appetite and the premium attached to frontier technology companies, reinforcing public markets as a viable destination for large-scale capital
• Equities recovered into the weekend after a softer start to June, with retail participation signalling a continued willingness to pay up for innovation-led growth
• Hopes of an Iran deal supported cyclicals and pushed oil lower, while bonds rallied, particularly in the UK, as inflation concerns eased - reports emerged on Sunday evening that a peace agreement had been reached
• The European Central Bank (ECB) has begun tightening into a weak growth backdrop, raising rates while signalling concern over energy-driven inflation but limited evidence of second-round effects
• The US Federal Reserve (Fed) is expected to hold rates, but a more hawkish (favouring higher interest rates) tone is likely as inflation remains sticky, with Chair Warsh potentially signalling a shift away from prior easing bias
• The Bank of England (BoE) is likely to remain on hold, balancing weak domestic growth against persistent inflation
• The Bank of Japan (BoJ) is expected to continue gradual normalisation with a modest rate hike, supporting yen stability and avoiding disruption to crowded carry trades.

Market review

Escape velocity: markets react to the biggest IPO in history

SpaceX blasted off on Friday, raising US$75bn at a valuation of c.US$1.8tn. This commentary can only address matters at a macro level and, in that context, what matters is what this tells us about risk appetite, the health of public equity markets as a destination for capital, and the extraordinary premium investors are willing to assign to businesses at the forefront of technological innovation.

Equity markets have so far lost ground in June following an incredible spring rally. Last week followed a similar pattern, before sentiment turned sharply into the weekend as the largest IPO in history coincided with a notable rebound. Technology-related stocks supported the bounce. The deal went off without a hitch supported by strong retail participation. That retail enthusiasm speaks to a broader willingness to pay-up for exposure to transformative assets even in a month where broader indices have struggled. From this angle risk appetite remains firmly open.

For much of the past decade companies have chosen to stay private for longer including many consequential technology companies. Last week was a reminder of what public markets can offer that private capital cannot: price discovery, liquidity, and broad participation. This deal marks the beginning of a handful of high-profile listings for large technology businesses and sets an encouraging tone for the markets ability to absorb such events.

The IPO also provides a fresh insight into how markets are pricing frontier technology and are assigning substantial premiums to businesses operating at the edge of what is technically possible. While this is fine in a rising market and where the economic backdrop remains supportive it leaves little margin of safety in a downturn.

Markets buoyed by hopes of Iran deal

There were renewed hopes for an imminent peace agreement after President Trump indicated that a deal would be signed by the end of the week and stipulated that the Strait of Hormuz would instantly reopen. This added rocket fuel to equities with cyclical sectors such as materials, real estate and industrials driving the market higher. Oil prices fell by a little over 6% across the week, with Brent closing at US$87/bbl. Bonds ended the week on strong footing too particularly in the UK with short-dated yields falling sharply as inflation fears ebbed. The 2-year gilt yield fell 0.14% to close at 4.23%.

On Sunday evening, on President Trump’s 80th birthday, a memorandum of understanding indeed appears to have been signed. It is still early stages, and the deal is likely fragile, but both parties have reportedly agreed to lift their blockades this Friday. Oil is lower again this morning with equities and bonds extending gains.

ECB hikes into slowdown

In the eurozone, the ECB raised rates by 25bps to 2.25% as expected, while revising inflation forecasts higher and growth lower. The decision reflects the inflationary impulse from higher energy prices, but the growth backdrop is undisputedly weak.

There is little evidence of second-round inflation effects; wage growth remains contained and medium-term inflation expectations are well anchored, suggesting that underlying inflationary pressures are not accelerating in a way that would justify a sustained tightening cycle.

Further hikes would weigh on European assets and could end up ultimately proving supportive of bonds. A pause after this initial move would allow risk assets time to adjust, while still anchoring inflation expectations. The market currently sees the ECB hiking once more this year with another likely in 2027. If the ECB hikes too quickly we would expect cuts next year, this seems unlikely now given the peace deal.

The week ahead

Fed rate decision

This Wednesday’s decision will be the first test for Chairman Kevin Warsh, who watches over an economy facing clear upward price pressures while the President continues to push for lower interest rates. While we think it is unlikely that the Fed will raise rates this week, the discussion within the Federal Open Market Committee (FOMC) will have shifted more hawkish. Warsh could look to assert his independence by abandoning Powell’s easing bias.

US CPI (a measure of inflation that tracks the changes in the average prices paid by consumers for a basket of goods and services over time) rose 4.2% year-on-year in May, in line with expectations at the headline level, with core inflation slightly softer at 2.9%. Much of the persistence in core inflation continues to be driven by shelter, and in particular the owners’ equivalent rent (OER) component, which is a lagging and somewhat imputed measure of housing costs rather than a real-time reflection of market rents. Strip this out and underlying inflation looks materially closer to target (with core CPI ex-shelter nearer 2.4%), but even so it remains above pre-pandemic levels, and underlying price pressures have not fully normalised.

BoE rate decision

The BoE is not expected to hike this Thursday with the swap market pricing in only a 4% probability of a move. Like the ECB, the BoE must weigh a weak growth environment against stubborn price pressures, but unlike the ECB it faces a more fragile domestic fiscal setting and a gilt (UK government bonds) market that remains sensitive to policy credibility. Recent weak data and the Iran deal gives Governor Bailey grounds to ‘wait and see’.

BoJ rate decision

The Bank of Japan is likely to raise its policy rate to 1.0% from 0.75%, continuing its glacial journey to normalise policy. The BoJ will likely tighten this week given their tightening labour market in combination with the global inflationary backdrop; higher energy prices and rising rates across other major central banks.

That gradual normalisation supports a steady appreciation of the Japanese yen, which remains heavily shorted by investors using it to fund carry trades (borrowing in a low-yielding currency such as the yen to invest in higher-yielding markets such as Brazil). When global rates are simultaneously rising, the yield gap is not materially lower when the BoJ hikes.

Given how crowded the yen carry trade is, any sharper or unexpected shift in policy or yield differentials could trigger a disorderly move in the currency - we saw this in the Autumn of 2024 when the Fed cut by 0.5% on the back of softening labour market data caused the yen to surge. We do not expect any surprises from the BoJ this week. 

Markets for the week 

 

This week in summary

• US equities paused after a strong run, as stronger economic data and renewed inflation concerns led investors to question whether interest rates may need to stay higher for longer
• A stronger-than-expected US payrolls report reinforced the picture of labour market resilience, but markets treated the news negatively as it added to fears that policy could remain restrictive
• Oil prices moved higher and price pressures continued to build, adding to evidence that the disinflation trend (a sustained period where the rate of inflation slows down) is becoming more complicated
• US Federal Reserve (Fed) officials have continued to strike a more hawkish or forceful tone, with markets now shifting away from expected rate cuts and beginning to price in the possibility of further tightening
• In Europe, the European Central Bank (ECB) is expected to raise rates, while the Bank of England (BoE) faces a more difficult backdrop of weak growth, persistent inflation and ongoing gilt market pressure
• This week’s focus is on the ECB rate decision, US Consumer Price Index (CPI) inflation and the market impact of the record-breaking SpaceX Initial Public Offering (IPO).

Market review

Hawks, payrolls and price pressures

Equities took a breather last week following nine consecutive weeks of gains in the US and a remarkably strong recovery globally since March. The tone has become more cautious as evidence of renewed price pressures continues to build.

Friday’s US payrolls report was particularly strong, with 172k jobs added in May, well above the 88k expected, while previous months were also revised higher. US equities fell 2.75% on the news, leaving the market down 2.6% over the week as inflation concerns outweighed the positive growth signal from labour market resilience. The strong payrolls added to other recent signs of renewed momentum in the US economy, including manufacturing output at a four-year high, strong equity market performance and resilient consumer spending. President Trump pushed back against the market reaction on Truth Social, writing: “With a great Jobs Report, like just announced, stocks should go up, not down. That’s the way it was for 200 years. Growth does not mean inflation! How else can a Country attain GREATNESS???”.

It is a dynamic investors have become familiar with in recent years: when inflation risks are elevated, good economic news can quickly become bad news for markets. Stronger growth raises the prospect that central banks may need to keep policy (interest rates) tighter for longer.

Oil prices also moved higher over the week, with WTI crude back above $90 per barrel, adding to inflation concerns as conflict in the Middle East continued to rumble on. Ahead of the June Federal Open Market Committee (FOMC) blackout period, Lorie Logan and Beth Hammack both argued for a tightening bias, aligning with our view that the Fed appears to be recalibrating in a more hawkish direction.

It is an interesting start to Fed Chair Kevin Warsh’s term, as he is already under pressure to move against the President’s view that interest rates should be lower. Warsh’s main argument for lower rates had been that productivity gains from Artificial Intelligence (AI) should help reduce inflation for now, however, the AI build-out appears to be having an indisputable upward impact on prices. Warsh may look to assert his independence at the June meeting by abandoning Powell’s easing bias in favour of a tightening one (cutting to raising interest rates).

The bond market is already pricing in a tightening bias with the market now predicting one hike this year and another likely in 2027. Before the Iran conflict the market was pricing in three cuts by the end of next year. The 10-year treasury yield rose 9 basis points last week to close at 4.53%, up from 3.94% at the end of February. 

The week ahead

ECB rate decision (and thoughts on the BoE)

Hawks are circling on the other side of the Atlantic too, with the ECB looking certain to hike on Thursday. The market is currently pricing a 99.9% probability of a move. While the ECB is more likely to raise rates because it is starting from a more neutral stance than either the Fed or the BoE, it will still be wary of sounding too hawkish against a weak growth backdrop. President Christine Lagarde will likely leave the door open for a second hike.

This is similar to the BoE, although relative to European bond markets the gilt market remains under more strain from multiple directions. Growth looks more exposed to economic shocks than in either the US or eurozone, and inflation is simultaneously less well anchored. With gilt yields elevated and growth soft, any renewed inflation pressure risks worsening an already difficult fiscal backdrop. Like the ECB, the BoE must weigh a weak growth environment against stubborn price pressures, but unlike the ECB it also faces a more fragile domestic fiscal setting and a gilt market that remains sensitive to policy credibility. 

SpaceX IPO

SpaceX is listing about 555.6m shares at $135 each ($75bn) on Friday; a deal that could value the company at about $1.8tn. The rocket and satellite company is set to deliver the largest ever IPO, over double the size of Saudi Aramco’s $29.4bn listing in 2019. The company has already received orders for more than the shares available and index providers, like NASDAQ and FTSE, have changed their eligibility requirements to accelerate the firm’s inclusion in their benchmarks which will fuel buying from passive investors. 

US CPI inflation

Economists see inflation rising to 4.2% in May, the highest since April 2023, driven largely by higher gasoline prices and unfavourable base effects. While the year-on-year reading is expected to move higher, the monthly increase may prove more benign and closer to a pace consistent with the Fed’s target, as firmer energy and commodity prices are partly offset by softer goods demand. Even so, with inflation still elevated and growth momentum holding up, the release is unlikely to materially alter the Fed’s increasingly hawkish tone. May may prove to be the high point for this cycle, but not one that offers immediate reassurance to policymakers that inflation is heading back towards target. Indeed, May will mark the 63rd consecutive month in which CPI inflation has exceeded the Fed’s 2% target.

Markets for the week 

 

This week in summary

• US equities rose to another record high last week, with technology once again leading the market higher
• The backdrop also improved as oil prices fell, hopes of a US-Iran ceasefire increased and global bond yields moved lower
• The rally continues to look earnings-led rather than purely valuation-driven, with record forward earnings extending beyond mega-cap technology companies
• Although technology remains expensive, current valuations are still well below the extremes seen during the late-1990s technology bubble
• Stronger inflation and AI-driven investment demand are complicating the disinflation story and forcing the US Federal Reserve (Fed) to recalibrate their easing bias
• This week’s focus is on US manufacturing data, the US employment report and eurozone inflation, all of which should help clarify how restrictive central banks may need to remain.

Market review

Equities extend gains as AI enthusiasm remains the dominant market theme

US equities gained 1.6% last week, reaching another record high, with technology again leading the advance. Ongoing optimism around innovation and investment in technology continues to support markets.

The wider backdrop was also supportive. Hopes of a US-Iran peace agreement increased after reports of a ceasefire deal awaiting US President Trump’s approval. Oil fell to US$92 per barrel, its lowest level since mid-April, while market-implied odds of a lifting of the US blockade of the Strait of Hormuz by the end of June rose to 68%. Global bond yields moved lower, with the US 10-year Treasury yield ending the week at 4.44%.

While markets have rallied strongly in recent months, the move continues to be supported by earnings rather than pure enthusiasm. Forward earnings reached another record high last week, with technology at the centre of that strength. Technology earnings are forecast to grow 47.2% this year and a further 32.7% in 2027, after expanding 24.7% in 2025. So long as those forecasts are broadly realised, higher valuations can be justified. An earnings-led melt-up (a rapid surge in asset prices) is far more sustainable than one driven purely by multiple expansion and a fear of missing out.

Importantly, this is not just a mega-cap technology story. While the largest names continue to dominate headlines, earnings momentum is visible across a much broader swathe of the US market, with forward earnings for mid and small-cap companies also reaching record highs last week.

Although the information technology and communication services sectors continue to lead the market, their combined forward price/earnings ratio (how much investors are willing to pay per the companies expected earnings) of 23.2x is not an especially dramatic premium to the broader market at 21.2x. During the technology bubble of the late 1990s, the equivalent multiple rose above 40x. If market performance were being driven primarily by multiple expansion rather than earnings growth, that would be a clearer sign of excess. For now, that is not the case.

The AI investment and infrastructure build-out is also supporting other parts of the market, notably clean energy, which is up 43.6% year to date. Commodity markets continue to reflect the scale of that demand, with copper hitting record highs in mid-May.

With the US economy strong and financial conditions relatively loose, inflation risks are becoming harder to dismiss. Last week PCE inflation rose to 3.8%, its highest level since March 2023. Some policymakers, including Chair of the Fed Kevin Warsh, have argued that productivity gains driven by innovation and AI support the case for lower interest rates. Yet, in the near term, heavy investment in AI infrastructure, alongside rising energy demand from data centres, is contributing to shortages and adding to price pressures.

Higher productivity should, over time, be disinflationary. But it is equally true that interest rates should remain restrictive during periods of solid growth and the Fed has little reason to cut without a clear deterioration in the economic backdrop. While the bar for further rate hikes remains high, the case for easing fades if AI is proving inflationary in the short run. In that sense, the Fed seems to already be recalibrating their easing bias.

The week ahead

Manufacturing PMIs

In the US, the ISM and S&P Global manufacturing PMIs are released this week. Manufacturing has now been in expansion for four consecutive months, while services activity has eased but remains in expansion. Forward earnings growth has historically led the manufacturing PMI and on that basis the signal points to further strength in US manufacturing. Economists expect a reading of 55.3 from S&P Global and 53.0 from ISM, both firmly in expansion.

US employment report

The labour market in the US bounced in March and April and economists forecast another strong month for job growth in May. The unemployment rate is anticipated to remain at 4.3%.

Eurozone inflation

Euroarea inflation is expected to rise to 3.2% increasing the probability of a rate hike from the European Central Bank at their meeting on 11 June. The market places the probability of a June rate hike at 95%. 

Markets for the week 

 

This week in summary

• US launches new ‘self-defence’ strikes in southern Iran despite apparent progress in peace talks between the two nations
• Key sticking points remain unresolved, including control of both the enriched uranium and the Strait of Hormuz
• Last week, US Treasury market yields initially rose before retracing, while UK gilts outperformed amid falling oil prices and weaker UK data
• Equities remained resilient, with US indices extending gains for an eighth consecutive week and trading around record highs
• The US Federal Reserve (Fed) minutes struck a more aggressive tone, signalling policymakers remain willing to tighten further if inflation persists and pushing back expectations for rate cuts
• Kevin Warsh was sworn in as Fed Chair, with markets expecting pressure from him to a somewhat looser rate policy, a reduced balance sheet and less reliance on forward guidance

Market review

Volatility continues in the Middle East

Tensions in the Middle East remain elevated, with US strikes on Iranian targets overnight. In response, the Iranian leadership has warned the US will no longer have a ‘safe haven’ in the region. Despite this, peace negotiations continue in Qatar with President Trump saying talks are going ‘nicely’. The uncertainty is feeding through to energy markets; Brent crude opened up around 3% amid concerns over supply disruption and the timing of any deal to reopen flows through the Strait of Hormuz.

Rates divergence

The uncertainty is causing persistent volatility across the markets. US borrowing costs spiked last week: 30-year US treasury yields hit at a 19-year-high with the 10-year at its highest yield in over a year. Both then fell on Friday as positive signals emerged in US-Iran peace talks.

UK gilt yields, which had increased in recent weeks due to persistent inflation concerns and expectations of further interest rate rises, moved lower. This reflected falling oil prices and softer UK economic data, which led markets to scale back expectations for any further increases in interest rates by the Bank of England. The biggest change happened in short-term bonds, which are more sensitive to interest rate expectations, with yields falling as markets reduced the likelihood of further rate rises.

Subsequently, the gap between US and UK 10-year yields narrowed to around 35 basis points, reducing the relative income advantage previously offered by gilts.

Meanwhile, the Fed signalled that it is prepared to keep interest rates higher for longer if inflation remains persistent. However, incoming Fed Chair Kevin Warsh, a President Trump appointee, is expected to show a bias towards rate cuts, despite committing to lead the central bank independently. At the swearing-in ceremony, President Trump told guests: ‘I want Kevin to be totally independent. Don’t look at me. Don’t look at anybody.’

A tale of two economies

US data was resilient last week, with initial jobless claims holding near multi-year lows. The flash manufacturing Purchasing Managers’ Index (PMI) surged to a four-year high of 55.3, likely driven by pre-emptive stockpiling ahead of anticipated price uncertainty.

The UK picture was notably weaker. Unemployment rose unexpectedly to 5%, while payrolls fell by 100k in April, the largest decrease since the start of COVID-19. Inflation also came in below expectations, with headline Consumer Price Index at 2.8% versus 3.0% forecast.

Activity indicators softened: The services PMI fell into contraction at 47.9, and retail sales declined by 1.3% month-on-month, worse than expected.

This comes against a more uncertain political backdrop. Keir Starmer faces growing pressure ahead of the 18 June Makerfield by-election, which some see as a potential trigger for a leadership challenge.

This shift in UK data is important for policy expectations. A services sector moving into contraction materially weakens the case for further interest rate rises and raises the probability that the Bank of England remains on hold. This has supported shorter-dated UK gilts and suggests scope for further gains should growth concerns persist.

Equities resilience and earnings

Equity markets remained robust last week. US stocks traded weakly in the early part of the week, weighed down by a pullback in some technology names, before recovering from Wednesday onwards, supported by growing hopes of a resolution to the Middle East tensions. US small caps outperformed large caps, rising around three times as much as the broader market although still underperforming over the month.

Nvidia was the standout earnings story, reporting its latest quarterly revenues to end-Apri of $81.6bn, up 85% year-on-year and ahead of the $79.2bn consensus. The company also announced an additional $80bn share buyback and raised its quarterly dividend. Despite the numbers, the stock fell in a classic sell-the-news reaction following a significant pre-earnings run-up, ending the week down around 4.4%.

UK and European equities had a strong week, with the latter posting their best weekly gain in over a month. 

The week ahead

Economically, this week is dominated by US data releases on Thursday, when Personal Consumption Expenditures (PCE), the second estimate of Q1 Gross Domestic Product (GDP), durable goods orders and initial jobless claims are all released. Core PCE is expected to tick up to 3.3% year-on year (YoY) from 3.2%, Q1 GDP second estimate is expected to be unrevised at 2.0% annualised and durable goods orders are forecast to jump sharply to +3.9% MoM from +0.8% as firms continue to manage inventories against cost uncertainty.

Overarching all of this is the Iran situation. A US-Iran deal, if announced, would be the single most significant macro event of the week, materially affecting the oil price backdrop against which PCE and bond markets are interpreted. However, with the overnight strikes it seems that uncertainty is prevailing.

UK data is light, with the May British Retail Consortium shop price index, already released at 1.2%, the underwhelming highlight. This Friday, flash German CPI for May is expected to hold at 2.9% YoY although a higher-than-expected print may reinforce the case for a European Central Bank June hike which is currently 90% priced in.

 

This week in summary

• UK gilts (UK government bonds) have come under pressure from a confluence of factors, including rising political uncertainty following Labour’s election losses, a deteriorating fiscal outlook, sensitivity to higher global energy prices amid the conflict in the Middle East and persistent inflation against a backdrop of weak growth
• Shorter-dated gilts have been more resilient, with current yields offering a cushion and markets arguably overpricing future rate hikes given the fragile economic outlook
• While downside scenarios highlight the risk of stagnation or recession from sustained yield increases, they underplay stabilising forces including demand destruction and potential policy support
• The Bank of England (BoE) is likely to remain on hold, with any near-term rate hike risking a policy mistake; a sustained further rise in yields appears unlikely without renewed inflation pressure
• In the US, stronger-than-expected inflation and AI-driven investment demand are complicating the disinflation narrative, likely keeping the US Federal Reserve (Fed) on hold for longer than markets anticipate
• This week’s focus is on Federal Open Market Committee (FOMC) minutes, expected to signal a more hawkish and less easing-biased Fed, alongside UK labour and inflation data which should show moderating employment but still-sticky inflation with a likely summer reacceleration.

Market review

The UK’s political risk premia

Job security at No. 10 Downing Street is at a low following the election rout for Labour earlier in the month. The Prime Minister is under pressure to step down after his party lost nearly 1,500 council seats across the country. Wes Streeting, Andy Burnham and Angela Rayner are seen as the front runners to challenge Starmer.

The timing for the political turmoil has not been good for the UK’s bond market as global bond yields have coincidentally surged due to the conflict in the Middle East and rising inflation. UK gilts are under pressure on multiple fronts; a rising political risk premium, a deteriorating fiscal backdrop, heightened sensitivity to this global energy shock accompanied by stagnating economic growth and finally a wave of inflation that has seen UK consumers lose a third of their purchasing power since 2021. Gilt yields have risen to their highest levels since 1998 with the 10-year yield closing the week at 5.17%. The pound fell 2.2% against the US dollar last week.

Shorter maturity gilts have been more resilient. The Bloomberg UK 1-5 Year Gilt Index has fallen only -0.5% year-to-date. With yields as high as they are it is hard to envisage a negative return from here on a one-year view. The market is already pricing around three rate hikes by March 2027 which appears pessimistic given the negative growth outlook in the UK. High yields provide a cushion against further losses, while the current pricing leaves scope for a rally should the outlook shift or inflation concerns ease.

The question from here is how high can yields go and what is the impact on the UK economy. Economist Stephen Jen outlines three potential downside scenarios over the next three years, based on both the magnitude and persistence of higher yields. While such frameworks are useful, the transmission of yields into the broader economy is complex and uncertain.

Crucially, these scenarios are deliberately bearish and do not fully account for stabilising forces. They ignore the old adage that the cure to high prices is high prices; high prices destroy demand which in-turn reduces the inflationary impulse facilitating lower bond yields. Policymakers retain tools to support the market if necessary, for one the BoE could halt active Quantitative Tightening – they are already effectively the last central bank still reducing their balance sheet. The Debt Management Office will likely focus on shorter-dated issuance, reducing the government’s borrowing costs and limiting the risks at the most vulnerable point on the yield curve (the long-end).

Our base case is for the BoE to remain on hold for the time being, they may hike rates in Q2 or Q3 once, but this is likely to be a policy error. While the bond market may be vulnerable, we do not believe that a further rise in yields will be particularly persistent given the implications for the economy. Nonetheless it is important to understand the potential economic implications for a further and persistent deterioration in the UK bond market:

Scenario 1: Stagnation

A persistent 1% increase in yields (this is approximately what we have seen since the end of February) results in a prolonged period of stagnant growth. Mortgage rates rise by around 0.75% and remain elevated gradually weighing on the housing market, leading to an approximate 7% decline by 2029. Sterling weakens, with GBP depreciating by around 4%.

Scenario 2: Recession

A persistent 2% yield shock (another >1% rise from here) pushes the economy into recession, shrinking by 3.2% over the three years. Mortgage rates rise by around 1.5%. Housing market weakness becomes more pronounced declining more than 13%. GBP depreciates by 7–8% vs the USD. This scenario would also create significant fiscal stress for the UK Government.

Scenario 3: Deep recession

Under a persistent 3% yield shock, the economy enters a severe recession contracting by more than 5% over three years. Mortgage rates rise by approximately 2.3%, remaining structurally higher throughout the period, while house prices fall close to 20% by the end of 2029. GBP/USD declines toward 1.20 (currently at 1.33). This scenario would also present a major fiscal crisis for the UK Government.

A note on US Input prices, AI and inflation

US Producer Price Index (PPI) inflation jumped from 4% to 6% in April far exceeding economists’ expectations – this surprise cannot be entirely explained by energy prices. Consumer Price Index (CPI) inflation has now been above the Fed’s 2% target for 60 consecutive months. The CPI print also reported higher than expected goods and services (core) inflation.

With the US economy as strong as it has been and financial conditions relatively loose, inflation risks becoming more deeply embedded. Some at the Fed, including its new chairman Kevin Warsh have argued that productivity gains driven by innovation and AI support the case for lowering interest rates; but it is notable today that the surge in investment to build out the infrastructure for AI and the insatiable energy demand for data centres is creating shortages and putting upward pressure on prices.

While it’s true that higher productivity reduces inflation it is also true that interest rates should be more restrictive during periods of economic expansion and that the Fed should not be cutting interest rates without the economic need to do so. While the bar for interest rate hikes remains very high, the Fed may be less inclined to cut interest rates when their main argument for doing so (AI) is having the opposite effect on price trajectory than their models imply – in short – the Fed is on hold for the foreseeable, at least until an obvious price trend emerges.

The week ahead

FOMC minutes

The FOMC minutes, due Wednesday, will provide further detail on the April meeting - also Jerome Powell’s final meeting as Chair. We expect the minutes to reflect a somewhat more hawkish tone, with several participants leaning toward a more neutral policy stance. As a result, any explicit easing bias in the guidance will likely be scaled back going forward.

The focus will also be on corporate earnings, with results from a major technology company closely tied to AI infrastructure likely to be a key market driver.

UK employment and inflation

UK labour market data, due Tuesday, is expected to show a moderation in job growth in March. Forward-looking indicators suggest labour demand may soften further in the wake of rising energy prices. The unemployment rate is expected to remain stable at 4.9%.

April inflation data is released on Wednesday. Headline CPI is expected to ease to 3%, largely driven by favourable base effects and previous government policy measures. However, inflation is expected to pick up over the summer, potentially rising toward 3.5% by year-end.

 

This week in summary

• US equities rose as earnings continued to impress, with technology leading on AI-driven demand and improving sentiment helped by signs of easing US‑Iran tensions
• The US labour backdrop stayed resilient, with payroll growth beating expectations and continuing claims falling, although labour force participation weakened
• Hard data was firmer than expected, with construction spending and factory orders both surprising on the upside, helped in part by continued electronics and infrastructure demand
• Outside the US, market returns were broadly constructive, with Japan particularly strong, while Europe was more mixed despite modest gains in some major indices
• Consumer sentiment weakened sharply, with survey data pointing to a record-low reading even as realised activity remained firmer than feared
• In Europe, firmer eurozone producer prices and hawkish European Central Bank commentary reinforced the risk that rate relief may be delayed if inflation does not ease sufficiently.

Market review

Earnings strength offsets softer sentiment

Markets moved higher over the week, underpinned by a strong earnings season. In the US, equities were up by over 2%, led again by technology on the back of AI-related demand. The wider message is that investors continue to favour companies with visible growth and resilient fundamentals.

Elsewhere, returns were more mixed but still broadly constructive: German equities rose 0.2%, Italian equities were up over 2%, China and Japan both gained c.3% and Emerging Market equities surged over 6%. The UK market was an outlier, with a modest decline on the week. Risk appetite was also helped by some easing in immediate concerns around Middle East tensions, although developments in Iran and the associated impact on energy prices remain an important macro risk to watch.

The macro backdrop remains supportive, if somewhat less clean than the headline market move suggests. US payroll growth in April beat expectations and continuing claims fell, indicating that the labour market is still holding up. Construction spending and factory orders also came in ahead of expectations, reinforcing the idea that activity has not softened as sharply as many had feared. However, weaker labour force participation, softer productivity and a record low reading in consumer sentiment suggest resilience is becoming narrower beneath the surface.

From a market perspective, leadership has remained relatively concentrated. The technology sector has continued to set the pace, supported by AI-related spending and demand expectations, while more cyclical and rate-sensitive areas have been less consistent. That pattern fits a market still willing to pay for structural growth and earnings visibility, but less willing to give the benefit of the doubt where the macro outlook is more exposed. For now, stronger hard data are carrying more weight than weaker survey evidence, although the divergence between the two is worth monitoring.

Thematics – not all exposure is equal

A consistent theme in recent earnings seasons has been the strength of infrastructure-related investment supporting the build-out of AI capabilities. Infrastructure has historically been viewed as a relatively defensive sector, offering some protection when wider markets fall, yet elements of the space, notably utilities, were among the strongest performers within wider markets in 2025.

Similarly popular in 2025 were positions in precious metals, with gold, silver and others surging to new highs. Mining equities were also very strong, with some returns running to several hundreds of percentage points during the year. Elements of this strength were fundamentally driven, with precious metals serving as important industrial inputs, but geopolitical uncertainty, central bank purchases and falling interest rates also played an important role.

The behaviour of these two thematics has been notably different thus far in 2026, demonstrating the importance of active selection and monitoring within portfolios. Both gold and silver saw significant drawdowns following the emergence of the Iran-US conflict, with miners responding accordingly. This reaction stands in contrast with what might typically have been expected, as a significant escalation in geopolitical tension would often prompt a flight to safety, including into precious metals. In this instance, however, rising inflation concerns appear to have offset that relationship, with traditional safe haven assets offering less protection than investors might normally have anticipated.

The gold price and related equities are now broadly flat year-to-date despite the very strong start to the year. This sits in contrast to infrastructure-related equities, which have delivered double-digit returns year-to-date and provided, for the most part, reasonable downside protection during wider equity market sell-offs.

Infrastructure-related investments suffered heavily as interest rates rose in 2022, so one might have expected similar concerns given the inflationary expectations emerging from the conflict. However, underlying fundamentals within the space have thus far proven resilient, with the strong inflation linkage of cashflows providing investors with greater comfort around future performance. Policy-backed investment in electrification and grid expansion, together with rising expectations for AI-related power demand, has brought a sector once viewed as relatively defensive into sharper focus for a wider group of investors.

As hopes for a resolution to the conflict resurface, we are again reminded of the importance of diligence and rigour in investment decision-making and of looking beyond first-order effects. One might have expected two traditionally defensive or safe haven themes to have delivered similar performance in portfolios this year, but gold and infrastructure have diverged relative to wider global equities. While this is not unique to these particular themes, it does highlight the need to combine long-term conviction with tactical flexibility in an evolving market environment.

The week ahead

US macro data: Existing home sales (Monday); CPI (Tuesday) PPI (Wednesday) and Retail Sales (Thursday) will give a further read on underlying strength of the US economy. Consensus is for broadly flat home sales and month on month CPI/PPI reads, with an uptick in year-on-year CPI and weakness in core retail sales.

Oil: Crude oil inventories and OPEC monthly market report on Wednesday will give colour on the current state of the oil market.

Geopolitics: US President Trump is due to meet Xi Jinping on Wednesday – Friday this week, in the first visit to China by a US President in nearly a decade. Tariffs and the Iran war will be the likely focus of discussion, with potential for market-moving updates in both directions.

 

This week in summary

• Global equities rose 0.76% on the week and 10.15% in April, with the US leading thanks to exceptionally strong and broad‑based earnings
• The ‘Magnificent Seven’ delivered across-the-board earnings beats, though market reactions were mixed; the group finished the week up 0.45% amid excitement over Artificial Intelligence (AI)‑driven demand offset by scrutiny of rising expenses and investment
• AI‑related capital expenditure remains extremely strong, with multiple investment categories hitting record highs and high‑tech’s share of US non‑residential capex reaching a record 55%
• Ten major central banks met with few surprises; all held rates, though the US Federal Reserve (Fed) saw unusual dissent
• Markets expect US cuts while the European Central Bank (ECB) and Bank of England (BoE) face pressure to tighten despite weaker economies
• US labour‑market data remains robust, with weekly jobless claims hitting their lowest level since 1969 last week, raising the possibility of a stronger‑than‑expected April employment report due this Friday.

Market review

US equities lead on earnings strength

Global equities ended the week up a muted 0.76%, but April closed with a striking 10.15% gain - the strongest monthly return since November 2020. The US continues to lead the rally, supported by broad‑based and exceptionally strong earnings. With most companies now having reported, the market is on track for a sixth consecutive quarter of double‑digit earnings growth. Analyst expectations for earnings growth over the next year rose to 21.2% last week, helping to justify the rebound following the March sell‑off around the Iran conflict.

The focus last week was on the ‘Magnificent Seven’, with five of the seven mega‑cap tech names reporting. All five beat expectations on both revenue and earnings, though market reactions were mixed as investors weighed AI‑related demand against rising expenses/investment. The group showed wide dispersion and ended the week up 0.45%.

A key takeaway is that AI‑driven capital expenditure remains extremely strong, with no signs of slowing, and external capital‑spending indicators are red hot. Nondefense capital goods orders (excluding aircraft) hit fresh record highs in March, continuing the strong uptrend since 2024. Intellectual property (including software) and business‑equipment investment (including semiconductors and servers) also reached record highs in the first quarter and have been rising for five years. Software, information‑processing equipment, and  research and development have likewise reached fresh record highs this year. Growth in information‑processing equipment has steepened significantly amid the AI‑driven investment boom, pushing a high‑tech’s share of total non‑residential capital spending to a record 55%.

Few surprises from central banks

There were a total of 10 central bank meetings last week including the Fed, ECB, the BoE and the Bank of Japan (BoJ). All face renewed inflation challenges. The key question is, of course, how much inflation is coming down the pipeline and how central banks will respond.

The Fed has a dual mandate explicitly targeting full employment as well as inflation, this makes it easier for the Federal Open Markets Committee (FOMC) to prioritise the labour market over inflation and to delay interest rate hikes. It helps that the US is about half as vulnerable to oil shocks as Europe or Asia. Markets still anticipate interest rate cuts in the US this year, while the ECB and BoE are expected to raise rates. However, both the UK and eurozone have weaker economies, and the transmission from supply‑side inflation (energy) to demand‑side inflation (wages and goods) is less clear. Workers have less bargaining power than in 2022, and firms may struggle to pass on costs to already‑pressured consumers. This may make policymakers more cautious about tightening further, even as markets price in additional hikes.

The Fed, ECB, BoE and BoJ all held rates steady last week and there were few surprises with the BoE, ECB and BoJ all hinting at their willingness to potentially raise rates when necessary. The Fed, however, saw an unusually high number of dissenters: one voting for a rate cut rather than a hold, and three opposing the inclusion of language implying a continued easing bias. This was notably the final FOMC meeting chaired by Powell and marked the highest number of dissents during his tenure.

While Powell’s term as chair ends in May he has vowed to remain on the Board of Governors for an unspecified period (an uncommon choice, as outgoing chairs typically step down entirely). He cited political interference as his reason for remaining. Powell’s term on the Board runs until January 2028.

The week ahead

US employment report:

The US labour market has remained robust this year, with job growth at larger companies offsetting cooling labour demand among smaller businesses. The unemployment rate is expected to hold at 4.3% in April. Weekly labour‑market data for April has also been remarkably strong. Initial unemployment claims fell last week to their lowest level since 1969, indicating that layoff activity remains exceptionally subdued. Continuing claims are also declining. This strength in the high‑frequency data raises the possibility of a stronger‑than‑expected April employment report from the Bureau of Labor Statistics.

 

 

This week in summary

• Equity markets paused after a sharp April rebound, with US strength supported by corporate earnings, while Europe and other regions lagged amid ongoing Middle East uncertainty
• Oil has surged to $105 per barrel (bbl) but the market has adapted well to the historic supply shock through rerouted flows and emergency supply
• The energy shock is feeding into inflation, with UK Consumer Price Index (CPI) rising to 3.3%, though pressures remain largely energy-led for now
• Central banks are expected to look through the spike, with inflation expectations still anchored, keeping the bar high for further tightening even as rate cuts are pushed out
• A busy week ahead, with major central banks expected to hold rates, alongside US growth rebounding and early signs of a conflict-related slowdown in euro area data.

Market review

Schrödinger’s Strait: oil shock, contained

The market recovery in April has been more sprint than marathon. While the US clung to its highs last week thanks to some strong corporate results, Europe and other regions slipped back, once again reacting to developments in the Middle East. The ceasefire may have been extended, but it remains fragile. The Strait of Hormuz is simultaneously open and closed (‘Schrödinger’s Strait’), and negotiations are stale, at best.

With both sides unyielding and with President Trump keen to end the conflict, it may well be that further military escalation is needed to expedite the war. There are hawkish members of the administration who are inclined to ‘finish the job’ in forcing regime change and this remains a potentially overlooked near-term risk for markets. For the moment, a continuation of extended ceasefires and stalemated negotiations seems the most likely outcome and equities are attempting to look through it all and focus on the rosier fundamental picture.

Oil remains the market’s most direct pressure point. Brent rose 16.5% last week to $105/bbl, yet some analysts have noted that the move still looks contained relative to the scale of disruption. The Arab oil embargo in 1973 removed roughly 5% of global supply and drove a 400% price surge. Today’s shock is significantly larger, yet prices have moved from around $60 to $100, surging rather than spiralling.

As highlighted by economist Ed Yardeni, this reflects a market that is far more adaptive than in past crises.

First, supply has not disappeared, it was disrupted and now, where possible, is being rerouted. Saudi Arabia and the UAE have pushed alternative pipeline infrastructure to capacity, diverting flows away from the Strait and offsetting the loss of seaborne supply by c.7m barrels per day (c.35% of the supply previously through the Strait).

Second, emergency supply has filled part of the gap. Strategic reserve releases and policy flexibility to accommodate sanctioned barrels, have injected additional liquidity into the market.

Third, headline prices are masking regional stress and illiquidity. While Brent has consolidated near $100, physical markets, particularly in Asia, are far tighter, with buyers paying substantial premiums to secure immediate supply. The global benchmark and futures (where two parties agree today to buy or sell something at a set price on a future date) therefore understate the severity of local dislocations in the spot market.

Fourth, like the old saying ‘the cure for high oil prices is high oil prices’ demand is already adjusting lower. Higher prices are beginning to ration consumption, from reduced air travel to government-imposed efficiency measures across emerging markets. The International Energy Agency (IEA) now expects global oil demand to contract this year.

Finally, and perhaps most importantly, the global economy is simply less energy intensive than in previous decades. That lowers the price required to rebalance supply and demand, preventing the kind of extreme price spikes seen in the 1970s. The global economy is more protected against high energy prices and $150 could well be the new $100, the level previously assumed to cause a recession.

All these factors considered, a reasonable base case may be for oil to trade between $85 and $100/bbl for the short to medium term.

The energy shock is already feeding into headline inflation. In the UK, CPI rose to 3.3% in March, up from 3.0%, with the increase almost entirely attributable to higher energy prices. A similar pattern, to a lesser extent, is evident in the US.

For now, central banks are likely to look through the initial energy-driven spike. Core inflation remains relatively contained and, longer-term inflation expectations are still anchored. Futures prices in the UK still show inflation undershooting the Bank of England’s 2% target over the medium term. Rate cuts have been delayed, but the bar for renewed tightening remains high. As long as expectations stay anchored and second-round effects are contained, this is more likely to slow the pace of easing than reverse it entirely. As long as a resolution to the conflict remains elusive, bond yields in the UK and Europe are likely to remain elevated and the probability for more structurally embedded inflation is increased.

The week ahead

Central bank meetings:

There are a total of ten central bank meetings this week including the Bank of England, the US Federal Reserve, the European Central Bank (ECB) and the Bank of Japan. All are expected to hold rates steady while maintaining flexibility to hike rates if signs of second-order effects begin to appear. 

US GDP growth: 

Economic growth in the US is expected to have accelerated in the first quarter to 2% from 0.5% in the final quarter of last year. The temporary slowdown in Q4 was driven predominantly by the government shutdown. This year consumer spending has softened slightly on the back of elevated inflation fears while business investment has been robust. 

Euro-area GDP growth:

Growth in the first quarter is expected to come in at 0.2%, a slower pace that evidences the first bit of damage from the conflict in the Middle East. The figures are released the same day as the ECB’s rate decision and the inflation report for April. Inflation is expected at 3.0%, up from 2.6%.