Weekly Markets Review

This week in summary

• Central banks turned more hawkish: The US Federal Reserve (Fed) raised interest rates by 25 basis points (bps) and signalled further hikes, while the Bank of England held its rate but saw three of its Monetary Policy Committee members back an immediate increase; the Bank of Japan also raised rates, though a divided vote weakened the yen
• Geopolitical tensions escalated: Ukraine launched its largest-ever drone attack on Moscow, while Russia struck targets near the Polish border, raising concerns about broader regional and NATO-related risks
• Markets navigated artificial intelligence (AI) and policy uncertainty: AI safety warnings briefly hit chip stocks, but sentiment recovered as investors looked past the concerns, while higher rate expectations boosted US Treasury yields (government bonds) and the dollar.

Market review – what’s happening now

Warsh walks the walk

As the Danish proverb goes ‘It’s hard to make predictions, especially when they’re about the future’ – this is one of the reasons why Fed Chairman Kevin Warsh refrains from providing forward guidance on future interest rate policy decisions.

The other is that reading the market is an important aspect of the conduct of monetary policy, and to influence the market through the provision of guidance obscures the very signals they are trying to read. This has not been a challenge in recent weeks; the market has demanded this rate hike and if the Fed had not delivered the weakness across the US bond market would have become even more acute.

Since taking the helm at the Fed Warsh had talked tough but done little and investors were beginning to question the Fed’s credibility in the deliverance of price stability. The bond market demanded action and the Fed delivered with a unanimous 12-0 vote.

In our view, Warsh is fundamentally a price stability pragmatist and questions over his credibility are unfounded. His commitment to price stability is sincere and this hike is necessary. During the press conference, Warsh said he would be "hard pressed to describe financial conditions as restrictive", signalling that further rate rises remain possible. While Warsh may not be in the forward guidance business, his reaction function here is clear, in making these statements he leaves open the door for further interest rate increases. The FOMC concur with the dot plot showing eight members expecting a second hike this year and a third in 2027 while four see a further two hikes this year. The median expectation across the FOMC is for one further hike this year and none in 2027 – on this basis the Fed remains behind the market which has a more hawkish expectation.

On inflation we have held the view for some time that pressures are primarily coming from two areas: energy and AI. In this regard there is no better argument than August’s data on import prices. Import prices rose 7.0% year-on-year in August, the fastest pace since August 2022. Petroleum import prices rose 27.3%. Import prices from the newly industrialised Asian countries surged 12.6%, consistent with the intense demand we are seeing for the semiconductors, servers, memory and other electronics required for the AI build-out. The AI build out continues to put upward pressure on prices – this is likely to continue until AI adoption produces enough productivity enhancements to offset the demand/supply imbalance – while this could happen, like a leprechaun's gold, such productivity gains seem to be getting further away the closer we get.

The week ahead – what's next for investment markets?

S&P Global PMI survey

The September flash PMI releases due Wednesday are the standout data point of the week, covering the US, eurozone, UK, France, Germany and Japan. Consensus expectations are broadly constructive, though the key question is whether elevated energy costs are beginning to weigh on activity.

Middle East conflict

Brent crude remains elevated at over US$100 per barrel (+68% year-to-date) as the US-Iran conflict keeps Strait of Hormuz transit risk in focus. Investors will be watching for any escalation in Houthi attacks on Gulf infrastructure or, conversely, diplomatic progress at the UN General Assembly (where Trump is meeting Gulf leaders this week).

Markets for the week 

 

This week in summary

• Middle East tensions escalated last week as the US and Iran exchanged attacks on vessels and maritime assets, while the Houthis advanced in Yemen and drone strikes damaged Saudi energy infrastructure, threatening key regional shipping and oil export routes
• Energy markets were volatile: Brent crude briefly surged above US$109, WTI oil topped US$100 for the first time since July before retracting and diesel prices reached record highs amid supply concerns
• US Treasury buybacks disappointed despite an increase in operation size, with 10-year Treasury yields reaching their highest level since 2023
• The European Central Bank (ECB) raised interest rates 25 basis points to 2.5%, with President Lagarde calling the move a "no brainer" ─ markets are now pricing a further three 25 basis point hikes by mid-2027
• UK July gross domestic product (GDP) rose 0.4% month-on month, beating expectations for a third consecutive month
• Monthly US core Consumer Price Indices (CPI) came in slightly above expectations (+0.3% month-on-month), strengthening expectations of a US Federal Reserve (Fed) rate hike next week and further rises by year-end.

Market review – what’s happening now

The evolution of the world's reference rate

The US 10-year Treasury yield pushed higher again last week, edging towards levels markets have not sustained for nearly two decades. The 5% threshold is a symbolic marker for investors and is likely to attract disproportionate attention from the financial press, not least because round numbers naturally lend themselves to headlines and market narratives. A move above 5% may be viewed as a signal of tighter financial conditions, pressure on equity valuations and further evidence that the era of exceptionally low yields has ended. Yet the significance of 5% should not be overstated. It is not a precise tipping point but rather a convenient reference point from which to assess the prevailing interest rate regime.

Why the focus on this 10-year rate? Well the 10‑year isn’t just another bond. It is the reference rate for much of the modern financial system. The modern history of this reference level begins in the 1950s, shortly after the 1951 Treasury-Federal Reserve Accord freed long-term government bond yields from wartime controls. As America's bond market matured, the 10-year Treasury yield gradually became the benchmark against which mortgages, corporate borrowing costs and eventually much of global finance would be measured.

The 10-year Treasury yield is also not just a single instrument, but a title. Since it was first issued, hundreds of different notes have worn the crown. Every few months, a new issue inherits the title of ‘the 10‑year,’ with the current holder being a 4 5/8 coupon Treasury which matures on the 15 August 2036. The 10-year is thus not a single bond, but a lineage of bonds, each passing the benchmark status to the next.

Although Treasury debt stretches back much further, the modern history of this dynasty spans every major American economic regime since the 1950s. The first generation emerged in the post-war boom, when yields were largely contained between 2% and 5% amid strong growth and relatively stable inflation. The ‘Great Inflation’, which ran from the late 1960s to the early 1980s, was a very different world, with yields surging above 10% for half of the 1980s and briefly over 15% as the Fed fought runaway prices. The ‘Great Moderation’, from the mid-1980s until the eve of the Global Financial Crisis in 2008, brought declining inflation, steadier growth and yields that generally ranged between 5% and 8%. Through it all, successive generations of 10-year Treasury notes reflected the economic realities of their time.

The period after 2008 was different. As central banks cut interest rates to zero and embarked on successive rounds of quantitative easing, government bond yields collapsed. By 2016, the reigning 10-year yielded less than 1.5%, a level that would have seemed extraordinary to many of its predecessors. Although the Fed embarked on a rate hiking cycle from late 2015, the broader regime of ultra-low rates, abundant liquidity and subdued inflation arguably persisted until 2022. It took the combination of post-pandemic supply disruptions and Russia's invasion of Ukraine to bring about a decisive break from that era and return inflation, interest rates and bond yields to levels that had become unfamiliar to a generation of investors.

Viewed in that context, the approach towards 5% may tell us less about the significance of a particular number and more about how far markets have travelled from the extraordinary conditions that prevailed after the Global Financial Crisis.

The current 10-year has inherited a very different landscape from many of its predecessors. For much of the post-crisis era, falling inflation, quantitative easing and abundant global savings acted as a powerful anchor on yields. Today, investors are grappling with larger fiscal deficits, reduced foreign demand for government debt, higher real interest rates and a more uncertain inflation outlook.

Yet this is not simply a story of deteriorating fundamentals. The US economy continues to show resilience. Unemployment remains low, wage growth has moderated without stalling, and there is little evidence that inflation is becoming embedded in wages and prices. At the same time, investors appear increasingly willing to give Kevin Warsh the benefit of the doubt. His recent communication has helped restore confidence in the Fed’s commitment to price stability, reducing fears that higher yields will trigger a disorderly repricing across financial markets.

The 5% level on the US 10-year Treasury matters because it is a visible threshold and a key input into borrowing costs, valuations and asset allocation decisions. However, a move over 5% does not automatically signal a fiscal crisis, recession or equity bear market. If yields are rising while nominal growth, productivity and investment are strengthening, the economy and corporate earnings can absorb a higher cost of capital. What 5% represents is a transition to a higher-rate world, not necessarily a breaking point.  

By contrast, a sustained move towards 6-7% would be more significant. Those levels would take yields back towards the upper end of the range experienced during the latter part of the ‘Great Moderation’. After briefly exceeding 7% in the mid-1990s, the 10-year Treasury spent most of the following three decades below that threshold. A return towards 6-7% would therefore prompt closer scrutiny of financing costs, economic growth and corporate profitability.

If last week’s move felt significant, it’s because the market is no longer just debating whether yields are high for the cycle. It’s debating the era. The 10‑year dynasty has entered a new regime. One where 5% is not an outlier, but a new reference point.

The week ahead – what next for investment markets?

Central bank rate decisions

The Fed will announce its policy decision on Wednesday, with markets now pricing a rate hike following firmer core CPI data. The Bank of England (BoE) meet Thursday and the Bank of Japan(BoJ) on Friday, making this a pivotal week for global monetary policy. There are hawkish expectations for both, but while a 25 basis point hike is fully priced for the BoJ, expectations for the BoE are that it will remain on hold.

UK data ─ triple results

Three key results will be announced this week: July employment (Tuesday): Weekly earnings expected at 3.9% versus 4.1% previously, with unemployment forecast to remain at 4.9%; August CPI (Wednesday): Headline inflation forecast to rise to 3.1% year-on-year; August Retail sales (Friday): Expected at -0.2% month-on-month ex-fuel.

US retail sales

August retail sales data are released on Wednesday, providing a read on the resilience of US consumer spending amid persistent inflation pressures.

Markets for the week 

 

This week in summary

• Rising energy prices and persistent inflation concerns pushed sovereign bond yields higher, as investors demanded greater compensation for mounting fiscal risks and questionable policy credibility
• In the US, attention is focused on whether Federal Reserve (Fed) Chair Kevin Warsh can reinforce the Fed's inflation-fighting credentials, with a failure to tighten policy risking further upward pressure on long-dated Treasury yields (US government bonds)
• Japan's move towards higher interest rates has strengthened the yen and challenged the global carry trade (borrowing in a low-interest-rate currency to invest in a higher-yielding one), reducing a key source of demand for international bond markets
• UK gilt yields rose amid renewed inflation concerns, fiscal constraints and structural vulnerabilities to energy price shocks
• This week's focus is on the European Central Bank (ECB) rate decision and US CPI inflation, both of which could have significant implications for bond markets and the path of interest rates.

Market review

The rising cost of fiscal imprudence

Sovereign bond yields continued to move higher across developed markets last week as the escalation of the conflict in the Middle East pushed energy prices higher. More broadly, the markets are becoming increasingly concerned about the combination of fiscal imprudence and central bank credibility in the face of persistent inflation. The bond vigilantes are demanding higher yields, as the 10-year US Treasury yield rose above 4.8% on Tuesday and remains marginally below that level.

The administration appears determined to outrun the deficit through growth having abandoned plans to reduce borrowing as the national debt rises above US$40tn. That leaves Kevin Warsh in the Fed and Scott Bessent in the US Treasury working to alleviate the bond market pressures.

Kevin Warsh took the chair of the Fed at the end of May and quickly affirmed his commitment to delivering price stability. That credibility was impaired by July's decision not to raise rates, which triggered a sharp bear steepening (long-dated yields rising) in the Treasury curve. His Jackson Hole speech was clearly intended to re-establish those inflation-fighting credentials and long-dated bonds initially rallied. Although investors have spent weeks listening to hawkish rhetoric, they increasingly expect action. If inflation comes in above expectations this week and the Fed fails to hike at their meeting later this month, they risk further bear steepening and erosion of Warsh's credibility.

The other major development last week came from Japan. The yield on 10-year Japanese government bonds briefly exceeded 3%, its highest level since 1997. Comments from Governor of the Bank of Japan Kazuo Ueda reinforced expectations that the BoJ will tighten policy again later this month. As Japanese investors become more willing to keep capital at home (because domestic yields are rising), global bond markets lose a significant source of demand. The yen strengthened last week as rising Japanese bond yields challenged the popular carry trade.

UK gilts (government bonds) have underperformed their European peers through the sell-off. The 10-year gilt yield reached 5.29% intraday on Wednesday - its highest level since 2007 - while the 30-year briefly touched 5.92%, a level not seen since 1998. The 10-year stands at 5.13% and the 30-year at 5.78%, with the front end bearing the brunt of the weekly move.

The UK's vulnerability to energy price shocks is more acute than most of its European peers, partly thanks to policy design (The Short-Run Marginal Cost formula for electricity pricing binds the cost of all electricity generation to the most expensive fuel source needed to meet demand). UK inflation is hovering just below 3% and is expected to end the year higher.

The domestic fiscal picture compounds the problem. UK Chancellor John Healey inherited a £23.6bn surplus against the government's main fiscal rule from his predecessor, Rachel Reeves. The surge in gilt yields has reportedly halved that buffer, leaving significantly less fiscal room ahead of his debut budget at the end of next month. UK government debt stands at approximately 95% of GDP, and with a 2026 fiscal deficit estimated at 3.8% of GDP, the debt trajectory is not self-correcting at current growth rates. Chancellor Healey will likely seek to restore most of the fiscal buffer at the October budget through further tax rises. The government has little appetite to address structural overspending. 

The week ahead

ECB rate decision

The ECB is expected to hike rates on Thursday, with markets assigning a 99.5% probability to the move after it was widely signalled by the governing council. The focus will likely be on future guidance with inflation expectations likely higher given the renewed surge in energy prices.

US CPI inflation

US inflation is expected to remain at 3.4% while core inflation (ex-food and energy) is anticipated to slow to 2.4%, its lowest level since early 2021.

Markets for the week 

 

This week in summary

• Global equities rose 0.7% in GBP terms, led by a continued recovery in technology shares
• Technology and communication services outperformed, while energy and healthcare lagged
• Software stocks rallied strongly as investors increasingly view them as beneficiaries of artificial intelligence (AI) adoption
• AI-related capital expenditure remains on an extraordinary trajectory, with major technology firms expected to spend around US$800bn in 2026
• Investors are paying closer attention to the financing structures underpinning the AI investment boom
• Jackson Hole – an annual gathering of central bankers and economists – reinforced the US Federal Reserve’s (Fed) focus on inflation, pushing expectations of a September rate hike higher
• Rising US debt levels and Treasury market intervention highlight growing tensions between fiscal policy, inflation control and bond markets
• This week, investors will focus on euro-area inflation and US payrolls for clues on the outlook for European Central Bank (ECB) and Fed policy.

Market review

Technology sector bounce back continues 

Technology stocks led the market higher in an otherwise mixed week for equities. Global equities gained 0.7% in sterling terms, with information technology rising 1.7% and the technology-adjacent communication services sector advancing 1.5%. Energy (-1.8%) and healthcare (-1.6%) lagged. Energy weakened as oil prices fell following diplomatic progress towards reopening the Strait of Hormuz and restoring Gulf shipments. Energy remains the best-performing sector year-to-date (+33.7%). Healthcare faced a combination of stock-specific disappointments, ongoing drug-pricing and regulatory concerns, and a broader unwind in market momentum.

Technology stocks were buoyed by another round of strong earnings, helping to revive the AI trade after a turbulent summer. The sector has been characterised by significant dispersion this year. Companies viewed as beneficiaries of AI investment, particularly semiconductor manufacturers at the base of the AI supply chain, significantly outperformed through the spring, while software and cybersecurity companies perceived as vulnerable to AI disruption lagged. That trend reversed during the early summer as investors began to scrutinise the pace and sustainability of AI-related spending.

More recently, however, performance has broadened across the sector. Both perceived AI winners and losers have rallied in August as investors increasingly view software companies as the critical distribution layer for AI adoption. While application software remains among the weakest-performing industries year-to-date, sentiment is improving rapidly. The software industry gained 5.3% last week and 8.4% over August, suggesting investors are becoming more confident that software companies will be beneficiaries, rather than casualties, of AI.

Assessing the plumbing of the AI investment boom

The summer swoon in AI-related stocks has done little to dampen the extraordinary investment cycle underpinning the theme. The world's largest technology companies are expected to spend roughly US$800bn on capital expenditure in 2026, primarily on AI infrastructure, with spending projected to rise further in subsequent years. Recent earnings and spending commitments suggest demand for compute capacity, graphics processors, memory and data centres remains strong, helping to support the broad recovery across technology shares through August.

What makes this cycle unusual is the increasingly interconnected, and often circular, nature of the ecosystem. Hyperscalers, semiconductor manufacturers and AI model developers are not simply customers and suppliers; they are also investors and lenders. Nvidia, for example, has provided financing to OpenAI, a portion of which will ultimately be spent on Nvidia’s graphics processing units (GPUs). 

For now, capacity constraints are evident across chips, memory and data centres, and major cloud providers continue to increase investment. Nevertheless, the market is paying closer attention to the financing structures supporting the AI buildout. Credit spreads, debt issuance and forthcoming capital market events, including a potential Anthropic IPO, will likely provide useful clues as to whether the investment boom remains on solid footing.

Warsh reaffirms hawkish tilt at Jackson Hole

Fed policymakers descended upon Jackson Hole Wyoming for the annual economic and monetary policy symposium, where Fed Chair Kevin Warsh delivered his keynote speech. In which he reaffirmed his commitment to delivering price stability, noting that inflation has remained above target for too long. The odds of a rate increase in September rose sharply from 37% to 65%. The yield on the two-year US Treasury bond rose from 4.17% on Tuesday to 4.34% by the week’s close.

The policy symposium comes at an interesting moment for the US Treasury market. Rising government debt and persistent fiscal deficits are increasingly colliding with the bond market's willingness to finance them at current yields, putting upward pressure on long-dated yields. Earlier in the month the Treasury issued 30-year notes with yields not seen since 2001, the market 30-year yield also hit 5.34%, the highest since 2007. 

According to Andrew Lees of MacroStrategy, the US is generating just 34 cents of nominal GDP growth for every additional dollar of debt, raising questions about the productivity of continuous government spending. With government debt now above US$40 trillion and interest costs continuing to rise, upward pressure on Treasury yields has become a growing challenge for authorities.

Recent interventions by Treasury Secretary Scott Bessent aimed at supporting the long end of the Treasury market were small in scale, but nonetheless sent a clear signal – that authorities are unwilling to tolerate endlessly higher bond yields. 

Concurrently, Jackson Hole and the Treasury's intervention offer a glimpse of the policy tensions likely to define the remainder of the decade. The Fed’s fight for lower inflation, the Treasury’s battle to lower yields, and the bond vigilantes demands for fiscal discipline at a moment where authorities are unwilling to deliver it. 

The week ahead

Euro-area CPI inflation

August's preliminary inflation reading, due today, is expected to show a sharp rebound in headline CPI – a measure of inflation that tracks how everyday prices of goods and services change over time – to 3.3% from 2.9% in July, driven largely by higher fuel prices following the Iran conflict. A stronger-than-expected inflation print would reinforce expectations that the ECB will deliver a further interest rate hike at next week's meeting.

US Payrolls report

August's employment report, due on Friday, is expected to show subdued job creation, with hiring over the summer running below the pace needed to stabilise unemployment. Much of the slowdown reflects a pull-forward of hospitality hiring ahead of the World Cup, alongside particularly weak government hiring. However, survey data continues to point to a relatively tight labour market, supporting our view that private-sector employment remains moderately resilient. The unemployment rate is expected to edge up to 4.2%.

Markets for the week 

 

This week in summary

• Bond markets remained under pressure as heavy government borrowing, sticky inflation risks and the scale of AI-related capital spending pushed long-dated yields higher
• US Treasury Secretary Scott Bessent announced that buybacks of 10- to 30-year Treasuries would rise from a maximum of US$2bn to US$4bn or more per operation from September, but the move was viewed mainly as support for market functioning rather than a change in the direction of yields
• Central bank risks remained finely balanced; this week’s discussion continued to focus on whether earlier evidence of easing US inflation was sufficient to justify patience, or whether resilient labour demand, firm underlying consumer activity and ongoing commodity-related price pressures would keep further tightening in play
• Equities were supported by strong earnings momentum and improving breadth; forward earnings for US equities have risen 24.9% year-to-date versus a 12.1% gain in the index, pulling the forward P/E multiple lower despite index highs – earnings strength has broadened to include a much wider section of global markets
• AI remained central to the market debate, supporting productivity and margins but also increasing scrutiny of infrastructure funding, supply-chain capacity and whether leading beneficiaries can continue to exceed elevated earnings expectations
• Japan highlighted the global bond market challenge, with inflation data released on Friday showing headline CPI rising to 1.9% year-on-year in July, core CPI increasing to 1.8%, and core-core CPI also reaching 1.9%, increasing pressure on the Bank of Japan as yen weakness continues to feed imported price pressures
• Japan also highlighted the broadening opportunity set, reflecting the continued expansion of investment themes beyond initial beneficiaries of the AI cycle.

Market review

Bond market pressure: supply, inflation and capital demand weigh on yields

Bond markets were again the main source of macro pressure this week. Long-dated yields rose as investors weighed the combined effect of large government funding needs, inflation risks linked to energy and commodity markets, and substantial private-sector investment in AI-related infrastructure. Together, these factors have increased competition for capital and made investors less willing to hold longer-maturity bonds without additional return. The US Treasury’s plan to increase purchases of older long-dated bonds helped calm trading conditions briefly, but does little to solve longer term concerns around debt sustainability.

US Treasury Secretary Scott Bessent has been consistent in his actions in recent weeks, showing little hesitation to intervene in support of the long end of the US Treasury market. His intervention in Japan at the beginning of August was the first joint US-Japanese intervention in over 15 years. By buying yen in euros rather than dollars, Bessent sent a clear signal that he is concerned about the impact of possible mass sale of US dollar denominated securities on the long end of the US Treasury market. This week’s intervention does nothing to reassure investors that the situation is in any way improved.

Equities: earnings strength supports the market

Equities were supported by another strong earnings season, with the notable feature being that earnings expectations have risen faster than share prices. Forward earnings for US Equities have increased materially year-to-date, outpacing the index and pulling the forward multiple lower even as the market has reached new highs. This means valuations have become less demanding than they were at the start of the year. The rally has also broadened beyond the largest technology companies, with stronger performance from the wider market and record forward earnings across large, mid and small caps. This breadth makes the earnings backdrop more durable than a simple mega-cap technology story.

Valuation is therefore less stretched than the index level might suggest. The premium attached to the largest technology companies has narrowed, while mid and small caps remain cheaper and have participated more fully in the rally. Technology valuations also look more grounded in earnings delivery than in multiple expansion. The key offset is the bond market: as Treasury yields move toward the top of their recent range, the comparison with equity earnings yields becomes more relevant. For now, rapid earnings growth is helping equities absorb that pressure, but the cushion would narrow if yields kept rising or earnings momentum faded.

Japan: policy pressure and AI-related opportunities

Japan is once again providing insight into a range of more global policy and corporate challenges. Inflation accelerated again in July as higher energy and commodity costs fed through into consumer goods, while yen weakness kept imported inflation in focus. This has increased speculation that the Bank of Japan may raise rates again as soon as September, particularly after earlier currency intervention only temporarily stabilised the yen. Japanese equities continue to benefit from improving earnings, revenues and margins, but currency weakness has diluted returns for overseas investors. More broadly, Japan reinforces the message from global bond markets: where fiscal policy is loose, inflation remains sensitive to commodities and central banks look behind the curve, investors are demanding more compensation to hold long-dated debt.

Japan continues to have meaningful exposure to the possible future beneficiaries of AI-related investment, lying beyond the most visible technology names in US and Emerging Market indices. It extends across the supply chain, including semiconductor production equipment, specialist materials, power components, data-centre infrastructure, electricity supply and grid equipment. As the cycle matures, the market is likely to focus less exclusively on the early winners and more on the practical constraints that determine whether capacity can keep expanding.

Despite current market exuberance and a clearly strong earnings environment, valuation discipline remains essential. Treating AI as a broad long-term theme rather than a single trade should help investors to avoid the worst of the hyperbole. Not all companies with exposure to the theme will generate attractive returns over the long-run and looking beyond the most ‘obvious’ beneficiaries of the AI story is likely to yield better results at this point in the story. 

The week ahead

Tuesday 25 August: US consumer confidence and new home sales

Our view: Consumer confidence is expected to edge down to 90.3 from 90.8, while new home sales are expected to fall to 620k from 628k. This would point to some moderation in household confidence and rate-sensitive housing activity.

Wednesday 26 August: Core PCE, Q2 GDP and durable goods orders

Our view: Core Personal Consumption Expenditures (PCE) is expected to rise 0.2% month-on-month, up from 0.1%, while the annual rate is expected to remain at 3.3%. GDP and durable goods are both expected to be broadly unchanged from their prior readings, at 1.5% and 0.5% respectively.

Thursday 27 August: Initial jobless claims and Jackson Hole

Our view: Initial claims are expected to rise slightly. Jackson Hole – an annual gathering of central bankers and economists – will be closely watched for any shifts in central-bank messaging on inflation persistence, fiscal pressures and rates.

 

Markets for the week 

 

This week in summary

• The second quarter earnings season has been very strong, especially in the US, pushing equity markets to new highs
• Upside surprises have come from the technology sector, but also energy and increasingly industrials as economic growth continues to broaden out
• Inflation data from the US showed a continued moderation, which is helpful for equity markets, and led to lower expectations for an interest rate increase at the next Federal Reserve (Fed) meeting in September
• US retail sales in July fell the most in over a year, tempering enthusiasm in markets at the end of the week, and reigniting concerns about the health of the US consumer
• Emerging Market stocks outperformed as investors bought back into the Artificial Intelligence (AI) trade after some steep declines
• Yet another heatwave spread across the UK and Europe, with implications for agriculture production and food prices
• Markets now look ahead to UK inflation and US jobs data, which will provide further clues as to the near-term direction of interest rates.

Market review

Strong corporate earnings are supporting the market

The vast majority of second quarter earnings reports are now in, and the results have been strong.  In the US about 85% of companies have beaten earnings estimates, and while the European figure is lower at about 63%, both metrics are above historical averages.  In the US second quarter earnings growth is expected to be close to 25%, excluding some one-off equity investment gains for large cap tech, which is a very healthy number. Estimates have been rising all year, in contrast to most, when analysts usually start the year too optimistic, and earnings growth for 2026 is now expected to be 30%-35% in the US and 10%-15% in Europe.  In the long-term equity prices tend to follow earnings, so this has been a positive week for markets, with US and Europe both reaching new highs.

So what has been driving this growth?  In the US it has come mostly from the technology sector, as demand for AI compute and investments in AI infrastructure continue to be very strong. This has eased some fears about over-investment in data centres and compute, although this remains a live debate. The energy sector has also shown strong earnings growth, driven primarily by oil prices being materially higher than a year ago due to the Iran war.  The industrials sector has also seen strong earnings growth and a recovery in orders. After several years of lower growth and destocking, industrial companies in the US are enjoying a cyclical upswing, as economic growth continues to broaden out.  Corporate operating profit margins in the second quarter are now approaching 20%, much higher than previous years.

The situation is similar in Europe, with the energy sector seeing the strongest earnings growth year-on-year.  Technology earnings have also increased, but less so than the US, and in Europe the large financials sector has seen higher earnings revisions too.  The industrials sector has not performed as well as the US, as it still has strong links to automotive production, which continues to struggle in the face of Chinese imports.  The sector with the highest negative revisions in Europe remains the consumer, as the high cost of living continues to dampen spending levels.  In Asia results have been more mixed, but technology stocks rebounded on strong demand for AI, leading to Emerging Market indices outperforming over the week.

Are cracks appearing in consumer spending?

On the positive side, inflation figures out last week in the US were encouraging. The core Consumer Price Index (CPI) rose 2.5% year-on-year, in line with economist expectations and matching the slowest increase since March 2021.  This pushed short-term government bond yields down on the day and expectations for an increase in interest rates fell.  On a less positive note, at the end of the week retail sales numbers were clearly disappointing, falling 0.6% month-on-month compared to an estimate of +0.1%.  Even stripping out the more volatile effects of automotive and energy sales it was a weak print, and the worst reading for over a year.  Putting the number in context, retail sales in the US still grew 5% year-on-year, but the consumer remains a very important part of the economy, and continued weakness would be a concern for growth.  However, if inflation remains more stable and the consumer is weak then there would likely be a lower chance of the Fed raising interest rates.

In Europe and the UK, the consumer has been struggling for a while with the cost-of-living crisis, having to cope with persistent inflation and high energy prices. Last week saw yet another record-breaking heatwave across the continent, with wildfires raging in drought like conditions in several countries. This has implications for agricultural production, with lower yields impacting supply, which could lead to higher food prices. It’s a risk that central banks will watch closely given the implications for inflation.

The week ahead

UK CPI inflation

Economists expect stable inflation in July of 2.9% despite the spike higher in oil prices during the month due to renewed tensions in Iran. 

US initial jobless claims

Markets will be watching labour market data closely for any signs of weakness following a surprisingly soft nonfarm payroll report for July.

Federal Open Market Committee meeting minutes

Investors are likely to scrutinise the minutes of the last Fed meeting, given it was just the second for new Chairman Kevin Warsh, with the next taking place  in mid-September.
 

Markets for the week 

 

This week in summary

• UK mid and small caps outperformed as strong earnings, improving economic data and record takeover activity highlighted the valuation opportunity in UK equities
• Foreign buyers continue to target UK assets, with more than US$60bn of mergers and acquisitions (M&A) announced this year as overseas acquirers take advantage of depressed valuations
• Global growth remains resilient, led by the US, with recession risks still appearing low despite signs of moderation in the labour market
• China remains the notable weak spot, with recent PMI data highlighting ongoing challenges in the world's second largest economy
• Key risks remain in focus, including Middle East energy supply disruption, scrutiny of AI-related capital spending and the potential for a more hawkish (favouring higher interest rates) US Federal Reserve (Fed)
• Markets now look ahead to US inflation and UK GDP data, which will provide fresh insight into the outlook for interest rates and economic growth.

Market review

The departure lounge: UK plc

UK mid and small cap stocks outperformed last week gaining 2.4% while large caps rose 0.5%, as a confluence of M&A activity and a broadly positive domestic earnings backdrop drew investors into the ‘cheap’ smaller end of the UK market.

 The M&A backdrop was the defining feature of the week - and of the year. The UK has now seen over US$60 billion of takeover activity in 2026, with foreign and private equity buyers consistently drawn by a valuation discount that continues to make UK assets look cheap relative to global peers.  The pace of dealmaking has accelerated to the point where UK takeover volumes are running some 250% above prior-year levels. 

The buyers are overwhelmingly overseas: US private equity, European strategics and Asian corporates. According to the ONS, the number of UK firms in foreign hands has risen 35% since 2020, with 6.6 million Britons now employed by foreign-owned companies - representing roughly one in five employees. 

The very valuation discount that has frustrated domestic investors for years is now acting as a powerful magnet for external capital, with Bloomberg describing the UK as a ‘departure lounge’. 

On a more positive note, underpinning the index move was also a busy and broadly constructive half-year reporting season. Across the domestically-oriented mid-cap universe, the tone of results was solid; companies in housebuilding, retail, insurance and financial services generally met or beat expectations, with several upgrading full-year guidance.  The one-year forward price/earnings multiple for UK mid and small caps stands at 11.6x, compared with 18.6x for global equities.

Strong UK economic data was the final trifecta of support for domestic equities. The July Services PMI rebounded sharply to 52.1 from a contractionary 48.8 in June, lending credibility to the more optimistic earnings outlooks being set by management teams.

The earnings and economic data suggest that the UK economy is in better shape than the persistent valuation discount implies - a message that overseas acquirers appear to have received more clearly than the public market.

Fresh global economic insights support our growth thesis

Economic activity remains robust, with the US continuing to lead global growth. Last week's data confirmed broad-based expansion. US ISM Manufacturing rose to 55.6 in July, its highest level since May 2022 and a seventh consecutive month of growth, while the Global Composite PMI climbed to 52.6, its strongest reading since February. Consumer spending, corporate profitability and labour markets remain supportive of continued expansion, leaving recession risks relatively low. The one notable exception was China where PMI data was significantly weaker than anticipated with the composite index falling to 50.8 from 53.6. The Chinese economy has struggled with persistent sluggish growth for over three years.

While global recession risks remain low, labour markets bear closer watching. Friday's July US nonfarm payrolls report surprised to the downside, with employers shedding 23,000 jobs against expectations of an 83,000 gain, while prior months were revised lower by a combined 103,000 positions. While hiring came in below expectations, unemployment fell to 4.1%. Some of the weakness reflected temporary factors and recent US government job cuts, leaving the overall picture one of gradual moderation rather than deterioration.

While the growth backdrop remains supportive, several risks warrant monitoring. The situation in the Strait of Hormuz remains unresolved. A deal between Iran and Oman is reportedly close, but key conditions, including sanctions relief, remain outstanding. Strategic petroleum reserve releases have helped cushion the impact of higher energy prices to date, but this is finite and a prolonged disruption would increase the risk of tighter energy markets particularly ahead of the Northern Hemisphere winter.

As discussed in last week's note, the AI investment cycle also continues to attract scrutiny. Hyperscaler capital expenditure remains at historically elevated levels, with investors increasingly focused on the return generated from that spending and the sustainability of the cycle. Last week saw the AI trade bounce back but it remained volatile with a severe mid-week rout particularly in Asian ‘memory’ technology stocks.

Finally, stronger growth and persistent inflation pressures have increased the risk of a more hawkish policy path from the Fed. With no Fed meeting scheduled in August, investor attention will now turn to the Jackson Hole policy symposium, where policymakers have an opportunity to provide further insight into their assessments.

The week ahead

US CPI inflation

Economists expect that inflation slowed in July to 3.4% with lower gasoline prices supporting the disinflation. Notably for the Fed however Bloomberg economists expect core CPI (excluding volatile food and energy) to have slowed to 2.4% the lowest since before the inflationary spiral in March 2021.

UK GDP

Economic growth in the second quarter is estimated at a fair 0.4%, slowing slightly from 0.6% in Q1. The UK economy is holding up given geopolitical events during the quarter. It is expected that consumer spending was boosted by the hot weather and the FIFA World Cup. Most economists see steady (‘slow and low’) economic growth in the second half of the year and through 2027. 

Markets for the week 

 

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