Oil, tech and volatility

Oil prices have given back most of their geopolitical gains as shipping through the Strait of Hormuz had rebounded last week, beginning to normalize towards pre-conflict levels before falling again over the weekend due to new, though relatively minor, US-Iran confrontations. Tensions persist as negotiations continue, with key red lines still in place, including firm US opposition to any transit tolls, while Iran continues to signal its intent to assert control. Despite this fragile backdrop, over the weekend Iran and US agreed to halt attacks and renew talks, according to US officials, causing Brent crude to ease back towards USD 72 per barrel.  

Bond markets benefited from lower oil prices, with yields declining. US 10-year Treasury yields fell below 4.4%, while German 10-year Bund yields dipped towards 2.85%. Gold temporarily slipped below USD 4,000 per ounce, weighed down by a stronger US dollar and renewed expectations of rate hikes from the US Federal Reserve (Fed). The EUR/USD exchange rate fell below 1.14, its lowest level in nearly a year. 

Equity markets became more volatile, as concerns grew over the chip boom and returns on rising AI-related capital spending. Technology-heavy indices moved sharply, including a 10% daily fall in Korea’s Kospi. After a strong post-IPO run, SpaceX pulled back and fell below its listing price. Mid-week results from Micron, a key supplier in the AI ecosystem, offered some reassurance and helped semiconductor and AI-related stocks recover. There are still few signs of weaker demand. This suggests supply constraints, especially in memory chips, are likely to persist.  

Pressure returned towards the end of the week as chip stocks weakened and Apple announced price increases for products such as iPads and Macs. Even so, global equities remain resilient despite higher volatility. Easing energy prices, upward revisions to economic growth forecasts and hopes of further de-escalation in US-Iran tensions continue to provide support. We maintain a slight tactical overweight in equities versus bonds within a broadly diversified portfolio framework, as outlined in our Mid-Year Outlook.

This Saturday marks the US Independence Day celebrations. Today, US markets account for a very large share of global equity market capitalisation, supported by strong private investment in areas such as AI. Provided fiscal risks remain contained and policy errors are avoided, this continues to underpin the US’s long-term structural advantages. 

Recent purchasing managers’ indices (PMIs) – which we consider a good gauge of economic activity – suggest that growth momentum remains stronger in the US than in Europe. Inflation, however, is still a concern. US inflation reached 4.2% in May and the Fed’s favoured core inflation measure remain above target too, as rising chip prices are beginning to feed through the supply chain, reflecting in higher product prices. This could lead the Fed hike policy rates sooner, and potentially more than expected. In Europe, European Central Bank (ECB) officials have also signalled that further rate increases remain possible, depending on how inflation evolves – further indications might be provided at the ECB’s Sintra forum, where leading central bankers are set to discuss future monetary policy challenges. A top event there will be Fed-Chair Kevin Warsh’s speech (Wednesday). 

This week’s data will be important in shaping expectations. Key releases include US consumer confidence on Tuesday and the US labour market report on Thursday, which is likely to remain solid. In addition, China PMIs, already under way, are expected to continue showing divergence between stable manufacturing and weaker services activity.