Markets spent much of last week reacting to the renewed escalation of conflict in the Middle East, with strikes carried out by both sides. Brent crude – which had dropped to around $83 midweek, down from its $100 highs of the previous week – climbed slightly back above $86 towards the end of the period. The impact of the conflict has continued to spread. Last Thursday it was announced that Saudi Arabia’s economy contracted 4.8% in the 12 months to the end of Q2 as oil activity fell sharply amidst export disruption and lowered production. Elsewhere, India and South Africa, among other developing nations, have moved to build or expand emergency fuel reserves – reflecting the increasing pressures energy shortages are now placing on countries with limited buffers.
The World Gold Council reported that central bank gold buying picked up in Q2. However, weaker demand earlier in the year meant purchases over the first half of the year were still at their lowest since 2022. Central banks use gold to diversify their reserves away from currencies, particularly in periods of market stress – renewed buying indicates restored faith from policymakers in gold as a defensive asset during uncertain periods.
Another asset class that has had a mixed year is South Korean equities, which have suffered a sharp reversal in AI-linked chip stocks over July, as retail investors and leveraged products amplified volatility. The KOSPI index, which by the end of June had gained 111% this year, has since declined almost 30%.
US Equity Market:
Investors continued to weigh resilient earnings from some US companies against renewed pressures on technology equities. Semiconductor stocks fell sharply last week, with the Philadelphia Semiconductor Index, which tracks the 30 largest US chip and semiconductor companies, falling around 7% through the period, as investors continue to be sceptical of the scale of AI spending.
It was a bumper earnings week for US technology companies, and one that painted a mixed picture for investors. Microsoft reassured markets with strong cloud growth and plans to roughly double its data centre capacity over the next 2 years, while Meta shares fell as investors focused on a 91% drop in Q2 free cash flow and continued investment in AI. Amazon added to the positive sentiment, reporting strong revenue and growth in its Amazon Web Services cloud business, though free cash flow remained under pressure from high AI-related expenditure. Apple also beat revenue and earnings expectations, helped by strong iPhone sales, but shares slipped after weaker services revenue and tamer growth forecasts. Overall, the S&P 500 Index closed the period to Friday modestly down 1.06%.
Credit markets also displayed increased caution towards the AI trade, with Fitch, a leading credit ratings agency, warning that a larger AI market correction poses a material risk to global credit markets. This follows industry peer Moody’s having previously warned that the shift from asset-light software business models towards expensive data centres and power infrastructure could threaten the credit quality of large tech companies.
UK Equity Market:
Andy Burnham’s appointment has boosted Labour’s popularity, with the party recording its highest poll rating since March 2025 at 24% – a big boost for the Prime Minister as he aims to restore a more stable political landscape.
UK property sales had a sharper-than-usual summer slowdown, as higher mortgage rates and economic uncertainty have weighed on buyer confidence – the number of sales agreed over the month to July 19thfell 9% compared to the same period last year. Meanwhile, in Scotland, the data centre boom has spurred backlash as communities fear squeezed access to electricity and water, in the same week as reports that half of England has been plunged into drought following recent heatwaves. Such events have raised further questions surrounding what the future of water accessibility will look like in the UK.
In company news, Rolls Royce and BAE both raised their profit targets for the year after beating expectations last week, jumping 4% and 2% respectively following their earnings releases. The FTSE closed the period to Friday up 1.23% off the back of strong corporate results in the finance and energy sectors, even hitting a record high last Wednesday. Sterling trades at 1.34 against the US dollar.
Inflation, Interest Rates and Bond Markets:
A week of key interest rate decisions saw central banks remaining cautious and increasingly divided. Last Thursday the Bank of England announced that it would hold the bank rate steady at 3.75% as 6 of the Monetary Policy Committee voted for the hold and 3 voted for a rise to 4%. The Bank weighed up falling inflation in June against volatile energy prices that threaten higher inflation later in the year. Gilt yields subsequently fell modestly, suggesting investors took some comfort from the Bank’s wait-and-see approach.
In the US, the Federal Reserve also elected to hold rates steady in the 3.5-3.75% range last Wednesday, though 3 of the 12 members of the Federal Open Market Committee dissented in favour of a 25-basis point increase. Longer-dated US yields rose after the decision, with the 30-year Treasury touching its highest level since 2007, an indication of investor worry that policymakers are not moving quick enough to contain the inflationary shock. A day later, soft GDP data showed the US economy grew just 1.5% in Q2, down 2.1% from Q1 and below the 2% forecast by economists. Declining government spending and export growth proved a drag on this figure, despite consumer spending having risen sharply over the period.
What’s on the horizon
Investors will remain highly attentive to changes in Middle East tensions this week and the implications for oil prices and inflationary expectations.
Another busy week of macroeconomic data is on the horizon. Import, export and trade balance releases are on the cards for China, the US and Canada, giving insights into the flow of global trade, whilst Purchasing Manager Index (“PMI”) July data, a key indicator of growth or contraction, will be released by economic superpowers US and China. The US will release a slew of employment related data, including July’s nonfarm payrolls and the unemployment rate before China releases its July consumer price index (“CPI”) to close out the week.
Earnings season continues this week, with SpaceX releasing its second quarter results and first earnings report following its June initial public offering.
This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.
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Source of financial market data: MorningstarDirect.