The collapse of the ceasefire between the US and Iran has pushed oil prices higher.

The Federal Reserve (Fed) minutes confirmed a hawkish tone, and the European Central Bank (ECB) explained its June rate hike. Despite these tensions, markets stayed calm: equities posted modest gains, supported by the artificial intelligence (AI) theme, whilst credit markets absorbed a great deal of new supply, though investor appetite for AI-related bonds is waning. The US dollar was stable over the week and attention is now turning to US inflation data and the start of the earnings season.

Macroeconomics

Last week gave a clear signal about the fragility of the ceasefire between Washington and Tehran, as oil jumped back above USD 75/bbl once President Trump declared the truce ‘over’ – a reminder that companies still have little room to alleviate cost-push pressures. The ISM’s Prices Paid Index confirms this: it eased to 67.7 in June from 71.3 in May, but remained firmly elevated. Meanwhile, companies highlighted their willingness to hire back: the employment index returned to expansion for the first time since February, a rebound attributed partly to FIFA World Cup-related staffing, reinforcing a labour market that continues to run on thin unemployment claims. Fed minutes confirmed the hawkish bias signalled at June’s meeting: staff revised 2026/27 inflation forecasts higher and participants judged inflation risks skewed to the upside.

Across the Atlantic, the European Central Bank (ECB) laid out the thinking behind June’s 25 bp hike: with the energy shock proving more persistent than envisaged at the March and April meetings, and indirect effects turning increasingly visible and broad-based, officials judged that the inflation outlook had deteriorated enough to warrant tightening rather than another ‘wait-and-see’ hold. Also, officials warned that ‘memories of the 2022 high-inflation episode could make households and firms react more quickly than in the past’. Nevertheless, the decision was taken before the sharp drop in oil prices, and we think that inflation risks have receded since then, which decreases the probability of further tightening.

German industrial production grew for a second month (0.9% m/m vs. 0.2% previously), driven by a 3.6% m/m jump in automotive output and a 1.9% m/m rise in orders that held up even excluding military equipment. Improving order intake due to military equipment updates and less gloomy sentiment amid lower energy prices could support the rebound further.

This week’s June US Consumer Price Index (CPI) will show if consumer prices have peaked; US PPI will test stickiness in service categories such as air fares, and portfolio management, which will drive future core personal consumption expenditures (PCE); US retail sales will show the strength and resilience of consumption. In the eurozone, industrial production for May will show whether Germany’s rebound is a national story or an EU-wide one.

Equities

Global equities only managed to put in modest gains last week (MSCI ACWI total return +0.3%), even as geopolitical tensions returned to the fore. The US-Iran ceasefire collapsed, with both sides trading strikes, shipping through the Strait of Hormuz slowed considerably, and oil prices climbed higher as a result (Brent crude +5.4% to USD 76/bbl as at 10 July).

Oil-importing regions including Europe and emerging markets both registered losses (STOXX Europe 600 -1.7%, MSCI Emerging Markets -1.7%) in a reversal of their previous week’s strength, while US markets proved resilient (S&P 500 +1.3%, Nasdaq +1.7%) as the artificial intelligence trade regained momentum, with the global technology sector rising +1.3% last week and notable strength in the semiconductor subsector (+3.3%).

Despite the fragility of the situation in the Middle East, market reaction was limited and suggested that investors are treating the latest increase in tensions as a source of near-term headline volatility rather than a shift in the broader equity market outlook, which remains constructive in our view.

While renewed geopolitical risks could still drive some near-term risk-off sentiment, particularly through higher oil prices, inflation and interest rate expectations, along with equity markets, possess a powerful counterbalance to AI/global earnings momentum, which we believe is a more durable predictor of market direction.

With this in mind, the earnings season officially kicks off this week with reporting from major US banks and investors looking for overall Q2 earnings per share growth of +23.6% (S&P 500). Figures from major semiconductor players (ASML, TSMC) will also be in focus after a successful US listing from South Korea’s SK Hynix last week added to renewed appetite for the space following the bout of volatility that began in mid-June.

AI and earnings momentum remain a more durable predictor of market direction

Fixed income

Developed market curves moved higher at the longer end due to heavy AI-related supply, a hawkish Fed tone, and a sharp US-Iran flare-up. US 10-year debt rose 9 bps to 4.56%, while 2-year paper added 10 bps to reach 4.21%. These moves centred on the Fed Chairman Warsh’s first FOMC minutes, which revealed that a few officials argued for a hike and that most see the rising risk of elevated inflation feeding into expectations even as labour concerns eased. Fed Chairman Warsh also unveiled leads for five Fed task forces (communications, balance sheet, data usage, productivity/jobs, and inflation), while the Fed’s Monetary Policy Report characterised inflation as still elevated thanks to tariffs, Middle East tensions, and AI demand, with growth solid and productivity strong. This week’s inflation print will test – and likely validate – the Fed’s cautious stance. In Europe, Bund yields climbed 12 bps to 3.07% and gilts 8 bps to 4.87%.

Credit delivered a mixed performance: US investment grade returned roughly -0.1%, reflecting new-issue concessions from Amazon’s jumbo print and a sharp secondary dislocation in hyperscaler bonds. US high yield also slipped by around -0.1%, with spreads oscillating as resilient carry met rate pressure. AT1s were broadly flat as coupon carry offset duration drag. Emerging markets underperformed at about -0.3%, with the Hormuz disruption adding a Gulf risk premium and Asia dollar investment grade widening into Friday.

Primary was dominated by Amazon’s USD 25 billion eight-tranche IG deal on Tuesday, the seventh USD 25 billion tech print this year. Peak orders of about USD 62 billion – roughly half the USD 126 billion seen for Amazon’s March deal – underscored fatigue with relentless AI-linked supply. The size triggered forced selling in secondary outstanding hyperscaler paper, leaving those names as the three worst US investment grade performers month-to-date. SpaceX’s USD 25 billion inaugural bond remained weak; the 30-year tranche now yields above 7%, implying a loss of ca 5% for investors who bought at issue.

The US high-yield primary market nearly stalled, with only USD 800 million of pricing, the slowest week since 20 March as Amazon absorbed risk appetite and geopolitics added caution. Europe stood out with ~EUR 48 billion of supply, led by an EUR 11 billion dual tranche EU deal drawing over EUR 83 billion of orders for new 5-year paper.

Amazon’s USD 62 billion order book underscored fatigue with relentless AI-linked supply

Forex & Commodities

Last week, the dollar traded in a broad range, with the DXY between levels of 100.5 and 101.25. The moves reflected the competing effects of risk-off flows driving USD upside with the resumption of heavy fighting in the Gulf, and moderating US interest rate expectations, standing as USD downside pressure. The FOMC’s June minutes focused sharply on AI demand driving economic activity. However, against the weaker June US non-farm payrolls, swap markets viewed some of the outlined upside risks to inflation as overdone and moved to reduce bets on a 2026 Fed hike.

The EUR/USD traded in a tight range between levels of 1.1400 and 1.1450. Eurozone rates had the most violent upside reaction to the renewed geopolitical risks last week, and re-emerging upside risks to inflation caused shorter-end overnight index swap (OIS) rates to rise to their highest levels of the year. Against more hawkish signals from the ECB’s June minutes, rate-pricing moved in favour of the EUR.

The GBP/USD traded higher while the EUR/GBP traded lower. The moves reflected continued GBP strength in a week with few sterling-specific catalysts. Over the week, Andy Burnham rejected a Labour Party proposal to break up the Treasury, which further reassured markets that his economic stance will be realistic. We note that option market data shows that downside protection on the EUR/USD is at its most in demand since February and, as the net GBP short position in the market remains crowded, the chances of seeing a GBP short squeeze have increased.

The USD/JPY traded in a range between levels of 161.5 and 162.5. The moves reflected efforts from Japan’s Ministry of Finance (MoF) to strengthen the JPY against short-selling pressure. Finance minister Katayama announced that more pressure would be put on Japan’s large government pension funds to invest in JPY-denominated assets. With no material changes in the Bank of Japan’s tightening plans, the MoF is likely to continue to try new angles to achieve JPY appreciation. The large net short JPY position in the market, combined with higher intervention risk, makes instances of more aggressive USD/JPY price action more likely.

Crowded JPY shorts and rising intervention risks point to sharper USD/JPY moves ahead

The opinions expressed herein are correct as at 13 July 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.