Escalating tensions in the Middle East sent oil prices surging and long-term US yields to their highest levels since early 2025 as inflation risks resurfaced and markets repriced the possibility of future rate hikes on both sides of the Atlantic.

Even as spreads held well, the move in rates erased year-to-date gains for Treasuries and investment-grade names. Global equities registered modest losses with pressure most felt among the Magnificent 7 as investors scrutinised further AI-related spending and the potential for future returns.

A pause in US-Iran fighting over the weekend has put hope back on the table for the return of a ceasefire, with investors also set to digest a swathe of reports from corporates in the week ahead (35% of the S&P 500), along with several central bank policy decisions, including that of the US Federal Reserve.

Macroeconomics

urchasing Managers’ Indexes (PMIs) show a strong rebound in services across the US, UK, and euro area, with southern Europe leading gains; in the US, major sporting events contributed to this improvement. Manufacturing sentiment has firmed up in the UK and eurozone (including a rebound in Germany), while the US manufacturing PMI paused on softer demand, but the index remained elevated at 53.8. The pick-up in services confidence has been accompanied by renewed price pressures.

In the UK, June headline inflation eased to 2.6% y/y on lower energy costs, and core inflation remained unchanged at 2.6%; the unemployment rate stabilised at 4.9%, while wage growth moderated to 4.3%; elsewhere, consumer confidence improved, and June retail sales rose 1.1% m/m.

In the euro area, the European Central Bank (ECB) left its rates unchanged at 2.25%, highlighting upside inflation risks and downside growth risks, as higher oil prices may feed through in the coming months. There is talk by some ECB governors of potential hikes, which is keeping September’s meeting live, with outcomes data-dependent.

In the US, the key release this week is the first estimate of the Q2 gross domestic product (GDP), which is expected to exceed 2.0% after 2.1% in Q1, led by consumption and investment; June core personal consumption expenditure (PCE) should be below 0.2% m/m and edge down to 3.3% y/y. The Conference Board and Michigan confidence indexes should both stay constructive.

In the eurozone, confidence should remain broadly constructive, and Q2 GDP data is expected to rise by about 0.2% q/q; unemployment should hold steady at 6.2%, and July headline inflation should tick up to 2.9% y/y, with core inflation remaining stable at 2.4% y/y.

The focus on central banks is intense this week: the Federal Reserve (Fed) is likely to keep rates on hold while maintaining a hawkish tone, the Bank of Japan (BoJ) faces sustained inflation and a weaker yen, while the Bank of England (BoE) is expected to stay patient amid easing inflation and moderating wages.

Equities

Global equities registered modest losses last week (MSCI ACWI total return -0.3%), bogged down by weakness in the US (S&P 500 -0.6%, Nasdaq -2.1%), while other major regions inched higher (Europe +0.5%, Japan +0.7%, emerging markets +0.5%).

Concerns about the potential returns on heavy artificial intelligence (AI) investments, a sharp rise in oil prices as tensions in the Middle East escalated, and long-term yields ticking upwards as a reflection of resurfacing inflation risk, all weighed on investor sentiment. 

However, pressure was concentrated on the Magnificent 7 group of actors (-5.7% last week). Alphabet’s decision to lift its 2026 capital-expenditure guidance to USD 195–205 billion (vs. USD 180–190 billion prior) and its first negative free cash flow overshadowed accelerating cloud revenue growth (+82% vs. +63% in Q1). Meanwhile, Tesla suffered from its sharpest earnings-day fall on record following a significant profit miss. Both reports became the focal points for investors who were suddenly less willing to fund AI ambitions without a clearer line of sight to returns.

The risk-off mood sat in contrast against overall corporate fundamentals, with 27% of S&P 500 constituents having reported Q2 results as at Friday, and 86% delivering earnings beats. Expected earnings growth for the quarter now sits at +37.9% vs. +24.8% a week ago, with ~90% of the increase attributed to results from Alphabet, which benefited from significant unrealised gains on equity securities (Q2 EPS USD 9.11 vs. 2.90 expected).

Excluding Alphabet, earnings growth is still moving in the right direction, with Q2 expected EPS growth rising to +25.9% vs. +23.2% expected at the end of June. In the week ahead, 35% of S&P 500 constituents (177 companies) will publish results, including the other Magnificent 7 members Amazon, Apple, Meta and Microsoft. While we believe we are still early in the cycle in terms of companies adopting and spreading the use of AI, investors will be once again focused on whether hyperscalers can translate elevated AI investments into higher returns in addition to Fed commentary on the forward path for interest rates.

Despite strong earnings beats, markets want proof that heavy spending on AI will translate into returns

Fixed income

Developed market yields sold off through the week as the Iran conflict escalated and energy prices ran higher. Even with spreads once again holding up well, the move in rates was enough to erase the year-to-date performance for Treasuries and investment grade (IG) names.

Treasury yields touched their highest levels in 18 months during the week: the 10-year closed above 4.70% on Thursday – the highest since early 2025 – as Houthi forces attacked two Saudi tankers in the Red Sea, and Brent crude briefly traded above USD 100/bbl. In Europe, Bunds were better behaved – up only 4–5 bps for the week – while gilts sat somewhere in between. Rates eased on Friday on reports that Pakistan, with Chinese support, was trying to revive negotiations, before falling further this morning after a weekend with no attacks from either side and continued Omani mediation, which points to both sides wanting to return to the interim ceasefire deal. The weekend talks brought no change to the status of maritime traffic through the Strait of Hormuz, and the US naval blockade remains in full effect. For the week, returns were negative across the board, with Treasuries at -0.4%, IG, high yield (HY) and AT1s all at -0.5%, and EM at -0.9% given higher duration. For the year, Treasuries and IG have erased their gains, while HY, additional tier 1 (AT1s) and emerging markets (EM) have delivered between 1.7% and 1.9%.

Spreads are the reason the damage was contained. IG ended the week unchanged and is unchanged for the year. HY, AT1s and EM gave up a few basis points on the week, though AT1s and EM remain tighter for the year, while all of them are sitting at close to post-GFC tights.

The ECB unanimously held rates at 2.25%, although Lagarde confirmed that some governors asked themselves whether a hike should be considered and that the full inflationary impact of the energy shock has yet to be played out. She placed the energy outlook, while volatile, at close to the baseline of the June staff projections, which keeps a 25 bp move on 10 September on the table. The Fed is expected to hold rates on Wednesday, with markets pricing in a roughly 33% chance of a hike (fully priced in for September). We do not expect significant forward guidance from Chair Warsh, who has limited his comments to broad observations, and group dynamics suggest the centre ground is showing patience, even if it is possible that we get 1–2 hawkish dissenting votes (compared with the unanimous decision in June). The BoE will make its interest rate announcement on Thursday, alongside the Monetary Policy Report, having voted 7–2 to keep rates on hold in June.

The still-young hyperscaler part of the IG market has been drawing significant attention, but not for the right reasons. Spreads within the IG segment started the year well, but have since moved significantly wide of it on heavy supply and ever-growing capex needs that have pushed a group that used to generate meaningful free cash flow into one that consumes it. Hyperscalers now offer a 60% spread pick-up compared with the rest of the market. Last week, Alphabet made the case for further issuance, raising capex guidance again and posting the first quarter of negative free cash flow since its 2004 listing. Investor demand has also been weakening, with Amazon's USD 25 billion eight-tranche deal in early July drawing the weakest reception of any hyperscaler primary since Meta’s USD 30 billion deal in October 2025. From the issuers’ perspective, they are arguably right not to care much about what their issuance ramp-up is doing to spreads. For most of them, even after this year’s widening, spreads are only 20% of the new coupon, with the other 80% being rate-driven. On the positive side, Alphabet raised equity in June, as an alternative to tapping bond markets, and Amazon has signalled that the July deal takes it out of the market for the rest of the year.

Developed yields rose on Middle East tensions and pricier energy, erasing Treasury and IG gains

Forex & Commodities

Last week, the USD edged higher against the majority of G10 currencies. USD gains were pronounced against energy importers (such as the EUR and JPY), reflecting the rise in energy prices. The Federal Open Market Committee (FOMC) meeting this week is expected to keep rates on hold at 3.75%; however, the overnight index swap (OIS) market has priced in a 25-bp rate hike with a probability of around 38%. A larger-than-expected vote split could result in markets bringing forward their expectation of the next Fed rate hike, resulting in a firming of front-end yields and consequent USD appreciation. On Thursday, Q2 advanced GDP data will be published, and real GDP is expected to print at 2.1% SAAR, reflecting robust consumer spending and high levels of AI-related investment. Overall, there is nothing visible that should lead to any imminent weakening in the USD in the near term.

The BoE is set to hold its Monetary Policy Committee (MPC) meeting this week (Thursday) and is expected to keep rates unchanged at 3.75%. The MPC vote split was 7–2 in favour of staying on hold at the last meeting, and no changes are anticipated this time. The BoE could slow the pace of quantitative tightening (QT), which would make sense given ongoing upward pressures on yields. This would only have a marginal impact on sterling, however, the signalling would be important. Overall, there is little to get excited about for the GBP, and tight ranges are expected to hold for both the EUR/GBP and the GBP/USD in the near term.

The BoJ will hold its MPC meeting on Friday and it is expected to keep rates unchanged at 1.00%. The BoJ is likely to present a slightly more hawkish stance to alleviate JPY weakness. The yen continued to weaken last week, reflecting higher US yields and higher oil prices. In the absence of an FX intervention, a catalyst for immediate JPY appreciation is not readily apparent.

The EUR will be in focus as growth and inflation data is published. The main event for the euro this week will be the publication of consumer price index (CPI) and GDP data for July and Q2, respectively. CPI data are expected to print at 2.9% y/y (headline) and 2.4% y/y (core), which is modestly higher than the June data, reflecting energy price impacts. The CPI data are unlikely to move the dial on ECB rate-hike expectations. Q2 GDP data are expected to show a return to growth of around 0.2% q/q, and 0.5% y/y. The quarterly data are more important, and the July PMI data were better than expected, giving a cyclical improvement to eurozone growth data. The upshot of this is that markets are likely to continue betting on one final 25-bp rate hike at the ECB’s September meeting, which is already priced in with a 90% probability. The bottom line is that with everything already so richly priced in, there is little delta for the EUR to benefit in the near term, and the single currency is expected to continue trading at the lower end of recent ranges.

USD stays firm on Fed rate hold and energy, while tight ranges in GBP are likely to persist

The opinions expressed herein are correct as at 27 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.