The week in markets

Read this article to understand:

• The impact of a week of rising oil prices on bonds
• Why equities held up well despite some concerns around AI
• What the growing disconnect between equity and bond markets could mean for investors

Markets entered the week facing an increasingly uncomfortable mix of risks. What had looked like a benign summer backdrop of easing inflation and steady growth quickly became more complicated. Oil prices surged as tensions in the Middle East escalated. Bond yields moved back towards multi-year highs. And investors began asking whether the enormous sums being committed to artificial intelligence would ultimately generate sufficient returns.

Escalating tensions between the US and Iran, repeated threats to key shipping routes and attacks on energy infrastructure pushed crude oil prices higher through the week. Brent crude, already having recorded its strongest weekly rise since April, climbed above $90 per barrel and by Friday had risen above $100, the first time it has passed that level since May. European natural gas prices also rose to their highest levels since early 2023.

Concerns quickly spread to bond markets. Inflation expectations rose on both sides of the Atlantic. Markets that only days earlier had been discussing policy easing were suddenly asking if further interest rate rises might be needed. US Treasury yields moved towards their highest levels in more than a year and UST 30-year inflation-adjusted yields climbed to levels last seen during the global financial crisis. German yields also reached levels not seen since 2011. Strong economic data added pressure, with US jobless claims falling to their lowest level since 1969.

The changing AI narrative was a second major theme. The debate is no longer about whether demand exists. Instead, investors are questioning whether the extraordinary amount of capital being invested will deliver acceptable returns. Alphabet was the clearest example. The company reported cloud revenue growth of more than 80 per cent but increased its planned capital spending to $205 billion. Rather than reward the stronger growth, investors focused on the scale of the investment bill. Similar concerns appeared across technology as companies continued to raise spending in an increasingly competitive AI race.¹

This was particularly obvious in semiconductor markets. By 17 July, the Philadelphia Semiconductor Index had already fallen by more than 20 per cent from its June peak. This reflected growing concerns that lower-cost Chinese AI models were improving quickly. The fear was that they could challenge the economics behind the vast AI infrastructure buildout underway in the United States.

However, sentiment improved as the week progressed. Semiconductor shares rebounded strongly after company results showed that underlying demand remains exceptionally strong. This was most notable in South Korea, where exports surged by 52.3 per cent year on year in the first twenty days of July. That was one of their strongest growth rates in more than fifty years.

The rebound suggests investors are becoming more comfortable with the demand outlook, but it does not resolve the bigger question facing markets: whether the hundreds of billions of dollars being invested in AI will ultimately generate sufficient returns to justify current valuations.

The most striking feature of the week was the growing disconnect between equity and bond markets. Despite oil prices moving to above $100 per barrel, inflation expectations rising, and investors increasingly pricing the possibility of further rate increases, equities remained remarkably resilient. That reflected continued confidence in growth and the long-term benefits of AI. Bond markets looked more sceptical, with yields climbing as investors questioned whether inflation was truly under control.

For now, equities are focused on growth and innovation, while bonds are focused on higher energy prices, tighter policy and high valuations. The tension between those two views may prove one of the most important drivers of markets through the rest of the summer.²

Past performance is not a reliable indicator of future results.