The week in markets

Read this article to understand:

• The impact of oil prices on markets
• How US growth and tech resilience supported equities
• Policymakers’ concern about the Japanese yen

After a volatile July dominated by conflict in the Middle East, investors began August with growing confidence that tensions around the Strait of Hormuz might ease. That shift in mood had a powerful impact on markets.

Oil prices fell sharply, inflation concerns retreated, bond yields moved lower and equity markets surged to new highs. Yet as the week progressed, some of that optimism was challenged when details emerged suggesting any agreement with Iran could be more complicated than initially hoped.

The biggest driver of market sentiment was the oil price. At the start of the week, hopes of a diplomatic breakthrough saw Brent crude tumble from above $90 per barrel to below $80, marking a decline of more than ten per cent in just a few days. Investors rapidly reduced their inflation expectations, which had built up during July’s conflict. That helped government bond markets recover.

Importantly, falling oil prices were not accompanied by signs of economic weakness in the US. Quite the opposite. US manufacturing activity strengthened, with the ISM Manufacturing Index rising to 55.6, its highest level in more than four years. Employment components improved and company commentary pointed to strong demand linked to artificial intelligence, semiconductors and defence spending. Later in the week, data on services activity showed that sector also remained resilient, while productivity growth exceeded expectations. Even where some labour-market indicators softened, the overall picture remained one of a US economy that continues to grow at a respectable pace.

That combination of improving sentiment and resilient economic data provided a supportive backdrop for equities. The S&P 500 rose to fresh records during the week, including a 1.8 per cent gain on Tuesday 4 August alone.

European markets also participated in the rally, with the STOXX Europe 600, CAC 40 and several other major indices reaching new all-time highs. Investors appeared increasingly comfortable looking beyond the geopolitical headlines to focus on solid growth and improving corporate earnings.

The other major story was the return of enthusiasm for artificial intelligence. Following a difficult July, semiconductor shares staged a remarkable recovery. The Philadelphia Semiconductor Index rose by more than 16 per cent in just four trading sessions, its strongest run since 2020.

Companies linked to AI infrastructure, data centres and advanced computing attracted strong investor demand, supported by encouraging corporate updates and continued evidence that spending on AI technology remains exceptionally robust. While some individual earnings reports failed to satisfy lofty expectations, the broader message was clear: confidence in the long-term AI investment story has strengthened once again.

Japan also remained in focus. The yen continued to attract attention following coordinated efforts to support the currency, with policymakers increasingly concerned about its excessive weakness. Meanwhile, stronger wage growth and ongoing inflation pressures reinforced expectations that Japanese interest rates could continue to rise in the months ahead.

However, the week did not end entirely on a positive note. On Thursday, reports suggested that a potential Iran-Oman agreement might include transit fees and restrictions on some traffic through the Strait of Hormuz.

Investors quickly reassessed their outlook. Brent crude moved back to above $84 per barrel, European gas prices registered their largest daily gain in two months, inflation expectations rose and bond yields moved sharply higher. Equity markets proved relatively resilient, but the reaction served as a reminder that the path towards a lasting resolution in the region remains uncertain.

Overall, the week highlighted the remarkable resilience of markets. Investors are becoming more confident that the global economy can continue growing but remain sensitive to any development that threatens to reignite inflation.¹

Past performance is not a reliable indicator of future results.