Semiconductors Lead Tech Lower

MACRO FRAME

A heavy data calendar week in the US comes amid a fragile peace backdrop in the Gulf. Data this week is likely to shape US rate hike timing expectations substantially.

STOCK INDEX FUTURES

Equity index futures were higher overnight, with the geopolitical backdrop in the gulf easing from recent tension and ahead of a heavy macro calendar ahead.  Washington and Tehran have agreed to halt strikes and expected to meet in Doha in the coming days to discuss implementation of the interim 14‑point peace memorandum, with a specific focus on managing traffic through the Strait of Hormuz and de‑escalating tensions. Mediators have established communication channels to defuse incidents, and both sides have formally agreed (at least on paper) to stand down and allow vessels to move freely under the MoU. Brent has steadied around the low‑$70s  on the back of the return to diplomacy and expectations of resumed flows through the Strait, helping ease inflation expectations. While the reopening of Hormuz and prospective sanctions waivers for Iranian crude point to a lower risk premium, the backdrop remains fragile—missile strikes in Kuwait and Bahrain, hard‑line rhetoric from Tehran and Washington, and unresolved Lebanon–Israel tensions all argue that any renewed disruption to Strait flows could quickly reprice crude and re‑ignite inflation concerns.

Recent price action around major chip names has underscored how fragile tech rallies have become, with market cap swinging by hundreds of billions of dollars in hours. This kind of volatility is historically associated with market tops and bottoms. At the same time, parts of the semiconductor complex are now deeply embedded in AI narratives making the broader index more sensitive to earnings and sentiment. The technical market structure is indicating historically overbought levels. Meanwhile, fundamentals that are supportive and real, raise questions as to whether or not near-term earnings and future demand can justify current price levels. The backdrop of a higher-for-longer rate environment and a growing debt overhang in enterprise software have shifted the risk/reward profile for investors regarding concentration in the momentum-driven tech trade. The fundamental question for the indexes, mainly the tech-related momentum trade, is whether or not capex requirements outrun earnings estimates and demand as investors are try to price outcomes they cannot yet observe.

Defensive positioning could offer protection against these dynamics, especially as the Fed’s higher-for-longer stance weighs on near-term sentiment. The valuation discount in defensives relative to their own history and growth is historically wide, providing a margin of safety that momentum tech no longer offers.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure

CURRENCIES

US DOLLAR: The USD index slipped 0.13% to 101.23, alongside a drop in oil prices. The dollar is heading for its biggest monthly gain in nearly a year, broadly supported by growing expectations of rate hikes from the Fed and optimism over the US economy. Investors continue to monitor developments in the Gulf ahead of a key jobs report later this week. While some of the recent dollar strength can be attributed to expectations of Fed rate hikes, the performance of US assets, mainly the stock market, are very much in favor of the US, fueling demand for dollars. Currently, markets are fully priced for one rate hike this year, seeing around 32 bps of total tightening by year-end, roughly the same pricing from Friday. The two‑year Treasury yield has gained substantially on German and UK equivalents, underscoring the widening US interest rate advantage. The dollar is has been driven more by rates and macro factors than geopolitical developments over the last couple of sessions, as falling oil prices and direct US-Iran talks would otherwise see a flight away from dollar safety. Still, ongoing geopolitical uncertainty and Iran’s willingness to close the Strait are limiting the downside to the dollar.

Watch point: Thursday’s inflation data reinforced expectations that Fed policy will move higher before year-end. This week’s data calendar is set to shape Fed rate expectations substantially.

EURO: The euro is 0.18% stronger at $1.1405. The European Central Bank’s annual forum begins today, with opening remarks coming from President Lagarde. On Wednesday, a panel will include several central bank officials, including the Fed’s own Kevin Warsh. Markets will watch for signals on their economic and policy outlooks. Since the US-Iran ceasefire and reopening of the Strait, inflation expectations have fallen, prompting markets to reduce bets on rate hikes by the ECB. On the data front, Spain’s EU-harmonized consumer price index rose 3.6% year-over-year in June, unchanged from May and holding at its highest level since June 2024. Traders are fully priced for a hike in December, though remain favorable to a move upwards at the October meeting. The dollar has advanced against foreign currencies, even on days where oil prices drop and risk sentiment is strong, thanks to the outperformance of US assets and rate differentials. This dynamic is offering firm pressure against the euro in favor of the dollar.

Watch point: A peace deal, restoration of oil flows through the Strait, and easing services inflation are likely to push back tightening expectations, though policy expectations are still biased upwards.

BRITISH POUND: Sterling is 0.20% stronger at $1.3228. Andy Burnham, the man expected to become the next Prime Minister, has repeated his plans to commit to fiscal rules consistent with the Labour party’s 2024 manifesto. While he has previously stated such, his comments were welcomed for the currency market, helping drive the sterling higher, while the dollar fell broadly. Gilt traders in the UK are mainly concerned over how Burnham plans to address sluggish economic growth. Burnham favors expansionary fiscal policies, which gilt markets would broadly reject, given the limited headroom for extra borrowing or spending. Who Burnham chooses as finance minister could determine how volatile UK rates become. Any signs that Burnham will appoint someone who favors strong expansionary policies will likely see the pound come under pressure. Meanwhile, traders have built up the largest short position against the pound since May’s 2015 of around $8.72 billion according to recent CFTC data.

JAPANESE YEN: The yen was little changed overnight at 161.8 yen per dollar. Retail sales rose 5.6% in May, the fastest pace since November 2023, supported by the recent fiscal stimulus package. Still, the inflationary print did little to move pricing for Bank of Japan policy. The market sees a total of 19 bps of tightening by year-end, with a move expected to come in January of 2027. US-Japan interest rate differentials continue pressure the currency as Fed rate hike expectations remain elevated. The Japanese government have likely not intervened in the currency market yet because moves in the yen have been slower and less volatile than it was before previous interventions, like in April. A break above the 161.96 level would take it to its weakest level since 1986. Volatility in the yen should be expected from traders as the currency faces intervention risks from the government.  Fed pricing toward tighter policy, persistent rate differentials against Japan, and the lack of effectiveness of prior interventions without a sound Bank of Japan backdrop all continue to pressure the currency. Despite Japan’s Ministry of Finance signaling willingness to intervene, market skepticism of that effectiveness, largely resulting in a intervention vs. hawkish Fed and strong US data trade.

Watch point: With the yen sustaining a break above the 160 level, intervention from the government appears to be the greatest near-term risk against further depreciation.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.6896. The data calendar is thin this week for the Aussie, leaving attention on the heavy raft of US data. The recent drop in oil has led investors to pare back bets of another rate hike to just 40%, and to flirt with the idea of cuts as early as mid-2027. Minutes of the
Reserve Bank of Australia’s June meeting are due on Tuesday and should offer details over policymaker’s decision to hold rates steady. Recent pressure against the Aussie has come from stronger Fed rate hike pricing, which has led to a compression in interest rate differentials. Still, progress in US-Iran talks are largely supportive of the risk-sensitive currency.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in the RBA’s policy minutes.

TREASURY FUTURES

Yields inched higher at the front end and lower at the long end ahead of a data-heavy week for the US. Yields seem poised to maintain a tighter range ahead of upcoming data. Thursday’s PCE data reinforced expectations of Fed tightening and did little to change overall market odds on policy timing. While oil prices have dropped in recent sessions, yields have remained higher in the face of the hawkish shift in Fed expectations. While this week’s labor data is likely to move yields, the market has appeared to be more focused on the inflation problem in the US and has seemingly priced out any bad news in the labor market. Recent data has been indicative of a strong labor market, meaning it will likely take a sharp drop in hiring in this week’s report to reverse expectations of tightening this year substantially.

Warsh characterized the inflation overshoot as supply-driven rather than demand-driven, leaving room for yields to eventually ease if oil prices continue to hold a substantial drop. Warsh will be speaking at an ECB forum on Wednesday, where his remarks are likely to be scrutinized for details over the policy outlook. However, markets should not expect any signaling from Warsh, given that his new mandate is to not signal policy.

Watch point: The Warsh-led Fed held on rates and signaled broad institutional change. Mainly, markets should expect fewer words from the Fed and less policy signaling, raising near-term rate volatility with incoming data.

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