Continued Pressure in Semis

MACRO FRAME

The military exchanges between the US and Iran re-inflate the geopolitical risk premium in energy and add a hawkish skew to the macro backdrop.

STOCK INDEX FUTURES

Equity index futures are lower ahead of the bell as the selloff in chip stocks deepened. Pressure remains concentrated in tech. Nvidia and Intel are both down close to 3% in pre‑market, and the main semiconductor ETF (PHLX) is off by more than 2%, extending previous-session losses. Strong earnings and capex signals from TSMC and ASML have not stopped the selling, which suggests investors are more concerned about positioning, valuation, and the scale and timing of AI spend than about the fundamental demand story in isolation. The renewed bout of selling has pushed the VIX above 18, its highest in over a week, signaling a pick‑up in implied volatility and demand for downside protection. Geopolitical risk is back in the foreground: Iran has announced fresh attacks on US facilities in the Gulf after a sixth straight night of US strikes, reviving concerns about energy flows through the Strait. On top of that, new accusations from President Trump that China meddled in US elections risk complicating the fragile truce with Xi ahead of a planned summit, adding an extra layer of US–China uncertainty to the equity story. A potential closure of the Red Sea oil route hangs above investors heads, after Iran signaled it could prod the Houthi’s in Yemen to close the Bab al-Mandeb.

CURRENCIES

US DOLLAR: The USD index held steady overnight at 100.78. Despite the recent rise in oil prices and escalation in geopolitical hostilities, dollar strength has been limited by the recent inflation prints, which have reduced odds of near-term tightening expectations from the Fed. Chances for a Fed hike in July were cut to 11%, versus a 25% implied probability at the start of the week. Markets are still priced for a rate hike by December. Meanwhile, the narrowing advantage of US Treasury yields over major peers points to a dollar that is losing momentum, further downside would be expected if tightening expectations ease. A sustained breakout in oil prices could provide near-term support and put a floor under the currency, even if the broader uptrend has run its course. In the near-term, a steepening in the yield curve would add to near-term headwinds for the dollar. On the other hand, a strong Q2 earnings season will help offer some support. Still, the bias for the dollar remains higher as policymakers will not place too much weight on a single benign inflation print after several months of upside surprises with a stable labor market.

Watch point: June’s inflation data is bearish for the dollar, though the report’s impact may be partially overshadowed by the current geopolitical backdrop and the rise in oil prices.

EURO: The euro is little changed at $1.1431. The recent rise in European bond yields has been supportive of the currency, while monetary policy expectations have also proved as a solid source of support. Money markets are pricing nearly an 80% chance of a rate hike at the European Central Bank’s September meeting and see a total of 55 bps over the next 12 months. Traders are expecting a more hawkish ECB than Fed, which would explain the performance in the eurozone since the renewed fighting between the US and Iran. Final CPI figures for the eurozone confirmed inflation in the currency zone at 2.8% YoY, with core at 2.4%. While these figures would mark a four-month low, the drop in prices was largely attributable to lower energy prices. The recent rise in European natural gas prices is also giving reason to support a hawkish ECB. Natural gas prices are currently at the second highest level since the conflict in the Gulf began.

Watch point: With the MOU seemingly done with, policy expectations are biased upwards though performance of EUR remains dependent on US inflation data and domestic growth factors.

BRITISH POUND: Sterling is 0.3% weaker at $1.3437. The choice to appoint Shabana Mahmood (currently interior minister) as finance minister rather than the more left‑leaning Ed Miliband, has been modestly for the pound, as Mahmood is viewed more as a centrist and favorable toward fiscal discipline. This has been taken as a signal that Burnham  does not intend to ramp up fiscal spending, easing potential pressure on gilt yields and alleviated some headwinds. Government bonds have rallied alongside the pound on the back of this perceived fiscal prudence and a softer dollar earlier in the week. Expectations of an orderly leadership change and a fiscally cautious chancellor could boost market confidence and the pound. While recent growth data was better-than-expected (GDP rose 0.1% in May; over the three months to May: 0.7%; on a YoY basis, May GDP was 1.3% higher, the strongest annual increase in about 10 months), a scaling back of Bank of England tightening expectations would reduce the pound’s attractiveness and weigh on the currency.

JAPANESE YEN: The yen is little changed at 162.36 yen per dollar. The yen has been trading in a tight range this week between 162.42 and 162.18 as traders remain weary of intervention from the government, while the recent announcement on potential moves by Japan’s Government Pension Investment Fund (GPIF) has done little to support the currency. The announcement is also seen as a way for the government to reduce depreciation in the yen using official-sector capital allocation. Still, this process would be the start of a multi-year restructuring rather than an immediate shift into yen. For now, existing dynamics continue to pressure the yen. No new data overnight lends focus to developments in the Gulf and potential intervention from the government. For the yen, bearish pressure in expected to continue in the near-term. The market little changed regarding Bank of Japan policy expectations, pricing about 21 bps of tightening by year-end, with a move expected to come in January of 2027.

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 0.34% weaker at $0.6971. The Aussie is on track for a third-straight week of gains against the dollar as a scaling back of Fed rate hike expectations has been supportive despite a similar dynamic occurring for the Reserve Bank of Australia.  Australian bond yields have eased slightly as traders remain pessimistic over prospects of any tightening from the Reserve Bank of Australia. Markets are pricing a 52% chance of a hike before year-end and are flirting with the idea of rate cuts in late 2027. A survey of businesses out on Tuesday showed conditions remained soft in June, before the renewed fighting in the Gulf, while cost pressures eased modestly. Meanwhile, a separate survey showed the mood among consumers improved a little in July, but again that will be challenged by rising fuel prices. With markets awaiting further data on the economy, the Aussie is likely to remain subject to geopolitical developments, mainly regarding moves in oil.

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 upcoming data.

TREASURY FUTURES

Yields edged lower across the curve overnight, with the 10-year Note falling below 4.55% for the first time in a week as a reduction in market expectations of Fed tightening have taken recent pressure off bond prices. Weekly jobless claims continued to support the narrative of a stable labor market, the backdrop of US-Iran fighting, and a drawdown in oil inventories support a dynamic that favors an upwards move in policy action by the end of the year. The two-year yield at 4.17% is the greatest indicator that Fed policy could move higher later in the year despite a pullback in near-term tightening expectations. Money markets are priced for a hike in December but have pulled back on bets of near-term tightening after this week’s inflation data. While PPI and CPI prints for June came in weaker-than-expected, the data still supports a hawkish bias from the Fed. Largely, the reaction from markets was that the data was not as bad as it could have been. The Fed will probably need to see further benign inflation readings before ruling out a rate hike later this year.

Watch point: Mainly, the renewed fighting and prospect that some inflation remain sticky reinforce a hawkish backdrop for the Fed despite a drop in the headline reading.

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