Semis Rebound

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 higher, led by tech and semis. The main semiconductor ETF (PHLX) is up around 4% pre-market, rising for the second straight session after the recent selloff.  The PHLX ended last week more than 20% below its late‑June record high, formally marking a bear‑market decline, but it is still up roughly two‑thirds year‑to‑date, underlining how much room there is for swings within the AI theme. The recent correction reflects investors questioning whether this year’s powerful move in semis has overshot, and scrutinizing the lack of visible, near‑term returns on heavy AI capex by hyperscalers; today’s bounce shows dip‑buying interest remains ahead of key earnings. Market focus is turning squarely to big tech earnings, specifically Alphabet and Intel this week, for guidance that either validates or challenges the sustainability of the AI trade and elevated profit expectations. Despite volatility and geopolitics, earnings growth should remain the main driver of equity performance, with central banks unlikely to tighten aggressively if energy shocks have limited pass‑through to core inflation.

CURRENCIES

US DOLLAR: The USD index held steady overnight near 101.00 as traders weigh safe‑haven support from ten straight nights of US strikes on Iran and renewed threats to shipping against last week’s softer inflation data, which cut the implied probability of a September Fed hike to around 60% from nearly 90% pre‑CPI. In the Gulf, a tanker has reported being hit in the Strait and flows through the waterway continue to shrink, while Iran is pressing its Houthi allies to be ready to close Bab el‑Mandeb, an action that could take another ~7% of global oil supply off the market on top of the ~10% already disrupted, helping push Brent up roughly 24% month‑to‑date and reinforcing a durable energy risk premium in the inflation and rates backdrop. Meanwhile, a strong Q2 earnings season will help offer some support.

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 $1.1417. Germany’s ZEW Indicator of Economic Sentiment rose 15.8 points to 26.3 in July 2026, continuing a jump in June and comfortably beating forecasts for a reading of 18. The reading marked the highest level since before the US-Iran war. The improvement was driven by stronger expectations for export-oriented industries and resilient domestic demand, although the conflict in Iran and elevated oil prices remain key risks to the recovery. Focus now shifts to the European Central Bank’s meeting on Thursday, where the bank is expected to maintain a hold on rates after hiking last month. Still, tightening expectations remain against the current geopolitical backdrop: traders are placing a 75% chance of a hike at the September meeting and see a total of 60 bps of tightening by September of next year. For the euro, direction will ultimately hinge on the divergence between ECB and Fed tightening expectations.

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 0.31% weaker at $1.3387, trimming earlier gains as traders await clarity on the government’s fiscal plans. John Healey, a former defense secretary, was appointed finance minister after the UK market close on Monday; he had not been seen as the obvious front‑runner for the role. Healey is viewed as having some Treasury experience and not being on the far-left wing of the Labour party has reassured the gilts market modestly, the bigger question is how Burnham chooses to use any headroom under the rules, which will shape term premia and gilt supply expectations. Longer‑dated bonds remain more sensitive to fiscal concerns; 30‑year yields recently hit a two‑month high near 5.76% after Burnham’s early comments about using “flexibility” in the fiscal framework reignited worries about potential looseness. Elsewhere on the data front, annual wage growth held at 3.4% in the three months to May, in line with forecasts. Markets have repriced BOE policy expectations quite hawkishly in recent days, with the market now seeing a total of 41 bps of tightening by year-end.

JAPANESE YEN: The yen is 0.18% weaker at 162.77 yen per dollar. Japan remains heavily dependent on oil imports from the Middle East, leaving the yen particularly vulnerable to supply disruptions and higher energy costs. 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 0.3% higher at $0.7014. Australian 10-year yields have gained against US Treasuries, now 38bps higher, up from a 26bp advantage last week. Q2 inflation data next week is expected to see the core measure rise around 0.9%, taking the annual pace up to 3.7%, from 3.5%. That is likely to keep the risk of a rate hike before year-end alive. The latest jump in oil prices has already seen traders add to expectations of one more hike to the cash rate to around 80%, though much depends on the geopolitical backdrop in the Gulf. 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 are little changed across the curve. Tehran received a proposal from mediators for a 10-day ceasefire although the decision by the Iran-aligned Houthis to impose a naval blockade on Saudi Arabia on Monday risked further escalating the conflict, keeping Brent crude just below $90 a barrel, a five-week high. Inflation expectations have steadily eased this month even as oil prices remained elevated, with one-year inflation swaps falling below the Fed’s 2% target for the first time since October 2024. The Fed’s renewed credibility in fighting inflation, dwindling tariff effects, and a stable labor market are among several factors contributing to the low expectation. A Reuters poll showed that economists are expecting the Fed to keep rates on hold for the remainder of the year, while a majority of those who answered a separate question about the chance of a rate hike this year now described the likelihood as “high”, a reversal from last month when most saw it as “low.” Markets are pricing in a October rate hike and see 39 bps of tightening before year end.  The Fed is in its blackout period before its policy meeting next week and the US economic calendar is light this week.

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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