Iran Tensions and CBs Drive Markets (20 – 24 July)

Global markets were dominated by renewed geopolitical tensions this week as the collapse of the US-Iran ceasefire reignited concerns over energy supplies and inflation.

Fresh US airstrikes, Iran's renewed attacks on shipping in the Strait of Hormuz, and expanding damage to regional infrastructure drove crude oil sharply higher, while investors balanced these developments against softer US inflation data. The contrasting forces kept central bank expectations in focus, with markets continuing to price additional policy tightening despite signs of easing price pressures.

The macro environment remains split between slowing inflation and persistent geopolitical risks. US consumer and producer prices surprised to the downside in June, helping Treasury yields retreat from recent highs. However, the renewed surge in oil prices following the breakdown of the Iran ceasefire has revived concerns that inflation could accelerate again. Markets continue to expect a Federal Reserve rate hike later this year, while the European Central Bank and Bank of England are also expected to continue tightening policy as energy-related inflation risks remain elevated.

Market Drivers & Catalysts

• US-Iran Conflict Escalates: The ceasefire collapsed after renewed US airstrikes and Iranian attacks on vessels in the Strait of Hormuz, increasing concerns over global energy supplies.
• Oil Prices Rebound: Brent crude has surged around 30% from its July lows as attacks expanded to shipping lanes and energy infrastructure across the Middle East.
• Inflation Outlook Shifts: Softer US inflation initially eased policy concerns, but rising oil prices revived fears of renewed inflationary pressure.
• Fed Expectations: Markets now assign a 53% probability to a September Federal Reserve rate hike, up from 47%, while futures continue to price at least one increase by year-end.
• ECB and BoE Tightening: Markets fully price a September ECB rate hike, with another expected by spring 2027, while a Bank of England rate hike is also fully priced by year-end.

Fixed Income

• US 10-Year Treasury Note Yield: Declined to 4.52% from the 5.62% peak reached on July 13 as softer consumer and producer inflation data and a second consecutive decline in Michigan inflation expectations eased price concerns. Nevertheless, renewed disruptions in the Strait of Hormuz continued to support inflation risks, while markets expect the Fed to leave rates unchanged in July before potentially tightening later this year.
• UK 10-Year Bond Yield: Held near 4.95%, remaining at a two-month high and on track for a third consecutive weekly gain, the longest streak since the Iran conflict began in early March. Investors also assessed Andy Burnham's confirmation as Labour leader ahead of becoming Prime Minister on July 20, while Chancellor frontrunner Shabana Mahmood helped ease concerns over fiscal expansion.
• Japan 10-Year Government Bond Yield: Climbed to 2.73%, extending gains for a second session as higher oil prices and Japan's dependence on Middle Eastern energy increased inflation concerns. Investors also continued to monitor the government's ¥370 trillion investment roadmap through fiscal 2040, while unchanged pension fund allocation plans limited support for domestic bonds.
• Germany 10-Year Bund Yield: Rose above 3.1%, reaching its highest level since May 20, as higher energy prices strengthened expectations for further ECB tightening. Markets continue to fully price a September rate hike, although policymakers have indicated that additional tightening in July remains unlikely.

Commodities

Gold slipped below $4,000 per ounce, approaching a nine-month low as renewed US-Iran hostilities lifted oil prices and increased expectations that the Federal Reserve will maintain tighter monetary policy. Oil has surged roughly 30% since July lows, while markets now see a 53% probability of a September Fed rate hike. India's gold market continued to see heavy discounts, while China's central bank recorded its largest monthly increase in reserves in two and a half years.

Silver remained below $56 per ounce, trading near an eight-month low as rising oil prices strengthened inflation concerns and reinforced expectations of tighter Federal Reserve policy. Markets also looked ahead to upcoming inflation data and further comments from Fed officials.

Currencies

• U.S. Dollar Index (DXY): Held near 100.9, finishing the week little changed as investors balanced weaker US inflation data against renewed geopolitical uncertainty. September Fed rate-hike expectations rose to 53%, while policymakers continued to emphasize their commitment to price stability.
• Euro: Traded around $1.145, remaining close to its strongest level since June 19. Expectations for a September ECB rate hike continued to support the currency, although cautious comments from Piero Cipollone and Martin Kocher reduced the likelihood of action in July.
• British Pound: Slipped below $1.345 after reaching a two-month high of $1.354. Markets focused on Andy Burnham's confirmation as Labour leader and his expected appointment as Prime Minister, while rising oil prices reinforced expectations of another Bank of England rate hike this year.
• Japanese Yen: Weakened toward 162.5 per dollar, remaining close to a four-decade low as higher oil prices increased pressure on Japan's import-dependent economy. Reports suggesting no changes to state pension fund allocations also disappointed investors awaiting stronger policy support.

Economic Data Highlights

• US Inflation (June): Annual inflation slowed to 3.5%, down from 4.2% in May and below expectations of 3.8%, marking the first decline in five months. Monthly CPI fell 0.4%, the largest decline since April 2020, driven by a 5.7% drop in energy prices. Core inflation eased to 2.6%, while monthly core CPI was unchanged.
• US Retail Sales (June): Increased 0.2% month-on-month, the smallest gain in five months. Excluding gasoline, retail sales rose 0.7%, while core retail sales, which feed directly into GDP calculations, increased 0.5%. Gas station sales declined 5.3%, offsetting gains in autos, sporting goods, electronics, and online retailers.
• China Trade Balance (June): The trade surplus widened to $125.62 billion, up from $113.84 billion a year earlier and marking the second-largest surplus on record. Exports jumped 27% to a record $412.39 billion, while imports rose 36%, the fastest pace in five years, reaching an all-time high. China's first-half trade surplus edged lower to $575.98 billion.
• China GDP (Q2 2026): The economy expanded 4.3% year-on-year, slowing from 5.0% in the first quarter and missing expectations of 4.5%. This marked the weakest growth since Q4 2022. Soft domestic demand, weak private investment, and continued weakness in the property sector outweighed strong AI-related exports. First-half GDP growth stood at 4.7%.

Macro Calendar Highlights

• US Existing Home Sales
• S&P Global Manufacturing & Services PMIs.
• Eurozone Consumer Confidence
• Crude Oil Inventories.
• European Central Bank Interest Rate Decision
• US Initial Jobless Claims
• US New Home Sales
• Germany Ifo Business Climate Index
• US Durable Goods Orders
• University of Michigan Consumer Sentiment (Final)