Report by Renta 4
Minimal fluctuations at the European open (Eurostoxx futures down 0.2%, S&P down 0.1%, Nasdaq down 0.4%) despite continued sharp falls in Asia (Japan down 2%, South Korea down 6%) and renewed tensions between the United States and Iran. Today’s session will have several clear focal points: the Fed meeting and the results from tech giants Microsoft and Meta Platforms, whilst keeping a close eye on the situation in the Middle East.
On the geopolitical front, Brent crude has rebounded by 4% to $87 per barrel (following a 17% drop over the last three days) in the wake of a new attack by Iran that has broken the three-day truce. The Islamic Revolutionary Guard Corps has launched multiple ballistic missiles (intercepted by the US) in a “surprise attack” against American bases in Jordan, whilst claiming to have attacked and detained three oil tankers. For their part, Saudi Arabia and the US are responding with joint strikes against “Iran-aligned terrorists” in Iraq.
Investors will also be keeping a close eye on the meeting between Trump and Netanyahu, whilst negotiations between Iran and Oman over shared control of the Strait of Hormuz are becoming more complicated, given Iran’s demand that the entrance to the strait must be entirely under Iranian control, along with part of the exit channel, making any swift agreement impossible.
Of particular note is the sharp fall in South Korea’s Kospi index, which triggered the ‘circuit-breaker’ for the second consecutive day with a drop of more than 11 per cent (although it is now ‘recovering’ to down 8 per cent), and has fallen by 19 per cent over two days – an all-time record. SK Hynix is down 10% despite reporting its best-ever quarter in absolute terms (a 557% rise in operating profit, with margins exceeding 80%), a clear sign that the fundamentals are exceptional but expectations are very high. Management is increasing capital expenditure to at least $31,000 million by 2026, a 50 per cent year-on-year increase, and has signed long-term contracts with around 10 customers, including an agreement with Nvidia (>$500,000 million, covering purchases of memory chips and supercomputers). They insist that demand will outstrip supply until at least 2030.
As for the Fed, we expect it to keep rates at 3.5%–3.75%, although the changes being made by Kevin Warsh (less transparency, scrapping ‘forward guidance’) are confusing the market, which assigns a 30% probability to a 25-basis-point rise. We note that the ‘dot plot’ remains in place (albeit without Warsh’s ‘dots’) and points to one rate rise this year (projected by 9 of the 18 FOMC members), and that the new Chair’s recent tone on inflation has been ‘hawkish’, showing no willingness to tolerate inflation above target. In this regard, although the June CPI figure moderated more than expected due to the fall in oil prices from their highs following the signing of the US-Iran MoU, the current situation in the Middle East (the threat of a double bottleneck: the Strait of Hormuz and the Red Sea) has triggered a fresh surge of over 20 per cent in oil prices from their early July lows. This necessitates maintaining caution and a hawkish stance in the fight against inflation, and it is likely that Warsh’s speech will be notable for its ambiguity, now that ‘forward guidance’ is no longer in place. The market is fully pricing in a 25 bp hike in September and a further 25 bp in Q1 2027.
As regards the results of the hyperscalers, the figures from Microsoft and Meta (today after the US market close) and Amazon (tomorrow) will be key to determining whether the high capital expenditure on AI is generating returns, in a market that is increasingly demanding the monetisation of investments rather than mere spending guidance. In this regard, the results already presented by Alphabet last Wednesday provided an early indication, but Microsoft (Azure) and Amazon (AWS) will deliver the definitive verdicts on whether or not the acceleration in ‘cloud’ and AI is genuine. Meanwhile, the rotation away from semiconductors and memory – which posted strong gains in 1H26 and are now the focus of profit-taking – continues, with capital shifting towards hyperscalers and software in relative terms.
