Weekly market commentary

This week saw the bond market take centre stage as equities came under pressure. The yield on global government bonds, especially longer-maturity bonds, moved sharply higher at the beginning of the week as investors reacted to renewed tensions in the Middle East, rising oil prices and the readthrough to global inflation. However the sell-off also was also catalysed by broader unease around fiscal deficits and the growing demand for capital from the AI investment cycle. These higher yields weighed on equity markets, as investors priced the impact of higher long-term borrowing costs, before the US Treasury’s decision to double its long-dated bond buybacks to $4bn, triggering a meaningful reversal mid-week, with bonds retracting their earlier moves and equity markets recovering some lost ground, albeit still finishing the week lower.

On the macro data front, in the UK, labour market and inflation data broadly reinforced a disinflation narrative. Overall unemployment edged higher to 4.9%, while payrolls continued to soften, suggesting labour market conditions are gradually cooling. Meanwhile, July headline inflation rose to 2.9%, in line with expectations, although, while there was little change in core inflation MoM, it surprised to the upside. Services inflation however, eased further to 3.4%, continuing a trend that will be welcomed by the Bank of England. Higher household energy costs were the largest contributor to headline inflation, with forecasts of a further rise in the OFGEM price cap later this year likely to keep inflation elevated in the near term. Across the Channel, Eurozone inflation data provided a rather benign picture, with both headline and core inflation unchanged at 2.9% and 2.5% respectively, reinforcing the view that inflationary pressures across much of Europe continue to ease gradually despite ongoing energy market uncertainty.

With the Q2 corporate earnings season now largely complete, investors are focused on a handful of companies whose results can provide valuable insight into broader economic and consumer trends. In the US, updates from Walmart and Target suggest households remain price sensitive. Walmart’s sales growth, though positive, missed expectations as shoppers pulled back on non-essential spending amid higher fuel costs, while Target reported its strongest grocery growth in three years. Taken together, the results point to a consumer that remains resilient, but are increasingly selective about where they spend. In China, Alibaba’s results highlighted Chinese commitment to developing domestic AI capabilities, with revenues up 9% but quarterly profit falling 75% due to AI infrastructure related capital expenditure (capex).