The Cambridge Weekly – 6th July

The Japanese yen fell to its weakest level against the US dollar since 1988 last week, briefly dropping below ¥162, as the gap between US and Japanese interest rates continued to fuel carry trades. This involves investors borrowing cheaply in the yen, then selling the yen for dollars to invest in higher-yielding dollar assets. The Bank of Japan (“BoJ”) raising its benchmark rate to 1% in June – its highest level in three decades – did little to dampen the slide in its currency, prompting Japan’s finance minister to reiterate that authorities are prepared to take action should it continue. Such weakness is further compounded by investor concern surrounding Prime Minister Takaichi’s loose fiscal agenda, contrasting the discipline pursued by predecessors. Further rounds of BoJ currency intervention, following the $72 billion deployed in late April and early May, remains a live risk for markets in the weeks ahead.

Russia launched one of its heaviest bombardments of Kyiv last week, striking the Ukrainian capital and surrounding regions with waves of missiles and drones. The attack followed weeks of intensifying strikes from both sides, as part of the enduring conflict that initially began in February 2022. While last week’s escalation has yet to translate into broad market volatility, it remains a reminder of the tense geopolitical backdrop in which investors continue to operate. Meanwhile, in the Middle East, US and Iran talks continued, with Brent crude oil settling around the $72 level towards the end of the period.

US Equity Market:

June proved a turbulent month for the US technology giants, with the ‘Magnificent Seven’ dropping nearly 10% over the period, to shed $2.2 trillion in market value, as investors rotated out of the group and into semiconductor and AI infrastructure names. Microsoft was hardest hit, falling around 20% over the month – its worst showing since 2000 – while Oracle, not part of the group, slumped almost 35% on concerns surrounding its AI-related borrowing. The rotation has reflected growing market scrutiny of the enormous capital expenditure directed toward AI infrastructure, with the more than $700 billion spent amongst the group in 2026 prompting some to question whether near-term returns justify such an outlay.The recent SpaceX initial public offering (“IPO”) – the largest in history – ruled stock market sentiment for much of the previous week. The debut confirmed continued strong investor demand for exposure to AI-integrated platforms. Despite the lofty price, analysts have warned that the valuation is at a significant premium to historical technology listings.

OpenAI proposed handing the US government a 5% equity stake in the company – worth an estimated $42.6 billion at its recent $852 billion valuation. This comes as part of a broader push by the administration to ensure Americans can share in the financial upside of the AI boom. The proposal, which envisages other leading AI developers offering similar stakes via a public vehicle, has drawn some criticism that the government being both a shareholder and regulator of the same firms represents significant conflicts of interest. Separately, research from Deloitte shows how the scramble to power AI data centres has been reshaping the US utility sector, with merger and acquisition activity in the space reaching a record $204 billion in the first half of the year. The S&P500 index closed the week to Friday up 1.78%.

UK Equity Market:

Attention remained fixed on political transition as Andy Burnham vowed to rewire the British state through more intervention, regional control and the biggest council housebuilding programme in 50 years. The bond market reacted calmly to his comments, with 10 years gilts down slightly lower on the day to 4.72%, while the pound was modestly up 0.4% by late afternoon to $1.33. This came amidst Sir Keir Starmer’s comments that some road and energy projects will be scrapped to pay for the government’s £15 billion defence plan. Separately, UK house price inflation rose as falling energy costs softened interest rate expectations, with the Middle East ceasefire agreement containing oil prices. Meanwhile, the Financial Times reported that UK energy prices may remain elevated, as lower wholesale costs are offset by higher spending on electricity networks and renewables subsidies.

Businesswise, Barclays bought its Canary Wharf HQ on a 999-year lease for £750m, one of the biggest office deals in Europe in recent years, whilst Lloyds announced plans to scrap the Halifax brand and gradually rename branches throughout the next year. Telecommunication giant BT announced a merger with Verizon for £3 billion last Monday and roadside recovery company, AA, are in talks to potentially list £5 billion of their stock on the London Stock Exchange. Currys also announced a £50 million stock buyback last Thursday. The FTSE 100 closed the week to Friday up 1.64%.

Inflation, Interest Rates and Bond Markets:

UK 10-year gilt yields started last week at around 4.72%, but rose to 4.81% last Thursday before settling down thereafter. This rise came off the back of Bank of England Governor, Andrew Bailey, speaking at the Sintra Forum, where he acknowledged a softening UK economy but strongly ruled out near-term interest rate cuts due to inflation in the UK – cooling market hopes for cuts any time soon. Yields also rose in line with broad global bond sell-offs in the US and eurozone as markets prepared for major macroeconomic data releases. The UK political scene had minimal impact last week, but weaker-than-expected US labour market data last Thursday brought yields back down, as it became clear that Fed rate hikes might not be coming as soon as originally anticipated.

Sticking with the US, yields rose early last week from 4.27% to a peak of 4.50% on 10-year Treasuries, before revising down to 4.46%. Treasuries had sold off the previous week, when core inflation came in at 3.4% and investors expected hawkish comments from Fed chair Kevin Warsh at the Sintra forum, last Thursday’s weaker job market data somewhat offset this. The 2-year Treasury note stayed around the 4.17% level throughout the period, with the probability of a July rate hike now significantly lower. The Federal Reserve’s latest meeting minutes, due for release this Wednesday, will shed further light on their likely rate trajectory.

What’s on the horizon

US-Iran discussions and the strength of the ceasefire agreement will remain in focus for investors this week. Eyes will also be on the UK leadership and the likelihood of credible opponents to Andy Burnham for Prime Ministership, as well as whether Japanese authorities will intervene in the currency markets to support the yen.

On the macroeconomic front, the US releases its May trade balance, and June jobless claims, existing home sales and services purchasing manager’s index (“PMI”). A variety of UK housing data is also imminent, with the house price index, mortgage rate and construction PMI all due to give an insight into the UK’s housing and building market’s strength. Meanwhile, the eurozone will be focused on Germany’s June consumer price index (“CPI”), and China will also release June inflation.

This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.

Past performance is not a guide to future performance.

The value of your investments can go down as well as up and you may get back less than you originally invested.

Source of financial market data: MorningstarDirect.