The Cambridge Weekly – 27th July

Energy markets moved back to the centre of investor attention last week, as fighting in the Middle East escalated further. Brent crude reached around $99 per barrel last Thursday, its highest level in six weeks, after Houthi forces claimed attacks on two Saudi tankers. Oil prices had already been rising over last week in response to further US strikes on Iran and stalled diplomacy talks. This renewed pressure was not limited to oil – European natural gas prices briefly moved above €62 per megawatt hour last week and near highs seen at the start of the Iran war. Analysts argue that this move stems from fears that lower liquefied natural gas exports from Qatar could make it harder for Europe to build up storage before winter.

The Japanese yen also suffered under the pressure of reignited tensions in the Middle East, as investors flocked to the traditionally safe-haven dollar. The currency traded at under ¥163, its weakest level against the US dollar since 1986. Tokyo officials reaffirmed that they were prepared to take action if currency moves became excessive, while markets weighed up whether the central bank should raise rates sooner to limit ‘imported inflation’ – yen depreciation making imports to Japan more expensive. Japanese government bond yields have continued to rise off the back of this currency weakness, leaving policymakers to balance currency stability, inflation and bond market resilience.

US Equity Market:

US equities were mixed last week, with investors weighing up stronger technology earnings against rising oil prices and renewed tariff uncertainty. The US administration announced fresh 50% tariffs on a range of Canadian goods, including some auto, alcohol and dairy-related products – with these due to come into effect in August, with the potential of others to follow at a later date. Weighing up the implications of this, tech earnings reports and renewed Middle East tensions, the S&P 500 index finished the period to Friday down 0.6%.

Earnings season continued with Alphabet reporting very strong growth in Google Cloud, as demand linked to AI remained a key driver. However, the issuer saw its share price fall over 7% into last Thursday as investors responded to the upwardly revised capital spending plans. Previous guidance indicated spending of $180-190 billion in 2026, and this was lifted to $195-205 billion in this reporting period. Tesla also announced record revenue, but profits disappointed as operating costs rose sharply and margins narrowed, causing its share price to slip over 9% into last Friday.

Last week a federal judge temporarily paused Paramount’s acquisition of Warner Brothers Discovery for 14 days in response to challenge from a coalition of state attorneys on the grounds of competition. The pause creates renewed regulatory risk for Paramount, who will owe Warner Brothers Discovery shareholders $650 million should the deal not complete before the 1^st of October deadline.

UK Equity Market:

UK politics was at the centre of UK news flow last week as Andy Burnham became Prime Minister last Monday. He used his first speech to promise measures to give households “breathing space” on the cost of living, including ideas around VAT cuts on electricity bills and a £2 cap on bus fares. He also set his cabinet, replacing former Chancellor Rachel Reeves with former defence secretary John Healey. Markets reacted, with gilt yields ticking up slightly off the expectation of further defence spending, and investors will remain receptive to any signs of looser fiscal policy, particularly with government borrowing remaining elevated.

In company news, easyJet reported that their profit in the second calendar quarter fell sharply as higher fuel costs and softer bookings weighed on margins. These moves were attributed to the Middle East conflict. The FTSE 100 closed the week to Friday up 0.3%, helped by cooler inflation and positive performance for internationally exposed businesses.

Inflation, Interest Rates and Bond Markets:

UK inflation data last week offered some relief, with the Office for National Statistics reporting that consumer price inflation fell to 2.6% in June, down from 2.8% in May and marginally lower than the 2.7% expected by economists. This move was helped by lower transport and fuel prices, while core inflation, which strips out more volatile items such as energy and food, remained unchanged at 2.6%. However, renewed tensions in the Middle East remain a concern for investors, raising questions over whether this improvement can be sustained.

Global bond markets weakened marginally last week as higher oil prices increased inflation expectations, reducing the scope for central bank rate cuts. In the US, treasury yields moved higher as markets assessed the likelihood of a Federal Reserve rate increase, while UK gilts remained sensitive to both oil prices and the new government’s fiscal approach. As a reminder, bond yields move inversely to prices.

What’s on the horizon

The Middle East’s shifting environment will stay front of mind for investors this week as the continued escalation of the conflict plays out. UK investors in particular will continue to watch how Andy Burnham follows up on his first week in office.

Macroeconomic data wise, there are 3 big interest rate decisions to be announced as the Federal Reserve, the Bank of England, and the Bank of Japan are all set to release their interest rate decisions this week. In addition to this, the US will release second quarter GDP and Core Personal Consume Expenditures (“PCE”) data, both of which will give an insight into the health of the economy. In Europe, Consumer Price Index (“CPI”) data for July will be released and China will release its July Manufacturing Purchasing Managers Index (“PMI”).

Earnings releases continue this week, with mega tech companies Microsoft, Meta, Apple and Amazon all reporting. Given the recent weakness in tech stocks, their results may prove influential in shaping the sector’s near-term outlook.

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.