The Cambridge Weekly – 10th August

Developments in the Middle East continued to shape global markets last week. It was reported that Iran and Oman had progressed talks on a proposed shipping arrangement through the strait, while western officials also struck a more optimistic tone on the prospect of an agreement. This saw oil prices cool, as Brent crude fell back below $80 per barrel during the period and settled at around $82 at the end of the week. Despite this, US diesel prices remain elevated and data from the Energy Information Administration illustrated that US on-highway prices have now reached $5.35 per gallon, a $1.50 increase from 12 months prior.

In Europe, raging wildfires have added a further pressure point for governments, with it estimated that extreme blazes in France, Spain and Greece have already caused c.€15.6-19.1bn of damage this summer. This includes damage to property, infrastructure, firefighting and insurance claims and has highlighted how growing climate-related events are becoming a more visible economic issue in developed economies.

Currency markets were also in focus following US Treasury and Japanese intervention to support the yen, in order to maintain the stability of global markets, after the currency’s slide towards 40-year lows. This represented the US’ first direct support of the yen since 2011 – while Japan’s finance ministry stated it would not hesitate to conduct further coordinated intervention if required.

US Equity Market:

Last week was a strong week for equities, with performance supported by optimism surrounding a prospective agreement in the Strait of Hormuz and lower oil prices. The S&P 500 climbed by 3.6% over the period to Friday, reaching an all-time high of 7,793 on its way. Earlier in the week, eyes were on SpaceX’s first earnings release as a public company. The company announced stronger-than-expected revenue over Q2 but also revealed higher-than-expected quarterly capital spending of over $15bn on AI infrastructure. Shares fell sharply on the announcement with investors remaining cautious on AI-related spending.

AI continued to be a broader theme across US markets, as Alphabet shares fell by around 5% on the announcement of a leadership overhaul in its AI division. Notably, Demis Hassabis announced he would be stepping down as chief executive of Google DeepMind to become its chair, while also taking on the role of chief scientist at Alphabet – a role that longtime Google employee, Jeff Dean, would be vacating.

Amazon continued its rally after its strong earnings report recently, surpassing $3tn market capitalisation mark for the first time, becoming only the fifth company ever to have done so.

UK Equity Market:

A sweeping new sanctions package on Russia was announced by UK foreign secretary Ed Miliband last week, focusing heavily on Russian banks that were financing the war economy and the shadow fleet tankers that have been used to dodge western restrictions.

Graduate job openings fell to their lowest level since the pandemic last week, giving a concerning pulse check on the condition of the UK job market. Elsewhere, a study by Imperial College London revealed the rate of Chemical company closures in the UK doubled between 2020 and 2025 due to reasons such as high electricity costs, rising regulatory burdens and ageing assets, with the medicinal and defence chemicals sectors being hit hardest.

In markets, AstraZeneca shares tumbled last Monday following news that it was considering the purchase of pharmaceuticals competitor, Bristol Myers Squibb. In the commodities space, Glencore announced earnings alongside their intention to initiate a secondary equity listing in Australia, a sign from the company that they believe their UK shares are undervalued. Investors responded favourably, pushing the stock up 4.5% last Wednesday morning.

The FTSE 100 closed the week to Friday broadly flat, as tech stock dragged the index, despite strong corporate earnings from retailer Next, financial services firm Admiral, and commodity trader Glencore. Sterling continues to trade at around 1.35 against the US dollar.

Inflation, Interest Rates and Bond Markets:

Bond markets have continued to weigh up the competing forces that have shaped recent weeks: lower oil prices on one hand, persistent inflation concerns on the other. US Federal Reserve Governor Lisa Cook announced her support for a rate hike if necessary, citing fears regarding higher inflation becoming entrenched. Treasury yields wobbled in response as the 10-year ticked up to 4.75% before then falling back towards the 4.65% level by Friday.

UK 10-year gilt yields marginally eased over the period, falling below the 5.00% level to approximately 4.90% by Friday. The move was driven by reduced expectations for future oil prices off the back of positive progress in talks regarding shipping in the Strait of Hormuz over the week. Lower oil prices and inflation in turn lower expectations that the Bank of England will keep interest rates higher for longer.

What’s on the horizon

The Middle East will remain in focus for investors this week, with hopes that talks between Oman and Iran can materialise into a reopening of the Strait of Hormuz. Additionally, attention will be on the continuation of diplomatic talks between Iran and the US.

Macroeconomic data wise, the US will release its Producer Price Index (“PPI”) and Consumer Price Index (“CPI”) for July, both key economic indicators for inflation. These datapoints help the Federal Reserve and the market evaluate the US’ progress toward the long-term 2% inflation target. The US will also release retail sales and existing home sales data for July this week. Elsewhere, the UK and Eurozone will both release their second quarter GDP data, whilst Germany will release its CPI for July. Lastly, OPEC will share its monthly crude oil trends report.

Companies will continue report their earnings this week, with tech company Cisco being one of the key tech firms reporting – the market will be focusing on what the report reveals about AI infrastructure demand and product order momentum from hyperscalers like Microsoft Azure, Meta and Amazon.

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.