Comments from President Trump on Monday suggested that diplomatic efforts to repair relations with Iran remain underway, with the US President stating that negotiations had been constructive and a deal could be reached in the near term. Iran, however, denied reports that it had requested talks with the US. Despite the more constructive rhetoric, reports on Tuesday that the US and Saudi Arabia had launched joint strikes against Tehran-backed militias in Iraq served as a reminder that geopolitical risks remain elevated. The situation continues to oscillate between escalation and de-escalation, underscoring the fragility of the current environment. Oil prices, which initially declined as investors reduced the geopolitical risk premium, rebounded on Wednesday as supply disruptions resurfaced. However, the move has remained relatively contained, with prices still well below the peaks reached during earlier stages of the conflict.
Equity markets came under pressure on Tuesday, led by weakness in semiconductor stocks as investors grew concerned about China’s rapid progress across the chip supply chain. Reports that Chinese firms have begun producing domestic lithography machines, coupled with the explosive stock market debut of memory chipmaker CXMT, reinforced expectations that China is moving closer to semiconductor self-sufficiency. This has heightened concerns that established chipmakers and equipment manufacturers could face greater competition, pricing pressure and potential market share losses over time.
The impact has been particularly noticeable in South Korea, where semiconductors account for a large share of the market. The KOSPI has pulled back amid selling pressure in major chipmakers such as Samsung Electronics and SK Hynix, driven by concerns over rising Chinese competition and questions around the durability of AI-related demand. However, the move should be kept in perspective. In sterling terms, the KOSPI had risen almost 100% year-to-date by June and, despite the recent correction, remains up around 43% for the year, making it one of the world’s best-performing major equity markets. Given the market’s heavy concentration in technology stocks, volatility is not unusual, and the recent weakness appears more consistent with a correction following an exceptional rally than a reversal of the broader trend.
Meanwhile, following a strong set of results from Alphabet last week, investors will turn their attention to earnings from Meta on Wednesday and Amazon on Thursday. Corporate earnings season has been encouraging so far, with more than 86% of the 135 S&P 500 companies to have reported beating analysts’ expectations. If that trend continues, it will mark the highest earnings beat rate since the second quarter of 2021.
Still to come this week, the Federal Reserve is widely expected to leave interest rates unchanged at 3.50%-3.75%. Although the June inflation reading came in slightly softer than expected, policymakers may remain cautious. The recent escalation of conflict in the Middle East and the resulting rise in oil prices could reignite inflationary pressures, leading some members of the Federal Open Market Committee (FOMC) to maintain a hawkish stance and keep the possibility of further rate hikes on the table. We also have the Bank of England’s interest rate decision.
Nicola Tune, Portfolio Specialist