AI rally and US-Iran hopes trigger risk-on

Risk-on returns

We are firmly risk-on this morning, with a good vibe in the equities space. Both the S&P 500 and the Dow refreshed all-time highs yesterday, and the Nasdaq 100 added 3.3%. This was bolstered by the AI trade finding its feet again and hopes for a peaceful resolution between the US and Iran in the Middle East.

Overnight in Asia, a similar picture was seen across regional indices. South Korea’s KOSPI gained more than 4%, and Japan’s Nikkei 225 also jumped 3.5%, though Chinese blue chips were more restrained, up around 0.7%. Equity index futures point to more of the same in Europe this morning, as I write.

Semiconductors continue to set the pace, with SK Hynix up nearly 7% and Nvidia adding more than 2% after hours, following Elon Musk's enthusiasm for its next-generation Vera Rubin chips. The wider semiconductor index has clawed back about 15% from June's sell-off low, leaving it up over 40% YTD.

Not everyone is having a good week, though, as AMD sank almost 9% after-hours on a lacklustre sales outlook. SpaceX also gave back over 7%, despite recording its first revenue beat since going public, as investors flinched at AI capex rocketing to nearly US$16 billion from under US$750 million a year ago.

‘Very good discussions’

Oil benchmarks fell by about 6% on Tuesday; both Brent crude and WTI also dipped below their 200-day SMAs at US$80.87 and US$76.02, respectively.

There are also reports that Iran is weighing the possibility of allowing Europe to clear mines in the Strait of Hormuz. However, while we all agree that demining this waterway is imperative and a step in the right direction, questions remain. How many European forces would commit, and how safe would it be? Also, how susceptible is the US to this potential arrangement? In terms of ship-tracking data through the Strait right now, while there are a handful of vessels transitioning, flow remains thin.

President Trump recently told Fox News that the US and Iran were having ‘very good discussions’. However, I would treat this with a touch of caution, as there has been no shortage of false dawns on this front in recent months. Iranian state media also struck a noticeably cooler tone.

Bonds, Gold and FX

The retreat in oil has taken pressure off bond yields, with the 10-year US Treasury yield edging down to around 4.60%, considerably off last week's highs as markets have trimmed the odds of a September Fed rate hike.

Gold has benefited from the softer rate outlook, pushing it to around US$4,135 and firmly above the trendline resistance, which extends from the high of US$5,419.

On currencies, the USD continues to lose a little ground, while attention in Tokyo remains fixed on the yen following last week's rare joint intervention between the US and Japan. US Treasury Secretary Scott Bessent said this week that he has confidence in BoJ Governor Kazuo Ueda to do right by the economy ahead of the BoJ's September meeting. 

Fewer US job openings

The June US JOLTS report showed the number of job openings fell 178,000 to 7.36 million, from 7.54 million recorded in May. This means very little in the grand scheme of things, suggesting a gradual cooling rather than anything drastic, with markets continuing to price in about 20 bps of Fed tightening by year-end.

Granted, there are fewer job openings, but the US labour market still has enough jobs to get to the neutral employment rate. Hiring actually nudged higher from 5,252 million (3.3%) to 5.348 million (3.4%), while the quits rate remained unchanged at 2% – essentially reinforcing the low-hire, low-fire jobs market. 

What’s on the radar today?

As for the day ahead, the focus will be on US data, specifically the July ADP non-farm employment report, released at 12:15 pm GMT, followed by the July ISM services PMI at 2 pm. 

The ADP print follows a soft June reading of 98,000 – below the 118,000 forecast – and ADP's own weekly tracker has shown hiring cooling for five straight weeks into mid-July. Consequently, another underwhelming report would not surprise me.

For the ISM release, June came in at 54.0, a touch below the 54.5 consensus and down from 54.5 in May, with the sector still expanding but losing a little momentum. Economists are broadly split on where it lands this time, so expect it to potentially move markets either way.