Crude at critical support, eyes on Ukraine, US/India talks

Data from both sides of the Atlantic painted a mixed picture yesterday. In Europe, July PMIs indicated slower expansion—or faster contraction in some regions—while in the US, the services sector slowed to near 50-mark, the threshold between expansion and contraction. New orders fell, employment softened, and, more worryingly, price pressures accelerated. That’s the last thing investors want to see, as higher inflation may prevent the Federal Reserve (Fed) from cutting rates. Reacting to this, markets pared back rate cut expectations for September. The US 2-year yield bounced above 3.70%, though still below the 4% level seen before last Friday’s jobs report revived hopes of a 25bp cut. Fed funds futures still price in nearly a 90% chance of that cut, partly on the view that a slowing economy will tame inflation over time.

The bigger unknown is whether a spending slowdown could offset the inflationary shock of Trump’s tariff plans—and whether markets could absorb a forced rate cut from Trump without seeing a jump in borrowing costs. So far, markets appear willing to roll with the punches. After a brief period of digestion, they resume pricing in risk and growth as usual—whether it’s exploding US debt, dramatic tariffs, or political unpredictability.

That said, demand for US debt remains a question: the Treasury's $58bn 3-year note sale met weak demand yesterday, and all eyes are on the 10-year auction today. Any softness could revive debt sustainability concerns—or not. The US dollar, meanwhile, is stalling near its 38.2% Fibonacci retracement on its summer rebound and looks poised to resume its bearish trend, weighed down by trade chaos, fiscal concerns, and dovish Fed expectations.

US equities pulled back yesterday, but futures are slightly higher today on hopes that rate cuts will ultimately support valuations. Palantir surged nearly 8% to a record high on strong results. In contrast, Super Micro Computer and AMD disappointed investors. AMD, the best-performing chip stock in the Philadelphia Semiconductor Index, dropped more than 6% after hours, while Super Micro fell 16%. Zooming out, the semiconductor sector broadly declined on reports that Trump may impose tariffs on chip and pharmaceutical imports. Trump even floated a 150–250% tariff range on pharmaceutical products—hardly encouraging news for Swiss negotiators who landed in the US yesterday hoping to roll back the 39% tariffs imposed last week. The SMI index is holding its breath, with hopes that US trade officials recognize that Switzerland’s low-value-added gold exports distort its trade deficit, while its $50bn in US service imports—like Microsoft licenses—should carry more weight.

But Trump has little incentive to entertain those arguments. After all, what’s the alternative—boycott Microsoft Office and send handwritten letters by carrier pigeon? In today’s digital world, that’s what negotiation power (or the lack of it) looks like. And Europe seems to have little of it.

In Europe, French industrial production posted a nearly 4% gain in June—its strongest in five years—driven by transportation materials and easing supply chain constraints. Still, the broader eurozone outlook remains tepid. Growth is hampered by regulatory rigidity and a stubbornly inflexible labour market. The Stoxx 600 eked out a modest 0.15% gain yesterday, but in the new geopolitical environment, defense and tech are emerging as the sectors to own, while luxury appears to be falling out of favour. Unsurprisingly, European tech and defense names delivered solid Q2 results, while luxury struggled. Banks also performed well.

European energy companies reported earnings declines—but not as steep as feared. Both Shell and BP beat estimates, maintained share buybacks, and emphasized capital discipline over aggressive green spending. Shell is trimming underperforming divisions like Chemicals, while BP is scaling back its renewables strategy under activist pressure. BP rose 2.8% on the results, while Shell is lower since its earnings announcement. In Saudi Arabia, Aramco reported its tenth straight revenue decline and is now borrowing to fund shareholder payouts as lower oil prices bite into revenue. Aramco is attempting to offset this by increasing output, hoping that higher volume will compensate for lower prices. The soft US dollar and a slowing global energy transition may help.

Crude oil is now testing a critical support near $65.30 per barrel. That level is under pressure due to speculation that Russia may announce an air truce in Ukraine. But in contrast, Donald Trump’s threat of tariffs on countries buying Russian oil could be bullish, if countries comply. India must now weigh the cost of cheaper Russian oil against the risk of damaging relations with an increasingly protectionist US. Price-wise, if WTI breaks below $65pb, it would likely mark the end of this summer’s price rebound and usher in a renewed downtrend, in line with higher supply and an uncertain demand outlook for the second half.