Middle East tensions and chip selloff set the tone

Middle East conflict deepens as MoU hangs by a thread

Oil benchmarks extended gains on Wednesday, albeit briefly, as momentum subsided this morning; Brent crude continues to trade around US$84/barrel. The latest from the Middle East shows that the US and Iran continue to exchange blows, which, of course, follows President Trump pulling back on his proposed 20% ‘Guardian of Hormuz’ fee – I still have no idea how this would have worked – and reimposing an Iranian blockade.

As you would expect, both sides continue to trade blame over breaches of the mid-June MoU, which, in my view, has well and truly collapsed. Although Trump noted that Iran wants to make a deal, that is, frankly, a hard circle to square with missiles still in the air. 

Chip rout weighs on Asia-Pac shares

In the equities space, the chip selloff has weighed on stocks. Asia-Pac shares had a rough session overnight. South Korea's KOSPI shed around 6%, with key constituents Samsung and SK Hynix taking sizeable hits, while Japan’s Nikkei 225 also fell by about 3%.

The US cash market closed largely positive, with equity index futures modestly on the front foot this morning. 

Dollar softens and Fed officials offer mixed signals

In FX, the USD took a hit yesterday after the June US PPI inflation data came in broadly softer than expected and reinforced Tuesday’s cooler June CPI inflation print. We also saw shorter-dated US Treasuries gain ground across the curve. OIS markets are also now pricing in 22 bps of Fed tightening by year-end, down from around 27 bps a day ago. 

Fed Chairman Kevin Warsh, testifying on Capitol Hill for the second day on Wednesday, noted dissatisfaction with current inflation gauges, said that the price impact from AI is not necessarily inflationary, and reiterated that the labour market remains in decent shape. Fed Governor Cook, meanwhile, offered a more balanced perspective, stating that risks have tilted towards higher inflation even as jobs have stayed stable, and remains in the higher-for-longer camp for now.

BoC holds firm but flags external uncertainties

We also had an update from the BoC yesterday. The central bank kept the overnight rate unchanged at 2.25% for a sixth consecutive meeting and reaffirmed that it is at the right point – the lower end of its neutral range – to bring inflation back to target. The BoC stated that growth is improving but is coming off a weak base, while inflation pressures (headline) are elevated but expected to ease, with external risks largely driving uncertainty: the Middle East conflict and US trade policy. 

According to the updated economic forecasts, the BoC expects Canadian growth to remain soft in 2026, before picking up to 1.8% next year and again in 2028, with inflation gradually cooling back to around 2% by early 2027. However, as you can imagine, how this plays out depends entirely on how energy prices move in the Middle East.

Day ahead: Retail sales, claims and earnings in focus

The calendar is heavily focussed on US metrics today, with June retail sales, weekly jobless claims, and the July Philadelphia Fed manufacturing gauge all landing at 12:30 pm GMT. Collectively, these data points offer a solid gauge of whether the consumer is holding up after yesterday’s softer PPI print. 

On the earnings front, Netflix reports after the close, alongside a clutch of regional banks, including US Bancorp and State Street. This offers a look at the health of both the consumer and financial sectors following this week's strong bank results.