Strong sell-off and risk aversion flows continue amid deepening AI tech rout

EU mid-market update: Strong sell-off and risk aversion flows continue amid deepening AI tech rout, after Kimi K3 release and China Pres Xi speech.

Notes/observations

- Europe opened lower but with more restraint than Asia and US which are defensive for a second session as the semiconductor rout deepened, overriding TSMC's earnings beat. Nasdaq futures have fallen for 24 hours straight (Gemini-delay reports adding ~1.4%), while the Nikkei briefly slumped 6% below 63K into correction territory. Hynix ADRs fell another 13% and SpaceX dropped below its IPO price to $127 post-Starship abort. China AI names cratered. Hedge funds cut AI-basket exposure to a yearly low. Weak US earnings added to it (Netflix -9%, Intuitive Surgical -10.7%). Gold slipped below $4,000 and Bitcoin fell 1.9%.

- Dominant driver was Xi's WAIC address (Shanghai, 17–20th July) which pushed open-source AI and global-south support, read by markets as confirmation AI is joining China's deflation-exporting industries- a "digital Belt & Road," with DeepSeek reportedly aiming to flood the world with cheap AI. That's negative for global AI profitability and for China's own AI firms' revenues. China's NDRC followed with an 8-point action plan. Elsewhere: Meta hired AWS compute chief Dave Brown, xAI added Grok automations, and the US is said to be eyeing a share of Korean chipmakers' excess profits.

- Kimi K3 is the most compelling thing to watch in 2026 China open-source models, not because it claims raw supremacy against even Fable in most tasks, but because - if it truly delivers on its reported strengths - it could become the developer productivity breakthrough that Claude Opus represented: a model that excels at the messy, compounding reality of shipping software rather than just acing benchmarks. Early signals show it leading on human preference for functional frontends, terminal persistence, and long engineering endurance (SWE-Marathon), addressing the coherence and reliability gaps that limited earlier Chinese models like GLM-5.2 in sustained agentic workflows. With architectural refinements like Delta Attention for long-horizon coherence and aggressive cost efficiency, it has the potential to embed deeply into real dev stacks - CI/CD, repository-scale automation, and agent swarms - much like Claude Code or Codex did at their peaks. If the production results match the hype, Kimi could become DeepSeek 2.0 moment and mark a structural shift where frontier-class usefulness becomes a commoditized, high-velocity default for developers worldwide, forcing differentiation elsewhere while creating powerful workflow lock-in.

- For UK, PM change is settled: Burnham is confirmed Labour leader today, replacing Starmer as PM Monday after backing from 300+ of Labour's 403 MPs. His route was unusual - Manchester mayor, won the Makerfield by-election in June, took his seat 22 June as Starmer resigned. On gilts: the May–June selloff saw 30yr yields jump ~20bp to 5.86% (oil shock a major confound), before moderating ~30bp as Burnham tied himself to existing fiscal rules (30yr ~5.45%). The lingering scar is his Sept-2025 "in hock to the bond markets" line. His "Manchesterism" platform (devolution, £40B housing borrowing, 50p top rate) raises funding-within-the-rules questions, with a floated defence carve-out a flashpoint. The IMF reportedly warned him on limited spending room. The swing variable is the Chancellor pick (early next week): orthodox caps the premium, expansionist widens it.

- US-Iran hostilities escalated for a sixth straight day. CENTCOM confirmed fresh strikes on dozens of military targets; Iran/IRGC claimed retaliatory attacks across Bahrain, Kuwait, Qatar (intercepted missile in Doha), Jordan and Syria's Al-Tanf, plus explosions at Chabahar after CENTCOM's stated pause. Strait of Hormuz risk dominates - Birol flagged energy security, Hegseth insisted Iran doesn't control it - and the IRGC reportedly urged the Houthis to shut Red Sea access on further escalation. A clear weekend risk. Oil stays contained, but the safe-haven bid is muddied by higher-for-longer fears.

- Trump's national address aimed election-integrity claims at China (declassification, alleged illicit acquisition of US election data, DNI/FBI probes), which China rejected - notable ahead of Xi's September US visit. Trump painted U.S. elections as under existential threat from Chinese data breaches, Deep State concealment, and hundreds of thousands of unauthorized immigrants on voter rolls, using the speech to rally support for his SAVE America Act requiring proof of citizenship while circling back obsessively to 2020. The remarks basically set the table for November turnout efforts and 2028 positioning—though Republican pollsters privately worry the "stolen election" focus risks eyerolls from swing voters even as it energizes the base.

- On rates: ECB expected to hold Thursday with one final 25bp hike to 2.5% eyed in September, while UK BoE hike pricing (~36bp) looks stretched.

- Corporate/regulation: VW flags ~140K jobs at risk (above the prior 100K). Germany reportedly readies Commerzbank-UniCredit talks; Burberry opened -4%.

- Asia closed lower with KOSPI underperforming -6.4%. EU indices -0.2% to -1.0%. US futures -0.7% to -2.0%. Gold +0.5%, DXY +0.1%; Commodity: Brent +1.3%, WTI +1.7%; Crypto: BTC -1.8%, ETH -2.8%.

Asia

- Korea markets closed for holiday (Japan closed on Monday).

- New Zealand Jun Food Prices M/M: 0.6% v 1.0% prior.

- Singapore Jun Non-oil Domestic Exports Y/Y: 20.7% v 28.7%e; Electronic Exports Y/Y: 105.1% v 94.8% prior.

- Japan Fin Min Katayama reiterated stance that was ready to respond appropriately and "decisively" to currency moves at any time as needed (Reminder: Japan closed on Monday).

- World Artificial Intelligence Conference [WAIC] saw China President Xi attend for the 1st time since 2018. He noted that should encourage open source, cooperation in AI development.

Global conflict/tensions

- US launched another wave of strikes for the 6th straight day.

- US military strikes against Iran continued. Targeted infrastructure linked to the Islamic Revolutionary Guard Corps naval base in Bandar Abbas. Other areas included Qeshm Island, Bushehr, and other areas across Iran.

- Bahrain, Kuwait, Jordan and Qatar all reporting attacks from Iran while report that the IRGC was in Yemen calling on the Houthis to shut access to the Red Sea if the US escalates attacks on Iran infrastructure.

- Weekend risk as Iran and US continue to trade attacks.

Europe

- IMF said to have warned incoming UK PM Burnham on the little room to increase public spending given the UK's challenging fiscal outlook.

Americas

- Fed's Jefferson (voter )noted that the current policy stance should support job market, allow inflation to resume decline toward 2% as tariff effected, energy prices pass through. In scenario where inflation did not start cooling, it could be appropriate to reconsider stance to ensure we deliver price stability.

- Pres Trump National Address turned most of his ire at the evidence of 2020 election irregularities at China as he claimed China illicitly obtained US election data and asked the Dir of National Intelligence and the FBI to investigate China. (**Note: Pres Xi’s scheduled state visit to the US in September).

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [FTSE -0.25% at 10,545.93, DAX -0.82% at 24,663.11, CAC-40 -0.96% at 8,297.73, IBEX-35 -0.25% at 19,190.90, FTSE MIB -0.97% at 51,863.50, SMI -0.07% at 14,257.80, S&P 500 Futures -1.03%].

Market focal points/key themes: European indices trade lower Friday, tracking weak U.S. futures amid mounting skepticism over the AI boom's sustainability and fresh geopolitical risks in the Middle East. Tech and growth-sensitive stocks across the continent face particular pressure after China's Kimi K3 model release and Netflix's disappointing guidance and broader worries about hyperscaler capex, data center overcapacity, and weak free cash flow narratives spilling over from Wall Street. Rising oil prices following new U.S.-Iran strikes and disruptions to Strait of Hormuz tanker traffic add inflationary and energy cost concerns for European markets heavily exposed to imported crude. While macro data remains relatively resilient, the combination of AI fatigue, earnings misses, and escalating Middle East tensions suggests cautious trading in European bourses as investors await further corporate results and clarity on energy supply risks.

Equities

- Consumer discretionary: Burberry [BRBY.UK] -6.5% (trading update).

- Industrials: Volvo Cars [VOLCARB.SE] -7.5% (earnings; negative comments on China business), Volvo [VOLVA.SE] -1.5% (earnings; raises China outlook), SAAB [SAABB.SE] +5.0% (earnings), Skanska [SKAB.SE] -2.5% (earnings).

- Technology: ASML [ASML.NL] -4.5% (concerns over China Kimi K3 models and China Pres Xi speech at AI conf).

- Materials: Yara [YAR.NO] -3.5% (earnings).

Speakers

- Hungary Central Bank (MNB) Gov Varga noted that a stable HUF currency (Forint) between 355-360 per Euro would help the economy.

- China Foreign Ministry Official Lin stated that US accusations of election interference have no factual ground. China had never interfered in US elections. Rejected new US rules on journalist visas and may take countermeasures.

- China and Pakistan Foreign Ministries reiterated call for US and Iran to cease hostilities and resume talks.

- China said to adjust the consumption tax for some batteries to 2.0%.

- Japan PM Takaichi stated in Parliament that govt top priority was to ease burden on incomes for lower and middle classes. GPIF investing in domestic assets is key initiative.

- BOJ said to mull shifting risk view of economy; To likely raise growth forecast for this year, but sees little need for back-to-back rate hikes.

Currencies/fixed income

- Equity market weakness did not translate into USD safe-haven flows. Oil was steady while a drop in the equity futures was led by the tech sector. Middle East conflict dominated headlines but did little to move oil prices. US and Iran continued to exchange jabs on various targets for a 6th straight day.

- EUR/USD at 1.1445. Dealers noted of a small change that ECB could continue its tightening at next week’s policy decision.

- USD/JPY at 162.30 area by mid-session. Continued rhetoric by Japanese govt officials on possible FX intervention did little to have any market concern. Dealers noted that Monday is a Japanese holiday and does risk FX intervention but price action not concerned at this time.

- Bonds: 10-year German Bund yield last at 3.12%, France 10-year Oat at 3.92% and 10-year Gilt yield at 4.93% 10-year Treasury yield: 4.53%; 10-year JGB: 2.68%.

Economic data

- (AT) Austria Jun Final CPI M/M: 0.0% v 0.0% prelim; Y/Y: 3.2% v 3.2% prelim.

- (CZ) Czech Jun PPI Industrial M/M: -0.4% v -0.4%e; Y/Y: 1.3% v 1.4%e.

- (CN) Weekly Shanghai Deliverable Copper Inventories (SHFE): 79.9K v 100.3K tons prior.

- (TH) Thailand May Foreign Reserves w/e July 10th: $279.4B v $282.1B prior.

- (EU) Euro Zone May Current Account : €25.1B v €17.5B prior.

- (IT) Italy May Current Account: -€0.6B v +€2.6B prior.

- (PT) Portugal May Current Account: €0.6B v €0.3B prior.

- (GR) Greece May Current Account: -€1.0B v -€1.4B prior.

- (RU) Russia Narrow Money Supply w/e July 10th (RUB): 21.82T v 21.59T prior.

- (HK) Hong Kong Jun Unemployment Rate: 3.7% v 3.7%e.

- (EU) Euro Zone Jun Final CPI Y/Y: 2.8% v 2.8% prelim; Core CPI Y/Y: 2.4% v 2.4% prelim.

- (CY) Cyprus Jun CPI Harmonized M/M: 0.9% v 0.8% prior; Y/Y: 4.1% v 3.5% prior.

Fixed income issuance

- (IN) India sold total INR320B vs. INR320B in 2029, 2033 and 2055 bonds.

Looking ahead

- (UK) Special conference: Burnham confirmed as Labour leader (unopposed).

- (EU) ECB's Pre-Rate Decision Quiet Period.

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (IN) India to sell combined INR320B in 2029, 2033 and 2055 bonds.

- 05:30 (ZA) South Africa to sell combined ZAR1.0B in I/L 2038, 2046 and 2058Bonds.

- 06:00 (IT) ECB’s Cipollone (Italy).

- 06:00 (UK) DMO to sell £6/5B in 1-month, 3-month and 6-month bills (£1.5B, £2.0B and £3.0B respectively).

- 07:00 (BR) Brazil July FGV Inflation IGP-10 M/M: -1.0%e v -0.3% prior; Y/Y: 2.7%e v 2.2% prior.

- 07:30 (IN) India Forex Reserve w/e July 10th: No est v $674.2B prior.

- 08:00 (BR) Brazil May Economic Activity Index (Monthly GDP) M/M: -0.1%e v +0.5% prior; Y/Y: 0.5%e v 0.9% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (US) Jun Import Price Index M/M: -0.6%e v +1.9% prior; Y/Y: 6.7%e v 6.7% prior; Import Price Index (ex-petroleum) M/M: 0.4%e v 0.8% prior.

- 08:30 (US) Jun; Export Price Index M/M: -0.6%e v +1.3% prior; Y/Y: No est v 11.2% prior.

- 08:30 (US) Jun Housing Starts: 1.312Me v 1.177M prior; Building Permits: 1.402Me v 1.413M prior; Housing Starts M/M: +11.3%e v -15.4% prior; Building Permits M/M: -0.2%e v -0.7% prior.

- 08:30 (CA) Canada May Int'l Securities Transactions (CAD): No est v 46.9B prior.

- 09:00 (IN) India announces upcoming bill issuance (held on Wed).

- 09:15 (US) Jun Industrial Production M/M: 0.2%e v 0.1% prior; Manufacturing Production M/M: 0.1%e v 0.0% prior; Capacity Utilization: 76.2%e v 76.2% prior.

- 10:00 (US) July Preliminary University of Michigan Confidence: 51.0e v 49.5 prior.

- 11:00 (EU) Potential sovereign ratings after European close (Moody’s on Spain; Fitch on Finland; DBRS on EFSF & ESM).

- 13:00 (US) Weekly Baker Hughes Rig Count data.