Supportive AI developments give tailwinds to chip stocks

EU mid-market update: Supportive AI developments give tailwinds to chip stocks; New UK Chancellor a 'safe pair of hands' but unknown fiscal direction; US continues Iran barrage for 10th straight night.

Notes/observations

- Dominant European story is the shape of new PM Andy Burnham's cabinet, and specifically the appointment of former Defence Secretary John Healey as Chancellor. Markets had overwhelmingly positioned for Shabana Mahmood (prediction markets had her at ~92%), who was seen as the fiscally conservative option; she instead goes to the Home Office. The surprise pushed gilt yields to a two-month high and weighed on sterling on Monday. Healey is broadly regarded as a safe pair of hands and an executor rather than a driver of economic strategy, but he is an unknown quantity on fiscal direction, and the autumn budget is now the focal risk event. Both Burnham and Healey moved quickly to reaffirm commitment to the fiscal rules. Elsewhere: Miliband to the Foreign Office, Streeting to Defence, Cooper to Health, Rayner retained at Housing - a combination sell-side desks flag as constructive for housebuilders. Of note for the tech theme, Burnham has created a dedicated AI Minister post (Kanishka Narayan) attending cabinet. 27 appointments in total, 15 new faces, 11 of Starmer's cabinet out. Burnham has already spoken to Trump, von der Leyen, Macron, Merz, Costa, Rutte and Zelenskyy. He set out a cost-of-living measure today, the removal of VAT from electricity bills from 1 October (~£45 off the annual Ofgem cap), funded by scrapping the digital ID programme.

- UK labour market release was benign on balance. Claimant count rose 6.7k (vs 1.3k prior) with the rate steady at 4.4%; ILO unemployment unchanged at 4.9% as expected; employment change a strong +148k 3m/3m vs +80k expected. Crucially for the BoE, headline average weekly earnings undershot at 4.3% (4.5% expected), with ex-bonus in line at 3.4% and private sector regular pay at 2.9%. June public finances also came in better than feared - PSNB £16.0B vs £17.8B expected and £23.3B prior - giving Healey marginally more room. Sterling held its gains post-data and gilts steadied, the 10y a basis point lower at after Monday's sharp back-up, though desks caution yields remain elevated on unresolved fiscal uncertainty. One structural caveat flagged: youth unemployment is an early headache for the new government.

- Iran - tenth night of strikes, but a ceasefire proposal on the table. CENTCOM confirmed a further round of strikes on Iranian command centres, maritime capability, missile/drone sites and air defences, in retaliation for three US servicemen killed at the weekend. Iran responded with missiles at Camp Arifjan in Kuwait, an IRGC attack on a US site in Jordan (Jordan says it intercepted five drones), and reported strikes on US personnel lodging at Sheikh Isa airbase in Bahrain plus Amazon infrastructure. The State Department has issued a worldwide caution. Offsetting this, mediators are said to remain in contact with a 10-day cessation proposed and efforts to revive the interim deal, which capped crude. Watch the shipping channel risk: the Houthis have declared a sea-navigation ban on Saudi Arabia in the Red Sea (Saudi-led coalition promising a forceful response), a vessel was struck near Dibba, UAE, and Iran says reopening Hormuz depends on security considerations. The Pentagon has asked Congress for $80B to cover war costs.

- AI and tech set a bullish overnight tone. Asia rebounded hard on chips. Nasdaq futures recovered off the US session lows. The catalysts were broad. Nvidia used SIGGRAPH to launch DLSS 5 (shipping autumn 2026, one-step diffusion-transformer real-time generative rendering) and the Cosmos 3 robotics/world-model family, framing synthetic data as the next leg of compute demand - plus a disclosed 9.3% passive stake in Nebius via warrant. Taiwan June export orders exploded to +59.4% y/y (47.3%e) with US orders +86.3%; Korean chip exports in the first 20 days of July were +181% y/y; and TSMC is reportedly set to raise both advanced and mature node prices by up to 10% in 2027. Beijing is simultaneously defending its tech market ahead of CXMT's 27 July IPO - Zhipu/Z.AI bounced +25% after a 50% five-day drawdown on plans for a 1GW all-Chinese-chip data centre, with ~CNY60bn of state-backed buying, CSRC dividend/refinancing measures and SOE buybacks. Washington also took a light-touch line, with an executive order permitting US firms to host Chinese models subject to security guarantees and liability. Counterweight is infrastructure cost and politics: Oracle (already BBB-) faces a $7B collateral requirement from Wisconsin's PSC, potentially >$100m/year - a template that may repeat in states turning hostile to data centres.

- ORCL’s 5-year CDS has blown out to levels not seen since 2008 as Wisconsin regulators demand up to $7 billion in letters of credit for its Port Washington “Lighthouse” AI data center to shield local ratepayers from potential abandonment risk — adding >$100M in annual carrying costs on top of Oracle’s already massive capital-intensive AI expansion. This comes after the S&P downgrade to BBB- (last investment-grade notch) in July and follows similar PUC pushback on Microsoft’s Racine project, with regulators refusing to ease rules in July, forcing Oracle into court. The episode highlights growing regulatory and balance-sheet friction for hyperscalers funding hypersized AI infrastructure: Oracle has already raised $48B this fiscal year and eyes another ~$40B in FY2027, even as revenue guidance holds at $90B — amplifying investor fears around execution risk and leverage.

- Asia closed higher with KOSPI outperforming +3.6%. EU indices +0.2-0.7%. US futures +0.4-1.4%. Gold +1.5%, DXY 0.0%; Commodity: Brent -0.7%, WTI -0.6%; Crypto: BTC +3.1%, ETH +4.0%.

Asia

- Australia ANZ Roy Morgan Weekly Consumer Confidence Index: 75.6 v 75.3 prior.

- New Zealand Q2 CPI Q/Q: 1.5% v 1.4%e; Y/Y: 4.1% v 4.0%e.

- South Korea July Imports 20 Days Y/Y: 20.0% v 23.2% prior; Exports 20 Days Y/Y: 52.3% v 60.4% prior.

- Japan cabinet approves its ("big-boned") 'Honebuto' economic framework policy document, citing BoJ autonomy, however, lacking sales tax decision. Centerpiece of growth strategy was the ¥370T investment plan targeted to 17 strategic areas through 2040. Blueprint will explicitly state they will no longer pursue primary surpluses on an annual basis.

Global conflict/tensions

- US continued its attacks on Iran for the 10th straight day. US and Iran have signaled that diplomatic efforts remain active despite 10 days of week of escalating attacks.

- Trump said to be nearing a decision with US & Israeli officials only seeing 2 options; pursue a 10 day ceasefire to try and open the Strait of Hormuz or launch a massive joint military campaign with Israel to force Iran’s capitulation.

- Iran mediators push new ceasefire as Trump eyes all-out war (**Note: Regional mediators include Qatar, Egypt, and Pakistan). Trump said to continue mode of all-out war.

- Israeli intelligence believe Iran moved thousands of uranium-enrichment centrifuges into tunnels beneath Pickaxe Mountain.

- Iran-backed Houthi rebels in Yemen announced a maritime blockade of Saudi Arabia.

Europe

- New UK PM Burnham appointed. Immediately signaled he would use the flexibility within the existing fiscal rules to push borrowing closer to the limit (**Note: UK Gilts underperformed on Monday as investors reacted to Prime Minister Andy Burnham’s economic agenda) John Healy as UK Chancellor of the Exchequer (**Note: surprise appointment and viewed as a seen as a shrewd appointment). Miliband and Mahmood passed over for the Treasury; Miliband goes to the Foreign Office and Mahmood keeps the Home Office.

Trade

- Canada PM Carney issued statement on US intention to impose tariffs; Canada ready to engage intensively to address issues with US. (Reminder: White House stated that would impose additional 50% tariffs on certain Canadian goods over alleged trade discrimination, beginning in 30 days.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [FTSE +0.19% at 10,545.11, DAX +0.21% at 24,913.06, CAC-40 +0.14% at 8,351.93, IBEX-35 +0.59% at 19,320.15, FTSE MIB +0.52% at 52,135.00, SMI +0.22% at 14,285.50, S&P 500 Futures +0.51%].

Market focal points/key themes: Broader European sentiment remains cautious amid persistent Middle East tensions (Houthis threatening Saudi shipping routes) that keep Brent crude elevated near $89, risking imported inflation for the region. US futures edged higher following Asia trading and upcoming tech earnings (Alphabet, Tesla, IBM, Texas Instruments) will likely set the tone for European indices given cross-Atlantic AI and growth linkages. Swiss pharma giant Novartis stood out positively, beating Q2 core operating profit forecasts thanks to controlled costs despite softer Entresto sales, pushing its shares up over 1% in early trade. Amsterdam-based Nebius (ex-Yandex spin-off) gained traction after Nvidia disclosed a 9.3% stake (including warrants), reinforcing AI infrastructure momentum in Europe with the Dutch firm targeting over 5 GW of capacity by 2030. On M&A front, Mitie Group being acquired and trades higher by almost 40%.

Equities

- Consumer discretionary: Swatch [UHR.CH] -2.0% (earnings).

- Healthcare: Novartis [NOVN.CH] +2.0% (earnings).

- Industrials: Mitie Group [MTO.UK] +38.5% (to be acquired), Babcock International [BAB.UK] +6.5% (UK appoints former Defense Min as new Chancellor), Alfa Laval [ALFA.SE] +1.0% (earnings), Wartsila [WRT1V.FI] -3.5% (earnings), Jungheinrich [JUN3.DE] -3.0% (Germany financial regulator Bafin initiates audit of the co's financial statements for H1 2025).

-Technology: ASML Holding [ASML.NL] +2.5% (TSMC to raise prices; rally in Asian tech names), ALSO Holding [ALSN.CH] -4.5% (earnings).

Speakers

- ECB Bank Lending Survey noted that banks tightened access to credit in the Q2 over geopolitical instability fears, and they expect further tightening in the current quarter.

- Japan said to relax rules on bank lending for M&A and encourage pension funds to invest more in alternative assets.

Currencies

- USD steady as US-Iran strikes stretched into its 10th day and the price of oil remained elevated with Brent Crude at $89/barrel.

- EUR/USD at 1.1420 with focus on upcoming ECB rate decision on Thursday. ECB largely expected to keep interest rates on hold at its meeting. Currently markets fully pricing in almost two more full hikes before end of 2027.

- GBP/USD at 1.3440 area as markets continued to digest new UK PM Burnham's initial policies. PM pledged to stick to fiscal rules but use flexibility within them. UK 10-year Gilt at 5.02%.

- USD/JPY at 162.50 as the Japanese government economic blueprint was approved by Cabinet as expected. Dealers noted that the centerpiece of growth strategy was the ¥370T investment plan targeted to 17 strategic areas through 2040. JGB yields higher on elevated US yields. Threat of Japan FX intervention remained as the pair probed 40-year highs.

- Bonds: 10-year German Bund yield last at 3.15%, France 10-year Oat at 3.95% and 10-year Gilt yield at 5.02% 10-year Treasury yield: 4.59%; 10-year JGB: 2.71%.

Economic data

- (FI) Finland Jun Unemployment Rate: 10.0% v 12.7% prior.

- (UK) Jun Jobless Claims Change: +6.7K v +1.3K prior; Claimant Count Rate: 4.4% v 4.4% prior.

- (UK) May Average Weekly Earnings 3M /Y: 4.3% v 4.5%e; Weekly Earnings (ex-bonus) 3M/Y: 3.4% v 3.4%e.

- (UK) May ILO Unemployment Rate: 4.9% v 4.9%e; Employment Change 3M/3M: +148K v +80Ke.

- (UK) Jun Public Finances (PSNCR): £15.2B v £23.7B prior; Public Sector Net Borrowing: £16.0B v £17.8Be.

- (CH) Swiss May Trade Balance (CHF): 5.2B v 6.0B prior; Real Exports M/M: -6.0% v +4.5% prior; Real Imports M/M: -1.6% v +0.5% prior; Watch Exports Y/Y: 11.2% v 0.4% prior.

- (NO) Norway Jun Trend Unemployment Rate: 4.7% v 4.7% prior.

- (CH) Swiss Jun M3 Money Supply Y/Y: 3.6% v 4.5% prior.

- (ES) Spain May Trade Balance: -€8.2B v -€5.2B prior.

- (TW) Taiwan Jun Export Orders Y/Y: 59.4% v 47.3%e.

- (HK) Hong Kong Jun CPI Composite Y/Y: 2.0% v 2.2%e.

- (DE) Germany July ZEW Current Situation Survey: -77.6 v -77.0e; Expectations Survey: 26.3 v 15.3e.

- (EU) Euro Zone July ZEW Expectations Survey: 23.4 v 9.5 prior.

Fixed income issuance

- (UK) DMO sold £5.0B in 4.0% May 2029 Gilts; Avg Yield: 4.463% v 4.419% prior; bid-to-cover: 3.42x v 3.60x prior; Tail: 0.3bps v 0.2bps prior.

Looking ahead

- (FR) France May Retail Sales (ex-auto): % v 0.4% prior.

- (MX) Mexico CitiBanamex Survey of Economists.

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

- 05:30 (DE) Germany to sell €6.0B in new Oct 2031 BOBL.

- 05:15 (CH) Switzerland to sell 3-month Bills.

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-Month Bills.

- 05:30 (ZA) South Africa to sell combined ZAR2.55B in 2037. 2039 and 2042 bonds.

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO).

- 05:40 (UK) BOE allotment in 6-month GBP-enhanced liquidity repo operation (ILTR).

- 06:30 (TR) Turkey to Sell Bonds.

- 07:00 (RU) Russia announcement on upcoming OFZ bond issuance (held on Wed).

- 08:00 (HU) Hungary Central Bank (MNB) Interest Rate Decision: Expected to cut Base Rate by 25bps to 5.75%.

- 08:00 (MX) Mexico May Retail Sales M/M: 0.1%e v 0.8% prior; Y/Y: 3.1%e v 4.4% prior.

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

- 08:15 (US) ADP Preliminary Employment Change for 4-weeks ending July 4th: No est v +19.8K prior.

- 08:30 (US) July Philadelphia Fed Non-Manufacturing Activity: No est v -25.8 prior.

- 08:55 (US) Weekly Redbook LFL Sales data.

- 09:00 (NG) Nigeria Central Bank (CBN) Interest Rate Decision (no set time): Expected to leave Interest Rate unchanged at 26.50%.

- 11:00 (CO) Colombia May Trade Balance: -$1.2Be v -$1.8B prior; Total Imports: $6.8Be v $6.7B prior.

- 11:00 (CO) Colombia May Economic Activity Index (Monthly GDP) Y/Y: 2.9%e v 3.3% prior.

- 11:30 (US) Treasury to sell 6-Week Bills.

- 16:30 (US) Weekly API Crude Oil Inventories.

- 17:00 (KR) South Korea Jun PPI Y/Y: No est v 8.5% prior.

- 19:50 (JP) Japan Jun Trade Balance: -¥120.0Be v -¥391.8B prior (revised from -¥378.6B); Adjusted Trade Balance: -¥575.3Be v -¥90.4B prior; Exports Y/Y: 17.9%e v 16.8% prior (revised from 17.0%);; Imports Y/Y: 21.1%e v 12.5% prior.

- 20:30 (AU) Australia Jun Westpac Leading Index M/M: No est v -0.04% prior.

- 22:00 (SL) Sri Lanka Dec Sri Lanka Central Bank (CBSL) Interest Rate Decision: expected to leave Overnight Policy Rate unchanged at 8.75%.

- 22:00 (AU) Australia to sell combined A$1.8B in 2029 and 2035 bonds.

- 22:00 (AU) Australia to sell A$150M in 2.5% inflation-linked 2030 bonds.

- 22:30 (HK) Hong Kong to sell 3-year, 7-year and 20-year Bonds.

- 23:35 (JP) Japan to sell 40-year JGB Bonds.