Tensions simmer in Middle East with focus on FOMC rate decision

EU mid-market update: Historic volatility in Asia, triggered by AI funding concerns and SK Hynix results; Tensions simmer in Mid-East with focus on FOMC rate decision, reasonable off-chance for a 25bps hike.

Notes/observations

- European equities opened firmer but faded into the red as morning progressed. Mood is best described as selectively constructive: strong EU bank and industrial earnings, fresh buybacks and guidance upgrades are supporting the region, even as sentiment overnight was rattled by a renewed Asian tech rout and Iran's surprise missile attack on US forces in Jordan. The rotation theme remains intact – US semis initially tracked the Kospi crash lower before recovering to near flat, further evidence of money moving out of AI winners into "anything but AI." Volatility stays elevated amid scrutiny of Chinese competitive threats, circular AI financing, widening hyperscaler credit spreads and leverage. Focus after the US close shifts to Microsoft, Meta and Qualcomm.

- FOMC decides tonight with markets pricing roughly a one-in-three chance of a hike - unusual and largely unchanged over the past day. FX desks note the dollar could fall if the decision dampens rate-rise bets. Fed is only the first of three major central banks this week: the BoE follows Thursday (Times shadow MPC recommending no change) and the BoJ Friday. Rates markets are also contending with the Middle East: gilt and eurozone yields rose as the flare-up lifted oil prices.

- History shows the Fed has never hiked with under 60% priced in since 1994 - making any July move unprecedented. Such a surprise would pull forward 2026 hikes and likely give incoming Chair Warsh immediate inflation-fighting credibility and independence. No modern Fed Chair has dissented on an FOMC policy vote (the sole historical exception being Marriner Eccles in the late 1930s), so a Chair-led minority vote for a hike would be virtually unprecedented and signal deep internal division.

- During the earnings call, SK Hynix said it is unlocking a high-KRW40T 2026 capex plan to accelerate M15X mass production and expand capacity ahead of Yongin Fab 1’s early-2027 cleanroom opening, with equipment still phased strictly to confirmed demand. Management guided Q3 DRAM bit shipments up ~10% q/q (server-focused) and NAND up low-single digits, while forecasting H2 DRAM growth above H1 as delayed high-value shipments, ramping HBM4, and rising 1c-nanometer conventional DRAM output drive a richer mix and higher blended ASP. They confirmed HBM4 entered mass production in Q2 with yields already nearing mature HBM3E levels and will ramp hard in H2, HBM4E samples are already delivered for 2027 volume, and 2027 HBM volume/pricing talks are progressing smoothly on solid demand.

- Notable EU earnings: A very busy morning, with banks the standout. Standard Chartered beat (Adj PBT $2.33B v $2.00Be), launched an immediate $1B buyback, raised the interim dividend 66% and upgraded income and NII guidance. UBS delivered underlying PBT of $3.88B v $3.47Be with $36B of GWM net new assets and plans to buy back at least $1B over three months, though flagged geopolitical/inflation uncertainty in its outlook. Deutsche Bank posted record Q2 results (pretax €2.68B v €2.39Be, IB revenue +19%), sees "upside" to 2028 targets and plans a new €500M H2 buyback. Elsewhere, BASF beat on EBITDA and launches up to €1B buyback in August; Eni beat, raised production guidance, lifted its buyback to €3.4B and announced a $2B Ares partnership; Reckitt beat on LFL sales (+4.7%) with up to £500M buyback; Nexans raised FY guidance; Telefónica nudged up cash flow guidance. In autos/luxury, Porsche beat on H1 operating profit ahead of its October CMD strategy reveal, Aston Martin narrowed losses on Valhalla deliveries and fresh £550M financing, Hermès grew +6.7% cc but sees China stabilising without a fundamental rebound, while Kering and Electrolux traded sharply higher on better-than-expected results (Electrolux flagging US tariff cost pressure and 5-20% price rises). Logitech beat strongly but warned a supplier fire could cost up to $200M of Q3 sales.

- Peripheral themes: Middle East turned kinetic again...Iran launched ballistic missiles at a US base in Jordan (all intercepted), the US and Saudi Arabia retaliated with strikes on Iran-backed groups in Iraq, the IRGC claimed three tankers were "struck and stopped" in the Strait of Hormuz, and Iran reportedly rejected Oman's Hormuz-sharing proposal – WTI spiked ~4% to as high as $82/bbl, a clear inflation risk into tonight's Fed. Separately, the IMF trimmed its 2026 global growth forecast to 3.0%, with notable EU downgrades (EU 0.9%, Germany 0.7%, France 0.6%) but a UK upgrade to 1.0%, while raising 2027 global growth to 3.4%. In the UK, NIESR sees a £24B inflation-driven "squeeze" on public spending under PM Burnham, with CPI peaking at 3.8% in early 2027, and Ofgem is consulting on data-centre grid connection fees – a theme to watch for EU utilities and hyperscaler capex. Finally, the Kumamoto earthquake in Japan has forced factory closures for inspection (including Tokyo Electron and TSMC facilities), adding a supply-chain wrinkle to an already stressed semis complex, and US-China friction is building ahead of Xi's planned September visit with proposed US bans on Chinese robot and inverter imports.

- Asia closed mixed with KOSPI underperforming -6.0%. EU indices -1.5% to +0.1%. US futures -0.1% to +0.1%. Gold +0.2%, DXY -0.1%; Commodity: Brent +3.3%, WTI +3.4%; Crypto: BTC +1.7%, ETH +2.3%.

Asia

- Australia Jun CPI M/M: -0% v +0.2%e; Y/Y: 3.8% v 4.0%e.

- Australia Q2 CPI Q/Q: 0.6% v 0.7%e.

- South Korea Jun Retail Sales Y/Y: 9.5% v 9.0% prior.

Global conflict/tensions

- Middle East tensions intensified. US intercepted an Iranian surprise attack on its assets in Jordan and struck back at the Iranian backed militants in Iraq.

- Iran launched multiple ballistic missiles at a US military base in Jordan on Tuesday; breaking a 3 day pause.

- US CENTCOM said all of the missiles were successfully intercepted in an attempted surprise attack. Conducted precision strikes in Iraq against Iranian linked groups directed at attack US forces and Saudi energy infrastructure.

Europe

- London Times Shadow MPC voted for the BOE to hold rates at 3.75% with vote being 7-2.

Americas

- Russia sanctions bill clears the procedural vote in US Senate. Would impose both primary and secondary sanctions on Russia as well as foreign individuals and companies purchasing Russian energy exports.

- Chile Central Bank (BCCh) left Overnight Rate Target unchanged at 4.50% (as expected) for its 5th straight pause under the current phase of its easing cycle. Decisions to be determined on a meeting-by-meeting basis.

Trade

- President Trump stated that he did not want to renew the US-Mexico-Canada Agreement (USMCA).

Energy

- Weekly API Crude Oil Inventories: +3.3M v +2.6M prior.

- Iran said to have ‘rejected’ Oman proposal to share the Strait of Hormuz.

- Iran's IRGC stated it had struck and halted three oil tankers in the Strait of Hormuz after they ignored warnings.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [FTSE +0.11% at 10,882.66, DAX -0.35% at 25,403.39, CAC-40 -0.49% at 8,417.22, IBEX-35 -1.45% at 19,440.10, FTSE MIB -0.09% at 51,650.00, SMI -0.02% at 14,567.80, S&P 500 Futures +0.21%].

Market focal points/key themes: European stocks showed a mixed performance today, with strong earnings-driven gains in several names offsetting weakness in luxury and industrial sectors. Swedish Electrolux surged +21.5% on a positive outlook update, while French luxury group Kering jumped +11%. Banking stocks performed well, with Deutsche Bank up +4% and Swiss UBS gaining +3% supported by a buyback announcement. On the downside, Hermes dropped -7% after signaling smaller future price increases, Danone fell -4%, BASF declined -3.5%, and ASML eased -3% following weak results from peers in the semiconductor supply chain. Porsche and some other cyclical names also traded slightly lower. Currency-wise, the euro recovered modestly to around $1.1396 (+0.05%), while sterling remained under pressure near multi-week lows ahead of the Bank of England’s policy decision later this week. Overall, European markets stayed cautious amid elevated oil prices and anticipation of key central bank meetings, with investor focus shifting quickly from the Fed to the BoE.

Equities

- Consumer discretionary: Hermes [RMS.FR] -7.0% (earnings; sees smaller price increases), Remy Cointreau [RCO.FR] +1.0% (earnings), Kering [KER.FR] +11.0% (earnings).

- Consumer staples: Danone [BN.FR] -4.0% (earnings).

- Financials: Deutsche Bank [DBK.DE] +4.0% (earnings), UBS [UBSG.CH] +3.0% (earnings; buyback), Standard Chartered [STAN.UK] +3.5% (earnings).

- Industrials: BASF [BAS.DE] -3.5% (earnings), Porsche [P911.DE] -1.0% (earnings).

- Technology: ASML [ASML.NL] -3.0% (SK Hynix and Advantest results).

Speakers

- ECB’s Patsalides (Cyprus) noted it was unclear how the upcoming data to Sept decision will be.

- South Korea Fin Min Koo to host emergency market meeting on Wed.

Currencies

- USD was steady as the Mid-East tensions continued to simmer. Overall price action was subdued with focus on the FOMC rate decision due out later today. Market participants perceive that the Fed was shifting in a more hawkish direction. Markets currently saw 70% chance of a pause continuing at the July policy meeting. Markets see over a 75% chance of a hike at the Sept meeting (57% for 25bps and 20% of a 50bps hike).

- EUR/USD around the 1.14 level and just off recent one-month lows.

- GBP/USD hovering around 1.33 with BOE expected to keep its policy steady later in the week.

- USD/JPY not too far from recent 40-year highs as Japanese fiscal concerns remained a persistent thorn on the yen currency front.

- Oil prices were higher by over 3.5% after US and Saudi Arabia launched strikes on Iran-backed groups in Iraq on Wednesday, saying they were responsible for drone attacks on Saudi oil facilities. The 10-year German Bund yield last at 3.12%, France 10-year Oat at 3.91% and 10-year Gilt yield at 4.96’ 10-year Treasury yield: 4.61%; 10-year JGB: 2.35%.

Economic data

- (DE) Germany Jun Import Price Index M/M: -0.7% v -0.7%e; Y/Y: 6.1% v 6.0%e.

- (ZA) South Africa Jun M3 Money Supply Y/Y: 9.3% v 9.6% prior; Private Sector Credit Y/Y: 7.8% v 8.3%e.

- (SE) Sweden Q2 GDP Indicator Q/Q: 1.4% v 0.7%e ; Y/Y: 2.8% v 1.6% prior.

- (SE) Sweden Jun GDP Indicator M/M: -0.2% v +0.9% prior; Y/Y: 2.4% v 3.8% prior.

- (NO) Norway Jun Retail Sales M/M: +1.8% v -2.4% prior.

- (JP) Japan Jun Final Machine Tool Orders Y/Y: 52.7% v 52.8% prelim.

- (AT) Austria July Manufacturing PMI: 51.5 v 50.9 prior (5th month of expansion).

- (CH) Swiss July UBS Expectations Survey: +10.0 v -25.0 prior.

- ECB Wage Tracker: Maintains 2026 expected wage growth at +2.6%.

- (IT) Italy May Industrial Sales M/M: +0.6% v -0.2% prior; Y/Y: 5.3% v 2,7% prior.

- (UK) Jun Net Consumer Credit: £1.8B v £1.7Be; Net Lending: £7.7B v £3.9Be.

- (UK) Jun Mortgage Approvals: 58.2K v 57.1Ke.

- (UK) Jun M4 Money Supply M/M: 0.8% v 0.1% prior; Y/Y: 5.0% v 4.3% prior; M4 (ex-IOFCs) 3-month annualized: 4.9% v 6.2% prior.

- (BE) Belgium Q2 Preliminary GDP Q/Q: 0.0% v 0.2% prior; Y/Y: 0.5% v 0.8% prior.

- (GR) Greece Jun Unemployment Rate: 8.0% v 7.8% prior.

- (IT) Italy Jun Hourly Wages M/M: 0.5% v 0.1% prior; Y/Y: 2.4% v 2.4% prior.

Fixed income issuance

- (IN) India sold total INR240B vs. INR240B indicated in 3-month, 6-month and 12-month bills.

- (IT) Italy Debt Agency (Tesorto) sold €7.5B vs. €7.5B indicated in 6-month Bills.

- (GR) Greece Debt Agency (PDMA) sold €500M vs. €400M indicated in 3-month Bills.

Looking ahead

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

- 05:30 (DE) Germany to sell €6.0B in 3.0% Aug 2036 Bunds.

- 05:30 (PL) Poland to sell Bonds.

- 05:30 (ZA) South Africa announces details of next bond auction (held on Tuesdays.

- 06:00 (IE) Ireland Q2 Preliminary GDP Q/Q: No est v -7.0% prior; Y/Y: No est v -13.0% prior.

- 06:00 (CZ) Czech Republic to sell Bonds.

- 07:00 (US) MBA Mortgage Applications w/e July 24th: No est v 1.9% prior.

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

- 10:30 (US) Weekly DOE Oil Inventories.

- 11:30 (US) Treasury to sell 17-Week Bills.

- 11:30 (US) Treasury to sell 2-Year FRN.

- 12:00 (RU) Russia Jun Real Retail Sales Y/Y: 7.5%e v 7.8% prior.

- 12:00 (RU) Russia Jun Unemployment Rate: 2.1%e v 2.1% prior.

- 12:00 (RU) Russia May Real Wages Y/Y: 5.4%e v 5.1% prior.

- 13:30 (CA) Bank of Canada (BOC) Summary of Deliberations.

- 13:30 (BR) Brazil Jun Total Federal Debt (BRL): No est v 9.033T prior.

- 14:00 (US) FOMC Interest Rate Decision: Expected to leave Target Range unchanged between 3.50-3.75%.

- 14:30 (US) Fed Gov Warsh post rate decision press conference.

- 17:00 (KR) South Korea July Business Manufacturing Survey: No est v 101.2 prior; Non-Manufacturing Survey: No est v 95.4 prior.

- 18:40 (AU) RBA's Hunter.

- 21:00 (NZ) New Zealand July ANZ Business Confidence: No est v 36.6 prior; Activity Outlook: No est v 36.9 prior.

- 21:00 (PH) Philippines Jun Trade Balance: -$5.3Be v -$5.5B prior; Exports Y/Y: 7.7%e v 7.6% prior; Imports Y/Y: 14.0%e v 21.9% prior.

- 21:30 (AU) Australia Jun Building Approvals M/M: -0.5%e v -1.1% prior; Private Sector Houses M/M: No est v 2.8% prior.

- 21:30 (AU) Australia Q2 Export Price Index Q/Q: 0.8%e v 0.5% prior; Import Price Index Q/Q: 0.0%e v 0.1% prior.

- 23:30 (JP) Japan to sell ¥3.8T in 3-month Bills.

- 23:35 (JP) Japan to sell 2-year JGB Bonds.