Markets look through summer uncertainty

17 August 2026

AT A GLANCE

Returns are broadly positive so far in August, after strong Q2 earnings and no red flag from macro data
Uncertainty however persists on the geopolitical front, as well as for the future trajectory of Fed policy
Our positioning remains slightly defensive and our profiles continue to participate in the market rally

We see nothing new under this summer’s sun. The US economy is still in a Goldilocks mode, while the conflict in the Gulf remains unresolved. Inflation releases in the United States showed more subdued price pressures, as both the CPI and the PPI printed lower in July for the second month back-to-back, respectively at 3.5% and 5.5% YoY%. Retail sales growth was negative for the month, though most likely for quite specific reasons. Also, the previous Friday July payrolls underwhelmed expectations. Altogether, this convinced investors it would be much less likely the Fed would raise rates in the near future, so bets were scaled back, with 2017 seeing not more than one full hike discounted. Equity investors celebrated and US benchmarks recorded new all-time highs for the week, with gains on average below 1% for large caps. The big IT companies showed to be able to monetise the massive AI investments, and for the broader market Q2 earnings grew at an impressive 50%-plus, though also on distortions due base effects from tariffs uncertainty in Q225. But bond investors remained under the impression the Fed could be falling behind the curve by postponing hikes. The yield on the 10-year note settled close to the highs for the year, at 4.69%, while the 30-year note ended at multi-year highs, at 5.26%. The Treasury curve steepened, with the 2-year yield falling by almost 3bps in response to tamer macro data.

The conflict in the Gulf remains unresolved. With the Strait still closed, passage reduced to a trickle, and the US Strategic Petroleum Reserves at critical levels, at some point something will have to give. Critically low crude oil stocks will stop being a buffer for macro volatility and actually start transmitting it. We are therefore happy with our slight underweight risk stance tactically in portfolios.

Have a great week.

Cross-asset Update

This hot summer saw the temperature on global bond markets remain uncomfortably high. Investors must have not liked a single bit the lack of forward guidance of the new Fed chair Kevin Warsh. With inflation sticky and well above the 2% target for a number of consecutive years in the United States, paying lip service to the fight against growing price pressures while not providing any details on how to execute creates uncertainty, rather than confidence. Across the major Western economies global yields have been rising YTD, driven by the longer end of the curve in light of unchecked public expenditures and high debt levels. The yield on the 10-year Treasury note has been drifting close to its recent 19-month peak at 4.75%, the 10-year Gilt yield, at 5.04%, has been driven up by inflation concerns and massive fiscal supply, and yields in the Eurozone have gone up as well despite more muted economic growth on elevated exposure to rising energy costs. That fiscal dominance is the issue du jour was brought out by the coordinated yen intervention executed at the end of July by the BOJ and the Fed. The Fed decided to step in and help the BOJ contain yen weakness not so much out of favour, as to protect Washington’s rising borrowing costs. The action was aimed at avoiding that the BOJ, as largest Treasury holder globally, would dump in an uncontrolled way lots of Treasuries in the market to get dollars to then buy yen and exerting in the process upward pressure on US yields. On the other hand, the Fed swapped dollars against Treasuries held by the BOJ, so that the US bond market would be unscathed.

The bottom line is that across the major Western economies, including the United States, the risk-free rate is not perceived as being entirely risk-free anymore. Although we are not yet close to a Liz Truss moment, when in 2022 Gilt yields spiked following the presentation of an unfunded minibudget by then PM Truss, we are getting closer to it with no Western government openly tackling the debt issue. And gold is taking notice. It rallied about 8% in the last two weeks, even with significantly higher yields at the longer end of the US Treasury curve. Was gold just oversold or is it that the debasement trade is restarting, meaning that gold bugs are again betting on deteriorating US finances? We cannot tell for sure, as at the same time kinetic action in the Gulf stopped, a positive for the yellow metal that was previously on the backfoot due to the supply shock caused by higher crude prices during the conflict. Also, investors just revised lower the number of hikes expected into year-end and beyond, again a net positive for a non-yielding asset like gold.

We hold the view that gold should have more upside from current levels, in the direction of $4,800, or $5,000/oz at most. Be it as tensions in the Gulf stall, or the US economy further slows down and more dovishness is discounted, or indeed investors take serious notice of deteriorating public finances. Whatever the reason, while the Strait of Hormuz will in the end reopen, and monetary policy follows the ebbs and flows of the economic cycle, the debt issue will most likely be left unresolved, to come back with a vengeance down the road. Investors are thus advised to hold a gold allocation that is at least at a neutral level versus benchmark.

Risk aversion came back last week and it wasn’t about geopolitics

Fixed Income Update

Inflation data shaped last week’s macro narrative. July CPI rose 3.4% year-on-year, in line with expectations, while July PPI was flat, marking the first back-to-back soft inflation readings since the FOMC’s divided July hold. The fading Iran-related energy-price shock strengthened the case for the Fed to refrain from near-term hikes. Friday’s weaker-than-expected US retail sales added to the downside surprises and further lowered tightening expectations, with the implied probability of a September hike falling to around 34% by the week-end. This came after the prior week’s unexpected July payrolls print of -23,000, alongside a decline in the unemployment rate to 4.1%, which had already driven a material repricing of Fed hike expectations. Separately, the Fed said it will not buy Treasury bills for reserve management in August–September, signalling confidence in current bank reserve levels.

Long-end yields remain near the top of their YTD range, with curves steepening sharply. Thursday’s $25 billion 30-year bond auction cleared at 5.216%, the highest yield for the tenor since 2001. The Fed-sensitive 2-year yield fell for a third consecutive week, briefly dipping below 4.10% before rebounding to 4.17% on Friday. Traders and strategists saw Treasury Secretary Scott Bessent as seeking to ease pressure on the bond market after long-term yields had climbed to a 19-year high in recent weeks. The Fed remains on hold but divided internally. Richmond Fed President Barkin outlined the case for both holding and hiking, while Chicago Fed President Goolsbee said Friday that the softer CPI print was encouraging but that more evidence was needed before concluding inflation is sustainably returning to 2%. FOMC July meeting minutes are released this Wednesday.

Fitch affirmed the US at AA+ with a stable outlook on August 13, citing the country’s large economy and reserve-currency status, while noting that government debt is more than twice the median for similarly rated peers. On the fiscal side, the US recorded a record July budget deficit of $432 billion, driven by faster federal spending. With two months left in the fiscal year, the 2026 deficit has reached $1.8 trillion, around 5% wider than in 2025.

Credit spreads remained broadly resilient. As of August 14, the Bloomberg US Aggregate Corporate OAS was 79bps, the Bloomberg US Corporate High Yield OAS was 266bps, and the J.P. Morgan EMBI Global Spread closed at 218bps. In EM, the Bloomberg EM USD Aggregate OAS narrowed 2bps over the week to 160bps, with a weekly total return of 0.03%, a YTD return of 1.52%, and a yield-to-worst of 6.13%. Fixed income also saw solid inflows. BofA/EPFR data for the week to August 12 showed bonds attracting $23.8 billion, second only to money market funds at $25.4 billion. High-yield funds recorded their largest inflow since the week ending July 1 at $1.96 billion, while short and intermediate IG bond funds drew $2.27 billion.

Risk aversion came back last week and it wasn’t about geopolitics

Equity Update

Global equities rose for a third straight week, the MSCI ACWI up 0.7%, as softer US inflation took the September hike scare off the table. Emerging markets did even better, up 2.7% on Korea's recovery, while China fell 3.1% for reasons of its own. In the US, the S&P 500 added 0.4% and went through 7,800 for the first time ever, and it did it while getting cheaper, which is the detail we keep coming back to. With 88% of the index reported, 86% of companies have beaten on earnings and 76% on revenue, and blended growth of 50.4% is the best since the second quarter of 2021. Profits are simply growing faster than the market, so the multiple has fallen from 26 times forward earnings in January to about 22 today, and an index setting records while derating is not how bubbles usually behave. The AI trade kept repairing itself, the Magnificent Seven up 9.1% from the late July low and chips up almost 10% in August after their worst month since 2008. And Nvidia settled the circular financing argument with other people's money, more than $500 billion of it from BlackRock, Goldman, Apollo, Blackstone, Brookfield and KKR, which took its debt insurance off record levels. The private names gave the trade fresh ammunition too, with OpenAI's revenue run rate topping $40 billion and Anthropic telling investors it did $11.5 billion in a single quarter, fourteen times the figure a year ago, both headed for listings as soon as this fall. The one blemish came Friday, when weak consumer data knocked the index off its record, a hint that the market's next argument will be about the consumer, not the chips.

Outside the US, the week sorted itself by exposure to the AI rebuild, and Korea led the world by a distance. The Kospi surged 11.5% and rose every single session, as the leveraged unwind stabilized, foreigners kept buying, and export prices jumped 49% from a year ago on memory pricing, with Taiwan up 3.7% behind it. Japan had its best week since June, the TOPIX up 3.0% to fresh records and the Nikkei up 4.7%, as hyperscaler money keeps landing on Japanese hardware. China sat at the other end, and the reason matters. Its Big Tech season opened with Tencent more than doubling AI capex and swinging to a free cash outflow, so the stock fell despite 11% revenue growth, and JD.com dropped more than 10% after its first revenue decline since listing in 2014. Chinese investors are asking the question the US megacaps just answered, show us the returns, and until they get an answer they are parking in consumer and dividend names. Europe's four week streak ended with MSCI Europe down 0.2%, and we would not read much into it, since European funds took in $1.2 billion, the most in six months, margins hit a record 12%, and the season kept rewarding and punishing with equal force.

This week the baton passes from AI to the consumer, with Walmart, Target and Home Depot all reporting, and after Friday's weak retail data the guidance will matter far more than the prints. Beijing hosts the World Robot Conference, and then the focus shifts to the two events that will set the tone in September, Jackson Hole, where Warsh gets his second chance at filling in the blank page of forward guidance. With the index at records, positioning calm and the VIX at its lowest for the year, the market is priced for good news, so the bar from here is not whether the news is good, but whether it is good enough.

Risk aversion came back last week and it wasn’t about geopolitics

Written by:

Maurice Gravier Chief Investment Officer , [email protected]
Nawaf Alnaqbi Head of Equity Strategy , [email protected]
Satyajit Singh Fixed Income Analyst , [email protected]
Giorgio Borelli Head of Asset Allocation , [email protected]

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