Markets react to the resumption of military action in the Gulf

14 July 2026

AT A GLANCE

The US and Iran traded strikes and heightened rhetorics from last week and into the start of this one
Parties are playing with fire and market reaction was limited, as talks are not interrupted
The week ahead will provide an avalanche of economic data and Q2 corporate earnings

In our recent Mid-Year Outlook, held last week with a replay available on Emirates NBD’s YouTube channel, we presented our base case when it comes to geopolitical developments. We said that we expected the fragile ceasefire and the complicated talks to continue, with inevitable sporadic flare-ups. On the one hand, Iran probably has an incentive to secure an agreement which doesn’t look unfavourable, on the other, they could consider that maintaining kinetic pressure at a time when the US is in an electoral campaign may be a way to improve their negotiating position. This is obviously an extremely dangerous game, but at this stage we keep our base case unchanged. We hope for some turbulent status-quo, which means that markets would focus on fundamentals.

To that extent, it is interesting to note that while oil prices and US Treasury yields logically rose last week, the broader market reaction was relatively muted. The dollar only marginally strengthened, and while stocks fell in emerging markets, they gained in developed regions led by the US.

Turning to fundamentals, the week ahead will provide a lot of data. Top down releases will include US CPI and PPI inflation reports, the first estimate of China’s Q2 GDP, as well as industrial production and retail sales for both superpowers. Bottom up will be equally rich, and maybe even more important with US banks kicking off the real start of the Q2 earnings season. Expectations are high for quarterly profits, with year on year growth forecasts above 20% for the US and 10% for the eurozone. It’s a high bar, comparable to Q1, that massively surprised to the upside. While one can pessimistically think that the risk of missing it is high, we also highlight that if expectations are met, current valuations will prove to be justified rather than too expensive.

All it would take for fundamentals to drive markets is an improvement of the geopolitical situation. Let’s hope for the best and we wish you a great week.

Cross-asset Update

The US economy is in a Goldilocks mode. The labor market is resilient though not strong enough as to cause inflationary pressures. This is what we can infer from the latest jobs report, the direction of inflation, that is up, and that of unit labor costs, headed south. Nonfarm payrolls have been averaging over 100,000 in the last three months, and the percentage of industries with rising employment trends is above 50% and inching higher, that is promising for future labor market trends. Unit labor costs have shown negative growth over a year ago, even as inflation has been rising, with core PCE inflation now at 3.4%. This points to expanding margins for corporations, as well as to the absence of a wage-price spiral.

This kind of economic resilience is to be put down to the massive AI investments that have boosted the manufacturing sector. Outlays for AI infrastructure have positively impacted industrial stocks, that in the United States have returned almost 18% YTD, outperforming the S&P 500 Index, up over 11% for the year. Japan has also been a beneficiary of the global AI boom, as Japanese industrial shares are very relevant globally, and are geared to the AI infrastructure theme. So, the Japanese Nikkei has returned almost 33% YTD, as against more modest gains for the MSCI World, up over 9% for the year. We foresee a continuation of these trends, as long as AI investments do not decelerate. What could pop AI euphoria is rising inflation, that would force the Fed to hike rates. On the opposite side of the spectrum, a Fed enticed to lower rates in the face of modest price pressures would most likely reignite inflation, ultimately curbing the AI cycle as well.

Elsewhere, geopolitical tensions have come back in the Middle East. The Strait of Hormuz is still de-facto closed, despite oil tank levels being dangerously low, in particular in the United States. Also, the US driving season is approaching, that tends to see a seasonal pickup in fuel demand. Despite all of this, oil prices are back to pre-war levels embedding no risk premium. Oil stocks are discounting a depressed crude price and can be considered oversold. Something will have to give, and we suspect that shortly we are likely to see a spike higher in oil prices, as well as a rebound in energy shares. Meantime, dollar and gold will continue to suffer opposite fates during the conflict. Impeded oil flows cause a supply shock that tightens financial conditions, benefitting the global reserve currency while weighing on the yellow metal. Our base case remains that both parties to the conflict have a vested interest in finding common ground eventually, hence we speculate that gold is close to levels that constitute a buying opportunity.

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

Fixed Income Update

Fixed income markets were dominated last week by the renewed US-Iran conflict, which pushed Brent above $80 per barrel and revived inflation concerns. The shock drove a global bond selloff and more hawkish central bank repricing. The Fed remained in focus ahead of Kevin Warsh’s first Congressional testimony and June CPI data. The NY Fed survey showed one-year inflation expectations rising to 3.7% and three-year expectations to 3.3%, the highest since June 2022. US Treasury yields rose for a second week, with maturities up seven to eight bps, while five- to 30-year tenors have climbed 18 to 20 bps over two weeks. The two-year yield reached 4.24%, its highest level since February 2025, as markets repriced Fed hike risk.

Looking purely at inflation data, the case for Fed hikes remains stronger than for other central banks, though lower energy prices give the Fed some breathing room. Risks remain, however, as the Iran situation is unresolved and core inflation is still elevated. Warsh’s selected advisers largely appear aligned with his own views, including three AI bulls on the productivity taskforce, which may limit how much hawkish FOMC colleagues trust their conclusions. On the balance sheet, the mix of views supports our expectation that Warsh will proceed cautiously, focusing more on preventing permanent expansions in future crises than on launching a large QT programme soon.

Credit spreads remained resilient despite geopolitical volatility, with US IG OAS at 70 bps and utilities leading the tightening. Issuance stayed strong, led by Amazon’s $25bn debt deal, one of the largest on record, which triggered a tech-sector selloff as credit investors appeared to reach capacity limits. Amazon, Alphabet, Nvidia, Meta, Oracle, and SpaceX have raised $182bn in US dollar IG bonds YTD, about 14% of total market issuance. S&P downgraded Oracle to BBB- from BBB with a Stable Outlook, citing rising risks from its rapid AI expansion, higher-than-expected spending on AI data centers and infrastructure, weaker cash flow, higher debt, and an expected $42 bn free cash flow deficit in FY27.

Fitch affirmed KSA at ‘A+’ with a Stable Outlook, citing strong fiscal and external balance sheets. UAE primary activity included two issuances last week: Ajman Bank’s debut $300 mn Tier 1 sukuk priced at 6.5% and Commercial Bank of Dubai’s $550 mn Tier 1 bond priced at 6.625%. Both were well received, with orderbooks, excluding JLM interest, exceeding issue size by more than 1.3x for CBD and 1.7x for Ajman Bank. YTD GCC $ issuance has crossed $93 bn, led by KSA at 46% and the UAE at 30%. We expect primary activity to moderate in the coming weeks as issuers pause ahead of summer.

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

Equity Update

Global equities traded mixed along regional lines last week as the Middle East ceasefire broke down and oil repriced higher. The S&P 500 rose 1.2%, taking it to 11.2% for the year, while Europe fell 1.9%, the UK -1.2% and Japan -1.0%, with Europe bearing the brunt of the oil shock as an energy importer trading at 15.3 times forward earnings against the S&P's 20.3. The sectoral level told the same story: Energy led at 3.2%, extending its year-to-date run to 20.4%, Communications added 2.2% and Tech 1.3%, while the cyclicals were pressured by the rise in yields, Materials down 3.0%, Health Care 2.2% and Industrials 2.1%. Underneath, semiconductors did the whipsawing. Samsung fell around 10% in Seoul on profit-taking after results and dragged the complex down with it, before Micron's plan to lift US plant spending to $250bn by 2035 and a heavily oversubscribed SK Hynix ADR listing turned sentiment, handing the SOX its best day in three weeks on Thursday. On valuation, the hyperscalers have now underperformed the semi names long enough that they trade at a discount to the chipmakers, an inversion, and with hyperscaler’s earnings approaching and semis priced for perfection, that dislocation looks like an interesting side of the AI trade.

Elsewhere, China was the standout, up 3.1% as money leaving Korean chipmakers turned up in Chinese tech, though that still leaves it down 11.1% for the year and the cheapest market on the board at 10.5 times. Korea took the pain, with the Kospi losing nearly 5% in a single session midweek. India and the GCC were flat at 0.1%. The flow picture was more defensive than the indices suggest, with US equity funds losing $8.6bn while developed market bond funds took in $28bn. The other tell was in energy itself: the oil names and crude both faded from their midweek highs into Friday, suggesting the market was positioning for de-escalation, however, the weekend proved it wrong. Even when the shooting stops, the Strait of Hormuz may remain blocked and Gulf supply will be slow to normalise, which makes the catalyst under energy look more structural than a short-term risk premium.

The bottom line is that the market absorbed a genuine geopolitical shock with the S&P still up on the week, but the escalation has followed it into Monday, with SK Hynix down a record 15% in Seoul, the Kospi off 8.9% and oil bid up again. The real test now is earnings. The big US banks report Tuesday with estimates already raised into the print, ASML follows Wednesday and TSMC and Netflix Thursday. TSMC's 36% quarterly sales growth already confirmed AI demand is intact; what will the market deem it is worth? For a market up 11.2% this year and priced for near-record results, expect misses to be punished harder than beats are rewarded. June CPI on Tuesday and Fed Chair Warsh's first testimony before Congress are the macro risks to the asset class, with oil putting a September hike close to fully priced.

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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