• Another Reversal on U.S.-Iran Diplomacy: The big news over the weekend, which has prompted a renewed risk-on atmosphere, is the cessation of tensions in this on-again/off-again war — President Trump again doing an about-face in shifting from “massive attack” to allowing “some space” for diplomacy. Brent crude has responded in kind by slumping -7% to $90 per barrel, helping ignite gains across most equity and bond markets, as well as Bitcoin and gold.

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• The Rally Loses Momentum: Despite the fact that oil prices are up nearly +40% since the eve of the war, the S&P 500 has still managed to post a +8% advance. That said, the S&P 500 stock market has been flat since mid-May and struggling these past two weeks. The major indexes all tested or undercut further support levels yesterday. Even before the latest pullback, the S&P 500 had been punctuated by bouts of volatility and rapid sector rotation. Until there is a clear uptrend established once again, investors would be wise to err on the side of caution.

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• Oil Chaos Returns: The stock market may be awakening to the array of headwinds facing it. The war is intensifying in the Middle East, and now not only is the Strait of Hormuz shuttered again, but the Houthis are also joining in and wreaking havoc on the Red Sea (claiming their first attack on commercial ships in recent months). About 20% of the world’s oil supply transits these two bodies of water. Chaos is back in the crude market: Brent crude has extended its gains to take out $98/bbl, up +11% for the week and +34% in July to date.

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• A New Deck of Global Risks: After a solid and broad-based bounce yesterday, the overnight action has dealt us a new deck of cards as investors wake up to ongoing hostilities in the Middle East, with the U.S. carrying out its bombing for the eleventh day and the Houthis now returning to action and threatening to cut off Red Sea transit (at the Bab el-Mandeb port). Tack on the fact that President Trump is back on the tariff warpath, targeting not just Canada, but twelve countries in total with a fresh round of replacement levies.

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• Markets Looking Through Middle East Flare Up: The tenth straight day of strategic U.S. bombing in Iran and subsequent retaliation have been met with a yawn in both the oil and equity markets. The attention is more on the truce talks behind the scenes, which looks to be another classic Lucy-Charlie Brown episode with the football.

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• China Disrupts the AI Trade Again: The complexion of the AI trade is in the process of changing yet again. In a repeat of the DeepSeek selloff in the winter of 2025, the launch of Chinese start-up Moonshot AI’s Kimi K3 model has opened up some price competition in open-source models for the likes of Anthropic and OpenAI. The revenge of cheaper, customized models now threatens the U.S. frontier model-makers.

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• Middle East Escalation Sours Risk Appetite: We end the week with risk-on morphing into risk-off as the selloff in global chipmakers intensifies and investor sentiment is hit by yet another day of attacks and counterattacks in the Middle East. U.S. equity futures are deeply in the red, with the Netflix results leaving a bad taste in everyone’s mouths — not the actual profit and revenue numbers, but the soggy guidance (the company’s share price has tumbled -8% in the pre-open trade).

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• Oil Shrugs Off Escalation in the Strait: The U.S. struck Iran for a fifth day (hitting a supertanker near Iran’s Kharg Island in the first vessel attack since the blockade resumed) and shipping traffic through the Strait of Hormuz slowed to a trickle (with Iran retaliating), but the oil price rally looks to have stalled at $79 per barrel for WTI (and $84 per barrel for Brent). Asian equities look to have reacted the most, down -1.4% overnight, with the Emerging Markets trading off by -1.2%. This came even though Taiwan Semiconductor raised its revenue (over +40% YoY) and spending ($60-$64 billion from $52-$56 billion) projections for the year.

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• China’s Q2 GDP Falls Below Target: China did not participate in the Asian equity rally today because its Q2 real GDP data really disappointed — slowing to +4.3% year-over-year, which undercut both the +4.5% consensus forecast and the official target of +4.5% to +5.0%. The +1.8% QoQ annualized growth rate was the softest in nearly four years. That said, some solid forward momentum is evident in the monthly data, which portends a better Q3, because Chinese retail sales did manage to surprise to the upside in June (+1.0% YoY versus the -0.1% consensus estimate and -0.6% in May), as did industrial production (+5.3% YoY — accelerating from +4.5% in May and again besting the consensus estimate of +4.6%).

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• Japan Attracting Investor Interest: Japan is in play. The 10-year JGB yield sank -6.5 basis points today to 2.70%, the Nikkei 225 rallied +0.7% (+35% year-to-date!), and the bleeding in the yen has stopped. All this occurred in the aftermath of comments from Japan’s Finance Minister Satsuki Katayama to the effect that JGBs may soon be allowed to enter a tax-free investment program for the household sector, following the push to move Japanese financial assets from abroad back to the domestic market. 

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• The Strait of Hormuz Is Disputed Once Again: Iran and the U.S. once again traded airstrikes over the weekend, with the skirmishes extending today, sending oil prices higher and undermining the risk-on trade. Tehran has targeted U.S. facilities in multiple countries (Kuwait, Bahrain, Oman, and Jordan) and declared the Strait of Hormuz closed — though President Trump refuted that notion yesterday, claiming that the key waterway was open to commercial traffic.

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• Back to An Oil Glut?: Oil prices have retreated on renewed hopes that the U.S. and Iran will now patch things up — indeed, reports that Iran’s foreign minister spoke with other regional leaders and Pakistani mediators were the catalysts for yesterday’s relief rally in both stocks and bonds. Any return to negotiations will likely create the conditions for a return to an oversupplied crude oil market, especially now that the IEA just reported that world oil demand is set for its first annual decline since the 2020 pandemic recession year.

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• Markets Shrug Off the Strikes: The attacks are back, but markets have barely responded today. Asian and emerging market equities were little changed. U.S. futures are flashing green at the moment, and the Euro Stoxx 50 is up +0.8%. While some stocks flashed buy signals on Wednesday, market conditions don’t seem conducive to making a flurry of new purchases, and the Nasdaq slipped below some key levels yesterday, which bears watching. No sense in being overly aggressive here.

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• Iran Flare-Up Rattles Markets: The renewed flare-up of hostilities between the U.S. and Iran is at play behind today’s extension of the risk-off trade. The interim peace deal looks to be in tatters. All the while, the NATO summit in Ankara has been rife with rancor. Oil prices are rebounding, equities are selling off around the globe, and bond yields are on the rise — compounded by the RBNZ policy tightening today and the threat to do more.

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• Extreme Bubbles In Valuations and Earnings: The data are haunting. The CAPE multiple of the S&P 500 today now classifies as a 2.9x sigma event — closing in on the bubble high of 3.3x back in December 1999. Lest you take solace, it is way higher than the 1.8x SD event ahead of the 1929 crash. The thing is, EPS growth is now so out of line with historical norms, let alone nominal GDP trends, that it has now reached a 4.6 sigma event — compared to 0.9x at the peak in early 2000. Under a more normal profit stream, the CAPE multiple would be a 4.6 SD event (see page 10 of the Financial Times for more).

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• Earnings Forecasts Are Off the Charts: The consensus is now seeing S&P 500 earnings rising at a +25% pace for the coming year — the level of expected operating EPS has ballooned +20% in just the past six months, which is the biggest upward revision since coming out of COVID-19 in 2021. Outside of that, we last saw something this powerful back in the mid-2000’s during the China-led commodity super-cycle. The big step-up in forecasts for 2026Q2 is more typical of recessions or at the beginning of new economic cycles — not the fourth year of a bull market phase.

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• Soft Data Versus Stubborn Expectations: The soft June jobs report cut the odds of an interest-rate increase by the Fed to 17% for the July 29th FOMC meeting, down from 29% on Wednesday. Those chances should be closer to zero. And, rather astoundingly, markets still see roughly 78% odds of a rate hike later this year, barely moving from 83% on Wednesday. Bizarre. Oil prices have done a complete retreat, the Atlanta Fed is down to +1.2% real GDP growth for Q2, and the job market has no pulse. Great environment for a policy tightening.

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• Bond Yields Defy the Disinflationary Story: What remains a mystery is how bond markets are reacting, because yields are up everywhere — 10-year rates are up +8 basis points in Japan (2.77%), by around +4 basis points across Europe and by +1 basis point in the USA (just below 4.5%). Not even the page B3 article in today’s New York Times titled Fed’s Warsh Says Inflation Poses Less Risk Than a Few Weeks Ago or Warsh Says Inflation Risks Abate on page A2 of the Wall Street Journal has managed to generate any bond market impact — but when he was construed as being “hawkish” at the recent FOMC meeting, the bond market sold off like it was nobody’s business.

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• Global Markets Power Up in Q1, Best Quarter in Years: U.S. equities are set to close Q2 with the best quarterly performance in six years. For the Asia-Pacific Composite, try seventeen years. Katie Stockton reaffirmed her bullish technical opinion on both Asian and Emerging Market equities on our webcast yesterday. Worth watching if you missed it.

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• Stocks Find a Reason to Bounce: U.S. futures are flashing a recovery at the open, with the only piece of news igniting the bargain hunters (especially in the beaten-down Nasdaq) being the cessation of these tit-for-tat attacks between the United States and Iran (as an aside, and a difficult read I might add, the lead Wall Street Journal editorial today on page A16 is titled Iran Is Winning the Battle of Hormuz).

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