AI Rally Lifts U.S. Markets Despite Middle East Tensions as Investors Eye Inflation Data

U.S. equities ended the week with mixed results as renewed geopolitical tensions in the Middle East fuelled market volatility early in the week, according to the latest stats from the Standard Investment Bank (SIB).

However, a rebound in semiconductor and artificial intelligence (AI) stocks helped lift the Nasdaq Composite and S&P 500 by week’s end. The Nasdaq gained 1.69%, while the S&P 500 rose 1.23%. In contrast, the Dow Jones Industrial Average slipped 0.48%, and the small-cap Russell 2000 declined 0.61%. Growth stocks significantly outperformed value stocks throughout the week.

Minutes from the Federal Reserve’s June policy meeting showed that while a handful of officials favoured raising interest rates immediately, they ultimately agreed to keep rates unchanged. Policymakers remained divided over the appropriate path for monetary policy amid continued economic uncertainty, although most agreed to remove language suggesting a bias toward future rate cuts. Economic releases were relatively limited during the week.

The Institute for Supply Management reported that its Services Purchasing Managers’ Index (PMI) edged down to 54.0 in June from 54.5 in May, matching expectations while remaining firmly in expansion territory for a 24th consecutive month. Separately, labour market data showed initial jobless claims declined modestly to 215,000 during the week ending July 4 from a revised 217,000 the previous week. However, continuing unemployment claims increased by 8,000 to 1.814 million.

Across the Atlantic, the pan-European Euro STOXX 600 Index declined 2.18% over the week. Renewed conflict between the U.S. and Iran remained the dominant market theme after the collapse of the ceasefire agreement, prompting investors to reassess inflation risks and the potential for additional European Central Bank (ECB) tightening. Germany’s annual inflation rate slowed to 2.3% in June from 2.6% in May, confirming preliminary estimates and indicating continued moderation in price pressures.

Meanwhile, Sweden’s economy expanded 0.9% in May following 0.6% growth in April, marking a third consecutive month of expansion. On a separate note, UK political transition and the housing market remained in focus. Labour Party lawmakers overwhelmingly backed Andy Burnham to succeed Keir Starmer as party leader, clearing the way for him to become prime minister later in July.

Meanwhile, the UK’s housing market remained subdued with the Royal Institution of Chartered Surveyors reporting that buyer inquiries and agreed home sales both stayed negative in June, although demand showed slight improvement compared with previous months. Moving along to Asia, Japanese equities declined over the week as renewed geopolitical uncertainty and higher oil prices weighed on investor sentiment.

The Nikkei 225 fell 1.70%, while the broader TOPIX Index declined 0.70%. Japan’s dependence on imported energy heightened concerns over rising oil prices, while investors also took profits in technology shares following recent strong gains. News late in the week that the U.S. and Iran would continue peace negotiations helped stabilize sentiment.

On the macro front, Japan’s latest economic data continued to point toward persistent inflation. The corporate goods price index, a measure of wholesale inflation, rose 7.1% year over year in June, exceeding expectations as higher fuel and nonferrous metal prices filtered through to businesses.

Chinese equity markets diverged during the week. Mainland markets retreated despite a brief rally in AI and semiconductor companies linked to China’s technology self-sufficiency initiatives. China’s June inflation data continued to show a gap between consumer and producer prices. Consumer inflation slowed to 1.0% year over year from 1.2% in May.

In contrast, producer prices rose 4.1% from a year earlier, matching expectations and reaching their fastest pace since mid-2022 with higher prices for metals, petroleum, coal, and other upstream commodities driving the increase. Attention now shifts to second-quarter GDP and June activity data, which should provide a clearer picture of China’s overall economic momentum.

Data highlights:

CAD Unemployment Rate (Jun) fell -10bps, from 6.6% to 6.5%, against the expectations for it to remain the same at 6.6%. USD Non-Farm Payrolls (Jun) fell from 129K to 57K, expectations were for a fall from 129K to 110K. CHF Unemployment Rate (Jun) fell -10bps, from 3% to 2.9%, against the expectations for a +10bps increase to 3.1%.

EUR PPI YoY (May) rose by +90bps, from 5% to 5.9%, +20bps more than the expected increase to 5.7%. CNY Inflation Rate YoY (Jun) fell -20bps, from 1.2% to 1%, more than the expected -10bps decrease to 1.1%. CNY PPI YoY (Jun) rose +20bps, from 3.9% to 4.1%, in line with expectations. JPY PPI YoY (Jun) fell -20bps, from 1.2% to 1%, double the expected -10bps decrease to 1.1%. NZD Interest Rate Decision rose +25bps, from 2.25% to 2.5%, in line with expectations.

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