Economic fury

• Germany and Japan equities advanced +1.75% and +1.63%, respectively
• UK mid-caps and small-caps added +1.32% and +1.02%, respectively (UK large-caps slipped -0.27%)
• The US dollar index climbed +0.91% against a basket of major currencies

• Brent crude oil slid -9.13% in dollar terms to $88 per barrel
• Korea equities fell -2.37%

(All equity data is MSCI; all data in sterling unless stated)

The US has pivoted to economic sanctions to try to topple the Iranian regime – a development that may prolong global energy supply disruption and an unwanted source of inflation. At the beginning of March, the US said that its military campaign, Operation Epic Fury, would last 4-5 weeks. Six months on, US Treasury Secretary Bessent stated that Iran faces “economic isolation the likes of which the world has never seen”. The threat stretches to anyone trading with Iran. But only the biggest buyer of Iranian oil – China – could make a difference. Bessent’s words may arguably be performative.

Brent crude oil at around $88 per barrel suggests markets are not catastrophising. “Dark fleets” (tankers switching off transponders), smaller vessels shuttling through the Strait of Hormuz and pipelines have reportedly kept critical crude flowing. Analysts also believe that Iran transports thousands of tanker trucks daily into Iraq, Pakistan and perhaps Turkey.

Three factors are pressuring the US’s global leadership:

• Washington’s shift to sanctions on Iran suggests it strategy hasn’t worked
• Trade tensions with Canada (see below) have deteriorated
• The US’s fiscal deficit has just topped $40trn

Underscoring this complexity, the CIA reportedly sent an envoy to Russia. Ukraine has had some success hitting Russia’s oil refineries. Together with diminished oil supply from the Gulf, refined diesel prices have risen starkly during harvest and holiday seasons. Wars are expensive and President Trump’s popularity is waning ahead of the mid-term elections in November.

All this led US Federal Reserve Chair Kevin Warsh to strike a hawkish tone at Jackson Hole, Wyoming. He dismissed taking any comfort from recent weaker inflation prints or that inflation is anchored longer-term. The odds of a September rate rise jumped from around 30% to 60% after his speech. The next set of jobs and inflation data (4 and 11 September, respectively), together with equity markets, will give investors another steer.

Trade tensions between the United States and Canada escalated last week after negotiations to resolve their tariff dispute broke down, with both sides blaming the other. As a result, the US implemented new 50% tariffs on approximately $20bn of Canadian goods from 22 August. Canadian Prime Minister Mark Carney subsequently unveiled retaliatory counter-tariffs on a "dollar-for-dollar" basis of between 15% and 50% on a range of US goods including steel, dairy products, agricultural equipment, pulp and paper, and electronics, from 8 September.

President Trump also announced plans to increase tariffs on Canadian vehicles, automotive parts and steel to 50% from January 2027, unless production is moved to the US. The move highlights Washington’s increasingly protectionist stance and raises concerns over the future of highly integrated North American supply chains. The dispute also became increasingly politicised, with Trump signing an executive order renaming Lake Ontario as Lake America.

While the direct economic impact appears limited, the escalation adds another source of uncertainty for investors at a time when markets are already grappling with elevated bond yields and interest-rate uncertainty. Businesses operating across North America's integrated supply chains, particularly in the automotive, industrial and manufacturing sectors, could face higher costs and disruption if tensions persist. A prolonged dispute could weigh on business confidence and economic growth expectations, creating another potential headwind for equity markets.

Nvidia’s latest results once again highlighted the strength of demand for artificial intelligence (AI) infrastructure. As the largest company in both the S&P 500 and Nasdaq with a market capitalisation of nearly $5.5trn, Nvidia is an important barometer for the technology sector and AI-related spending. 

Second quarter results exceeded expectations, driven by strong demand for its AI products and continued growth in its data-centre business. Major customers, including AWS and OpenAI, remain committed to expanding AI infrastructure, while the rollout of Nvidia's next-generation Vera Rubin platform is progressing ahead of schedule. More importantly, management’s outlook exceeded expectations, with revenue forecast to grow by around 70% in 2028. Nvidia also indicated that demand continues to outstrip supply, reinforcing the apparent strength of the current AI investment cycle. Commentary on profit margins was also more reassuring than investors had feared. 

AI-related companies have been a major driver of US equity market returns in recent years. Nvidia's results therefore provide an important gauge of both AI spending and the earnings outlook for the broader technology sector. Continued strong demand supports the case for further earnings growth across the sector, while any slowdown could have wider implications for US equity markets.

• US inflation remains above Fed’s 2% target – US core PCE inflation rose 3.3% in the year to July but monthly data offered some respite, with core prices rising just 0.2% in July
• Bank of Korea hikes interest rate to 3% – With inflation continuing to rise, the Bank’s move was expected. Export and domestic demand remain strong, supported by the economy’s exposure to the semiconductor sector, suggesting the central bank may continue its rate hiking cycle
• UK energy price cap to rise 4% on 1 October – Ofgem’s announcement takes the cap to its highest level in three years. The increase has been driven by the conflict in the Middle East pushing up wholesale gas prices
• European gas storage levels have fallen to 63% – Well below the five-year average of c.80% for this time of year. Disruptions to Middle East flows, reduced nuclear generation due to the heatwaves, and higher demand for air conditioning have made it increasingly difficult for Europe to refill its storage ahead of winter
• Germany’s Q2 GDP stronger-than-expected – Despite higher energy prices, the economy expanded by 0.3% vs 0.2% forecast. Export strength and improving sentiment offer some optimism, with business morale reaching its highest level in a year  
• SHEIN Group – Shares in the fast-fashion retailer closed around 4% lower after its debut on the Hong Kong Stock Exchange. Slower growth and a greater focus on profitability led the company’s valuation to drop to around $27bn at IPO from c.$98bn in 2022
• Alibaba Group Holding Limited – In a bid to expand and enhance its AI infrastructure, the Chinese tech powerhouse announced a placement of $10.2bn of newly-issued shares for non-US investors on Monday. Only a week ago Alibaba released quarterly earnings revealing a c.75% drop in profit for the quarter following an increase in AI spending

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.