Key facts
- AI-related stocks are experiencing unprecedented volatility due to investor concerns about profitability and competition.
- Japan and the U.S. have conducted joint currency intervention to support the yen, a move not seen since 1998.
- The Middle East conflict remains a focus, with potential threats to shipping lanes and oil prices briefly exceeding $100 per barrel.
- U.S. non-farm payrolls data is expected to show job growth of 91,000 in July, with the unemployment rate holding at 4.3%.
- Europe is grappling with record heatwaves and wildfires, leading to economic costs and concerns about food security.
- The Reserve Bank of India is anticipated to keep its benchmark interest rate unchanged at 5.25%, despite rising inflation.
Financial markets are bracing for a volatile week, with a significant selloff in AI-linked equities, ongoing geopolitical tensions in the Middle East, and critical economic data on the horizon. Wildfires across Europe are also adding to economic concerns.
In currency markets, joint intervention by Japan and the U.S. to support the yen has surprised traders. India's central bank is set to announce its latest policy decision amid a complex economic backdrop, while traders are increasingly convinced the Federal Reserve may need to hike interest rates again.
The AI-driven bull run has shown spectacular volatility in recent weeks, with investors uneasy about profitability and competition. This has led to unprecedented price swings in chipmakers and other AI-related stocks, exemplified by South Korea's KOSPI. Debt levels for some AI hyperscalers are rising, increasing the cost of insuring against default.
Geopolitical focus is returning to the Middle East, with efforts to revive a ceasefire. U.S. President Donald Trump has indicated fresh talks with Iran are planned. Drone strikes on U.S.-owned gas tankers in Egypt briefly pushed oil prices above $100 a barrel, though renewed talks saw prices fall. Saudi Arabia has publicly joined U.S. strikes on Iran-aligned groups and proposed a coalition to enhance maritime defense in critical global energy supply chokepoints.
Markets will also scrutinize Friday's U.S. non-farm payrolls report. Economists anticipate an increase of 91,000 jobs and an unemployment rate of 4.3%. A stronger-than-expected report could fuel bets on further Federal Reserve rate hikes to combat persistent inflation, despite the central bank holding rates steady recently with some policymakers voting for a hike.
Europe is contending with record-breaking heatwaves and wildfires, impacting economies through healthcare costs, insurance claims, and reconstruction. The drying of the Danube River has forced Hungary to shut down its sole nuclear power plant. A potential 'super' El Niño event raises the risk of further extreme weather globally. In the UK, major supermarkets warn of impending food price shocks, while Germany's Chancellor faces pressure amid record temperatures and a cabinet reshuffle.
The Reserve Bank of India is expected to maintain its benchmark interest rate at 5.25%. Authorities are working to support the rupee, one of Asia's worst-performing currencies, following measures that attracted significant capital inflows. However, rising oil prices and inflation breaching the central bank's target present challenges.