Global shares and bonds weakened on Monday as the escalating conflict in the Gulf region drove Brent crude oil prices above $90 a barrel for the first time in over a month, fanning fears of renewed inflation. This comes ahead of a crucial week for major technology company earnings, which will test investor confidence in the artificial intelligence sector. Futures markets are now pricing in 29 basis points of Federal Reserve rate hikes by year-end, with a 60% chance of a rate increase as early as September. This outlook is pushing yields on 30-year US Treasuries above the 5.0% mark, a level that tends to divert funds from equities to fixed income and raise the valuation bar for future corporate earnings.
The oil price surge is attributed to a ninth consecutive day of US military attacks against Iran and retaliatory strikes across the region, which disrupted shipping in the Strait of Hormuz. Brent crude climbed 2.4% to $90.18 a barrel, while US crude rose 2.1% to $84.18. Some analysts, like Shane Oliver of AMP, warn that a prolonged closure of the strait and escalation could drive oil prices to $150 a barrel, though this is not his base case. The higher fuel costs are a concern for central banks, particularly the European Central Bank, which is expected to hold rates at 2.25% on Thursday after a June hike, with markets almost fully anticipating another increase in September and rates reaching 2.75% early next year.
The artificial intelligence and semiconductor sectors are facing scrutiny, with the Philadelphia Semiconductor Index shedding 10% last week and now 20% below its June record high. This sell-off was partly fueled by the announcement from Chinese AI firm Moonshot of its new Kimi K3 model, which reportedly rivals top US AI models from OpenAI and Anthropic, potentially dampening demand for US tech firms' chips. Despite these concerns, BofA analyst Savita Subramanian remains optimistic, forecasting a 5% beat versus consensus earnings, translating to 28% growth, with tech expected to drive over half of this growth and semiconductors projected to rise around 130% year-on-year. Investors are eagerly awaiting earnings results this week from tech giants like Alphabet, Intel, and Tesla, which will be critical in assessing the sector's performance and future outlook.
