Investor intelligence – 10 August 2026

Renewed tensions in the Middle East were a key driver of market volatility early in July. Crude oil prices briefly jumped above US$100 per barrel, as investors assessed the risk of renewed disruptions to global energy supplies and shipping routes. While oil prices retraced some of those gains later in the month, the episode reignited concerns that inflation could prove more persistent than expected.

As the month of July progressed, investor attention increasingly turned to corporate earnings, particularly whether the returns generated by AI will justify the enormous investment currently flowing into the sector. That scrutiny weighed heavily on technology stocks, particularly semi-conductor companies and the technology-heavy equity markets most exposed to the sector.

At the same time, major central banks remained reluctant to declare victory over inflation. Combined with concerns about elevated AI valuations and the prospect of interest rates remaining higher for longer, this prompted a reassessment of technology and AI-related stocks. Although many technology-focused markets remain well above their levels of a year ago and the start of this year, the sector has become increasingly volatile, contributing to broader market swings.

The resulting rotation in market leadership was also evident across regions. The UK market outperformed many developed markets, benefiting from its larger exposure to energy and financial companies and lower dependence on technology stocks. In Japan, broader market indices proved far more resilient than technology-focused benchmarks, while European markets were supported by their more balanced sector composition. Emerging markets underperformed as semi-conductor manufacturers in Taiwan and South Korea came under heavy pressure, more than offsetting gains in Chinese equities.

Looking ahead, share markets remain caught between two powerful forces. On one hand, AI continues to offer the prospect of productivity gains and stronger earnings growth. On the other, investors are becoming increasingly selective, demanding clearer evidence that today’s elevated spending on AI will translate into tomorrow’s profits. At the same time, inflation risks have not disappeared, particularly given ongoing geopolitical uncertainty and its implications for energy prices. This combination is likely to keep market volatility elevated and reinforces the value of diversification across both growth and defensive assets.

Financial markets responded quickly to the softer-than-expected inflation outcome. Prior to the data release and a closely watched speech by the RBA Governor on 28 July, swap markets had fully priced in another rate increase. By month end, only a partial probability of one further hike remained priced. In the same speech, the Governor acknowledged that the housing downturn had become more pronounced than they had expected.

Sector performance reflected these shifting interest-rate expectations. Consumer discretionary and financial stocks benefited from the prospect that interest rates may not need to rise further, while energy was the strongest-performing sector, supported by ongoing geopolitical tensions and volatility in oil markets. In contrast, real-estate stocks came under pressure as the housing market weakened further. Banks reported a sharp decline in loan applications with subdued auction clearance rates pointing to further housing market weakness. Information technology was the worst-performing sector, reflecting the global reassessment of AI-related valuations and the broad technology sell-off late in the month.

The shift in interest-rate expectations nevertheless continued to support the broader market with the S&P/ASX 200 and 300 indexes reaching record highs on 7 August.

Higher energy prices, including a sharp increase in oil prices, and generally resilient economic data prompted markets to reassess the outlook for inflation and interest rates. While major central banks left policy rates unchanged, policymakers remained wary of persistent inflation pressures, reinforcing expectations that interest rates could stay higher for longer.

Long-term bond yields rose by more than short-term yields across most advanced economies, resulting in steeper government yield curves. In the US, the 10-year Treasury yield rose 27 basis points over July compared with a 12-basis-point increase in the 2-year yield, suggesting investors were demanding greater compensation for longer-term inflation and fiscal risks.

Australian bond yields also moved higher during the month, although the increase was more modest than in some overseas markets. The Australian 2-year government bond yield rose 9 basis points and the 10-year yield increased 20 basis points. Softer-than-expected inflation data late in July led yields to retrace some of their earlier gains as expectations of further policy tightening diminished. Prior to the June quarter inflation release, markets had fully priced one additional rate increase. By month end, however, only a partial probability of a further hike remained priced. As a result, the Australian 2-to-10-year yield curve steepened during July. This trend persisted into early August. The 2-10-year curve reached its steepest level since early March 2026 on 10 August.

Credit markets proved relatively resilient, despite the rise in government bond yields. Performance differences were driven more by duration than credit quality with higher-yielding securities benefiting from shorter duration and stronger income generation. By contrast, investment-grade credit faced greater pressure, particularly within the technology sector where increased bond issuance linked to ongoing investment in AI infrastructure weighed on valuations.

Currency markets were shaped by both commodity prices and evolving interest-rate expectations. Strong gains across a range of commodities, including a rise in oil prices, provided support for the Australian dollar. The currency appreciated 1.5% against the US dollar during July to finish the month around 0.7019. In trade-weighted terms, the Australian dollar ended July 1.4% firmer. The gain was also assisted by broader US dollar weakness, as investors pushed back expectations of the next Federal Reserve rate increase.

The Japanese yen was another focus for investors. A coordinated intervention by Japanese and US authorities that began on 28 July temporarily supported the yen after it had fallen to its weakest level against the US dollar in almost four decades. Although the intervention generated a sharp appreciation late in the month, underlying pressures remained, including negative real interest rates, a gradual approach to policy tightening by the Bank of Japan and concerns about looser fiscal policy. As a result, currency markets remained volatile into early August.

Rising bond yields created a more challenging backdrop for both sectors during July, particularly given their sensitivity to financing costs and asset valuations. Late July brought some relief as weaker-than-expected Australian inflation data reduced expectations of further tightening from the RBA. Nevertheless, higher long-term yields and softer housing market conditions remain important headwinds, particularly for property-related assets. Consistent with this, early August data continued to point to a deepening downturn in the residential housing market. Our forecasts have national dwelling prices declining by 2-3% this calendar year.

Attention has increasingly shifted back to economic fundamentals. In Australia, softer-than-expected June quarter inflation has strengthened confidence that the RBA can keep interest rates on hold, although inflation remains above target and services inflation continues to display some stickiness. Economic growth is slowing, housing market conditions have softened and labour market conditions appear somewhat weaker than the RBA had anticipated. In the US, resilient economic activity and persistent inflation continue to complicate the outlook for monetary policy. Markets are also adapting to a Federal Reserve that is placing less emphasis on forward guidance than investors became accustomed to during the Powell era, increasing the influence of incoming economic data on interest-rate expectations.

The AI investment cycle also remains a powerful force shaping financial markets and the global economy. Recent volatility has highlighted growing investor scrutiny of AI valuations and the enormous investment flowing into the sector. However, there is little evidence the broader AI investment cycle is coming to an end. Investment in data centres, electricity networks, digital infrastructure and related industries continues to expand, although investors are becoming increasingly selective and demanding clearer evidence that today’s spending will translate into tomorrow’s earnings and cash flows.

Looking ahead, inflation, interest rates and geopolitics are likely to remain the key drivers of markets. Valuations in parts of the market appear demanding, but elevated valuations alone are rarely enough to end an investment cycle. More often, turning points emerge when earnings weaken materially, cash flows come under pressure or financial conditions tighten sufficiently to constrain growth. While the outlook remains uncertain, economic and market conditions have so far proved more resilient than many expected. Maintaining diversification across asset classes, sectors and regions remains important, particularly as markets continue to navigate a rapidly changing economic and policy environment.