Weekly Market Review - 27 July 2026

Global risk sentiment weakens amid AI related volatility, coupled with rising bond yields and ongoing tensions in the Middle East.

US: Market retreats as Tech earnings fuel AI return concerns and bond yields climb

U.S. markets closed the week on a weaker note, with the Nasdaq leading declines amid investor concerns over the substantial capital being deployed into AI initiatives and uncertainty around future returns. Earnings reports from major technology companies, including Alphabet and Tesla, reinforced these concerns, while escalating tensions in the Middle East pushed oil prices higher, lifting energy stocks but fuelling inflation worries. Despite these headwinds, economic data remained broadly supportive, with services activity accelerating and jobless claims falling to their lowest level since 1969, highlighting the resilience of the U.S. economy. However, rising inflation expectations drove Treasury yields higher, weighing on both government and high-yield bonds as markets reassessed the outlook for Federal Reserve policy.

Japan: Topix outperforms as BOJ policy optimism supports markets amid semiconductor weakness

Japanese equities delivered positive returns over the week, with the TOPIX outperforming the Nikkei 225 as gains in financial sector stocks offset volatility in semiconductor and AI-related shares. Investor sentiment was supported by expectations of further Bank of Japan policy tightening following firmer inflation data and rising government bond yields, while the government's latest economic blueprint reinforced its commitment to strategic investment in areas such as AI, semiconductors and energy transformation, alongside preserving central bank independence. However, gains were tempered by heightened geopolitical tensions, rising oil prices and ongoing U.S. tariff developments. Meanwhile, the yen weakened towards a four-decade low against the U.S. dollar, reflecting the wide interest rate differential between Japan and the U.S. and continued concerns over Japan’s fiscal outlook.

China: State backed support lifts equities as technology gains moderate on valuation fears 

Looking at China, we saw solid gains over the week which was supported by renewed state backed market support measures and expectations of further policy assistance. The CSI 300, Shanghai Composite and Hang Seng indices all advanced, with technology and semiconductor shares initially leading gains following significant purchases by state owned investment vehicles and strong inflows into domestic equity funds. Investor confidence was further supported by signals of targeted fiscal and monetary support, including a sizeable liquidity injection by the People's Bank of China, as well as government calls for more effective policy implementation to support growth objectives. That being said, gains moderated later in the week as concerns over elevated AI-related valuations resurfaced and higher oil prices, driven by escalating Middle East tensions, weighed on broader market sentiment.

Europe: Improving economic activity supports equities as inflation and trade risks persist

European equities posted modest gains over the week, with the Euro STOXX 50 Index rising 0.80%, supported by generally resilient corporate earnings and improving business activity data. Germany’s DAX led major regional markets higher, while France’s CAC 40 also advanced. The European Central Bank left interest rates unchanged but maintained a cautious stance, with President Christine Lagarde highlighting inflationary risks stemming from higher energy prices and renewed geopolitical tensions, leaving open the possibility of further policy tightening. Economic data were broadly encouraging, with both manufacturing and services activity returning to expansion across the eurozone, signalling improving growth momentum. However, gains were tempered by higher energy prices, geopolitical uncertainty and the announcement of new U.S. tariffs on several trading partners, including the European Union, while weaker German consumer confidence highlighted that challenges to the region’s recovery remain.

UK: Equities rally as resilient consumer demand and higher oil prices support markets

Here in the UK, we saw our equity markets perform relatively well over the week, with the FTSE 100 rising 1.28%, supported by gains in energy and large cap multinational companies as higher oil prices boosted the outlook for the sector. Investor sentiment was aided by encouraging economic data, which indicated continued resilience in consumer spending and business activity. Political developments also attracted attention following the appointment of Andy Burnham as Prime Minister, with markets assessing the implications of the new government's fiscal and economic priorities. While broader geopolitical risks and the prospect of new U.S. tariffs contributed to market volatility, the UK market remained relatively resilient, underpinned by improving economic momentum and its defensive sector composition.

What’s Important Next: 27 July to 31 July 2026

US Fed: Will new Fed Chair, Kevin Warsh, raise rates at the next meeting?

On Wednesday, the US Fed meets to decide the next move in interest rates.

Why it’s important

Warsh has made it very clear that he wants to remove forward guidance on interest rates. This means the run-up to future meetings will carry much greater uncertainty. However, on this occasion, that uncertainty has already increased significantly. For some time, the consensus view was that rates might rise, but only gradually and over an extended period.

However, over the past few days, markets have repriced sharply. Until recently, investors were assigning only a very low probability to a rate hike; now it is close to a 50/50 call. The main drivers have been the rise in oil prices and concerns that underlying inflation remains sticky (with the latest data due on Thursday). This comes despite headline inflation continuing to drift down from its recent highs. The bottom line is that if the Fed does raise rates, it would come as something of a shock. While it could support the longer end of the US bond market by reinforcing the Fed's inflation-fighting credibility, it would likely be taken negatively by US equities, which are already beginning to lose some of their momentum.

Could the Bank of Japan pull the trigger on a bold policy shift?

On Thursday and Friday, the Bank of Japan (BOJ) meets.

Why it’s important

Interest rates in Japan have remained close to zero for many years, meaning bond yields have taken much longer to rise than in other developed markets. As a result, the catch-up now under way has been much more pronounced. In 2024, the 10-year government bond yield was around 1%; today it is almost 3%. However, yields on shorter-dated government bonds have lagged.

With inflation edging closer to 2%, there is a growing case for further rate hikes from the BOJ. Whilst an actual hike appears unlikely this time, some hawkish rhetoric cannot be ruled out. Further hints that Japanese pension funds may be encouraged to repatriate capital, or that Japanese Government Bonds could be made tax-free for domestic investors, could together create a genuine "bazooka moment". Were any of this to happen, the yen would likely strengthen significantly.