The situation surrounding Iran remained the key geopolitical factor influencing the capital markets in July, though it saw several shifts in direction over the course of the month. While the de-escalation that began in June initially continued, military tensions flared up again later in the month, causing oil prices to rise once more for a time. Toward the end of the month, the situation began to calm down again after Iran and the U.S. signaled a mutual pause in further attacks. As a result, part of the geopolitical risk premium that had previously built up was priced out of oil prices, even though the political situation remained fragile.
Stock markets again saw significant sectoral and regional rotations in July. At the beginning of the month, falling oil prices and renewed hopes in the technology sector supported stock prices. As the month progressed, however, there were at times sharp price pullbacks, particularly in the semiconductor sector, which had previously been the strongest-performing segment of the market.
Ahead of the Federal Reserve meeting at the end of the month, the market environment was shaped by a combination of geopolitically driven oil prices and heightened inflation expectations. The market thus remained in “higher for longer” mode: a short-term easing was not priced in; rather, the assumption continued to dominate that the Fed would maintain its cautious stance in light of inflation risks and energy-price-driven uncertainty. However, the inflation rate in the U.S. fell from 4.2% in May to 3.5% in June.
In Europe, the ECB left key interest rates unchanged, while the market is pricing in a rate hike for September. After the summer break, the ECB will have access to updated projections that are likely to be decisive for the future direction of monetary policy. Inflation in the eurozone rose only moderately, from 2.8% in June to 2.9% in July.
In the U.S. and German government bond markets, yields showed a consistent trend month-over-month. Yields on 10-year U.S. Treasury bonds rose by 27 basis points, closing at 4.74%. Yields on 10-year German government bonds rose by 35 basis points from 2.86% to 3.21%. The yield on 10-year Italian government bonds rose by as much as 39 basis points to 4.02%.
The picture was similarly consistent for corporate bonds. The yield on investment-grade euro-denominated bonds rose from 3.46% to 3.74%, and the yield on investment-grade U.S. dollar-denominated corporate bonds rose from 5.20% to 5.46%. In the high-yield segment, yields on U.S. dollar-denominated corporate bonds rose by 26 basis points to 7.41%, and yields on euro-denominated bonds rose by 20 basis points to 6.06%.
The price of gold stabilized in July and closed at 4,041 U.S. dollars per ounce. The U.S. dollar weakened by approximately 1% against the euro, trading at 1.153.
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