Weekly Market Commentary

Oil, rates and AI unsettle markets

Markets faced a challenging week as investors grappled with three interconnected concerns: escalating tensions between the US and Iran, rising interest rate expectations, and signs of fatigue towards the AI-driven technology rally. Energy markets were at the centre of the story, with Brent crude briefly climbing above $100 per barrel for the first time since May as fears of disruption to global supplies intensified. Higher oil prices fuelled concerns about inflation and the prospect that central banks may need to keep policy tighter for longer, pushing bond yields higher across major markets. Equity performance was mixed through the week, with technology stocks coming under particular pressure.

Energy shock drives inflation concerns

Attempts to revive negotiations between Washington and Tehran repeatedly gave way to renewed escalation, with further US strikes, tougher rhetoric from both sides and reports of attacks on key shipping routes. As a result, investors increasingly priced in the risk of a prolonged disruption to energy supplies. Brent crude rose close to 10% over the week, while European natural gas prices also moved sharply higher. The move reverberated across financial markets, lifting inflation expectations and driving long-term government bond yields to multi-year highs. While a tentative pause in hostilities over the weekend and the prospect of renewed talks helped oil prices retreat from their peak, markets remain sensitive to developments given the importance of the Strait of Hormuz and Red Sea shipping routes to global energy flows.

Mega-cap companies face a reality check

Alongside geopolitics, investors also reassessed the outlook for the AI investment theme following earnings from several major technology companies. While Alphabet delivered strong revenue growth, markets focused on another substantial increase in AI-related capital expenditure. Meanwhile, Tesla reported negative free cash flow for the first time in more than two years. The market reaction was notably negative, with both companies declining sharply and the Magnificent 7 suffering its largest daily fall since ‘Liberation Day’ in April 2025. The response highlighted a growing debate among investors over whether ever-higher spending on AI infrastructure will continue to be rewarded, even when underlying business performance remains robust.

A pivotal week ahead

Attention now turns to what could be one of the busiest weeks of the year. The Federal Reserve's interest rate decision on Wednesday will be closely watched, particularly after higher energy prices increased market expectations of a further rate hike. The Bank of England and Bank of Japan will also meet, while investors must digest a raft of economic data including US GDP, core PCE inflation and euro area growth figures. Corporate earnings will remain firmly in focus, with Microsoft, Meta, Apple and Amazon all due to report. With geopolitics, central bank decisions, economic data and earnings all competing for attention, markets look set for another volatile and eventful week.