Between Earnings and Geopolitics, Volatility Returns in July

July ended with financial markets navigating an environment marked by a combination of an earnings season characterised by demanding expectations, geopolitical tensions in the Middle East, significant fluctuations in oil prices and a reassessment of expectations for interest rates, which led to increased volatility without, however, materially altering the outlook for global economic growth. The dominant narrative moved beyond a sole focus on artificial intelligence and earnings growth, incorporating instead a risk premium associated with inflation, monetary policy and the geopolitical environment.

In the United States, the economy continues to demonstrate a remarkable degree of resilience. Business activity remained in expansion territory, with a still robust labour market supporting private consumption. However, the Fed opted to leave interest rates unchanged at its July meeting, while adopting a more cautious tone in response to inflation risks stemming from higher energy prices. Markets interpreted this communication as less predictable than in the past, prompting an adjustment in expectations for the future path of interest rates and an increase in long term yields. At the same time, the results of major technology companies once again confirmed robust growth, although investors showed greater sensitivity to the pace of investment in artificial intelligence and the impact of such investment on cash generation.

In the Eurozone, the environment remained more subdued. Inflation continues on a gradual downward trajectory, benefiting from the stabilisation of energy prices following the easing of tensions in the Middle East towards the end of the month, while economic activity is recording modest growth. The European Central Bank maintained a wait and see stance, closely monitoring developments in energy prices and their potential indirect effects on wages and inflation. Despite persistent weaknesses in European industry, the services sector continues to support economic activity, helping to avoid a more significant deterioration in the economic cycle.

In the bond market, July once again demonstrated that volatility remains elevated. In the United States, Treasury yields once again approached multi year highs, reflecting a higher risk premium associated with inflation expectations and the reduced predictability of Federal Reserve communication. In Europe, sovereign yields partially followed this movement, although they edged lower towards the end of the month as oil prices eased and investors anticipated more contained inflation. The environment nevertheless remains favourable to prudent duration management across portfolios, as the sensitivity of bonds to macroeconomic news has not diminished.

On the geopolitical and trade front, tensions remained central. Developments in the conflict involving Iran and concerns over energy routes once again influenced oil market dynamics throughout the month, although the second half of July was marked by signs of de escalation. At the same time, US trade policy remained more protectionist in nature, with higher tariffs and an environment of increasing geoeconomic fragmentation, factors that pose growing risks to supply chains and the evolution of global inflation.

The outlook for the coming months therefore remains constructive, although more demanding. The global economy continues to grow at a pace sufficient to support corporate earnings, although markets face a less favourable combination of higher interest rates, greater geopolitical uncertainty and more rigorous scrutiny of corporate investment. In this context, developments in inflation, the policies of the major central banks and the geopolitical situation will continue to determine market behaviour, making further episodes of volatility likely, but without, for now, compromising the central scenario of moderate global economic expansion.