Bendura Bank: Market Outlook August 2026
Overview
Summer is not that quiet at all
So much for a quiet summer. July proved far more turbulent than headline index performance would suggest. While the S&P 500 finished the month only marginally lower, sharp volatility beneath the surface exposed growing fragilities in one of the market’s most crowded trades: artificial intelligence. Semiconductor stocks and companies tied to the AI supply chain came under significant pressure as investors began questioning whether the enormous wave of spending on data centers, chips, and power infrastructure can ultimately generate returns sufficient to justify the trillions of dollars being committed. Concerns about AI monetization, overcapacity, Chinese competition, and increasingly complex financing structures combined with elevated positioning and leverage to trigger a broad unwind across the sector.
At the same time, the macro backdrop became less supportive. Trade tensions resurfaced following a new round of U.S. tariffs, geopolitical risks intensified with the renewed Iran-U.S. conflict, and bond markets sent an increasingly uncomfortable message to policymakers. Despite inflation remaining above target, the Federal Reserve under its new chair, Kevin Warsh, left rates unchanged, raising questions about policy credibility and contributing to a sharp rise in long-term yields. The move pushed the 30-year Treasury yield to levels not seen in nearly two decades and added another headwind for risk assets.
Yet despite the turbulence, market breadth showed signs of resilience. The equal-weighted S&P 500 outperformed the cap-weighted index, European equities posted gains, and earnings from many AI-related companies continued to point to robust underlying demand. By month-end, equities stabilized as the AI trade staged a partial recovery, helped by reports that forced liquidations from a highly leveraged hedge fund had amplified the selloff. August is likely to be defined by three key themes: the durability of the AI investment boom, the trajectory of bond yields, and developments in the Middle East. With earnings season drawing to a close and trading volumes typically fading during the holiday period, investors may finally get the calmer summer markets they expected. Whether the July correction was merely a pause in the AI-led advance or the beginning of a deeper reassessment remains the central question.
Global Economy
USA
The US macroeconomic backdrop has grown more complex, with inflation proving stickier than hoped and the Federal Reserve adopting an increasingly hawkish posture. Headline CPI moderated to 3.5% year-over-year in June. A softer reading briefly offered markets some breathing room, but renewed tensions in the Middle East sent oil prices surging again heading into the July FOMC meeting and keeping the inflation debate very much alive. Fed Chair Kevin Warsh, who has repeatedly stated the Fed has “no tolerance” for persistently elevated inflation, presided over a decision to hold rates steady at an upper band of 3.75% in late July, though the meeting was contentious: two dissenting officials, including Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack, called for an immediate rate hike, warning that delay risks requiring more aggressive action later. Logan argued that without policy restraint, inflation will likely continue to trend above the 2% target.
Consumer sentiment edged up to a five-month high of 55.2 in July as gasoline prices retreated from war-time peaks, yet inflation expectations remain elevated, with one-year ahead expectations rising to 3.7% in June per the New York Fed survey. Markets are now pricing a policy path that is higher for longer, with Bloomberg Economics suggesting the Iran conflict’s repercussions could keep global interest rates elevated for years. The balance between persistent inflation and moderating growth continues to define the macro landscape entering August.
Europe
The European macroeconomic picture is more nuanced. It is shaped by the ongoing Iran conflict, a cautious ECB, and diverging country-level dynamics. Eurozone headline inflation ticked back up to 2.9% year-over-year in July, reversing the brief relief seen in June when prices eased to 2.8%. It was a downside surprise driven by a temporary retreat in oil prices amid tentative Middle East peace signals. The rebound in July inflation, combined with resilient Eurozone GDP growth of 0.2% in Q2, has reinforced the case among hawkish ECB members for further tightening. At its July 23 meeting, the ECB held its deposit rate steady at 2.25%, though the decision was not without internal debate. Some policymakers reportedly considered an immediate hike before a unanimous vote for no change was reached.
At the country level, Germany showed tentative signs of stabilization after its cabinet agreed on pension reform and industrial data improved modestly, though the recovery remains fragile. France’s inflation continued to track near the ECB’s 2% target, while Italy and Spain demonstrated relative resilience. Overall, Europe enters August facing the same fundamental tension as in June. Slowing growth alongside inflation that, while off its peak, is proving difficult to durably anchor at target, leaving the ECB’s September decision finely balanced. Italy’s resilience is increasingly well-supported by data. GDP expanded 0.2% quarter-on-quarter in Q2 2026, in line with Germany and France, while Spain outperformed at 0.7%. The services sector was a particular bright spot, with the July Services PMI surging to 52.5, which was the highest reading since January 2026 and well above the consensus estimate of 51. The Composite PMI to rose 52.5 as well.
Asia
Japan enters August navigating a delicate confluence of persistent yen weakness, rising inflation, and an accelerating monetary policy normalization cycle. GDP growth remains modest. The BOJ raised its fiscal year 2026 GDP median forecast to 0.6% at its July 31 meeting, in line with IMF and OECD projections, even though the economy faces headwinds from elevated energy prices driven by the Middle East conflict. June CPI came in at 1.6% year-on-year, with the 10-year breakeven rate sitting just below 2% as of this week. BOJ June meeting minutes showed most board members see upside risks to underlying inflation, with one member calling for rates to be brought closer to the neutral range estimated at 1.1%–2.5% “as soon as possible.”
Recently, yen had weakened to multi-decade lows, around 160–165 per dollar. It was driven primarily by the persistent interest rate differential between the US and Japan, elevated global energy prices (which Japan imports almost entirely), and broader dollar strength. The depreciation was amplifying Japan’s inflation problem by raising the cost of imports, particularly energy and food, squeezing households and complicating the BOJ’s policy calculus. Therefore, a historic joint US–Japan currency intervention in late July has taken place to stabilise then yen. Japan is estimated to have spent approximately ¥8.45 trillion (~$52.8 billion) on Thursday July 31 alone, followed by a further ~¥5.33 trillion (~$34 billion) on Friday August 1 with a new monthly intervention record. The US side was orchestrated by Treasury Secretary Scott Bessent, who reportedly allowed to buy as much as $10 billion in yen. The operation lifted the yen as much as 5% from its four-decade low and the yen’s gains have since partially stalled, with USD/JPY trading around 157–158. Such unprecedented intervention firepower signals that currency stability has become a top-tier policy priority in Japan.
Shares
July proved to be a turbulent month beneath the surface, despite relatively stable performance at the headline index level. A strong rally on the final trading day helped the S&P 500 secure its first weekly gain in three weeks, yet the benchmark still ended the month marginally lower, slipping 0.13%. The technology-focused Nasdaq experienced a steeper decline, dropping 3.2% as semiconductor stocks came under significant pressure. Encouragingly, market breadth remained constructive, with the equal-weighted S&P 500 advancing 0.9% during the month and outperforming the traditional market-cap-weighted index by more than 100 basis points.
US corporate earnings remained a key source of support for markets, with more than 60% of S&P 500 companies reporting Q2 results and the vast majority exceeding expectations. Earnings growth has been particularly strong, driven by continued AI-related investment, pricing power, productivity improvements, and resilient consumer demand. Strength has been broad-based across sectors, with consumer-facing companies also reporting solid spending trends. Overall, the earnings season points to a healthy corporate backdrop despite ongoing economic and affordability concerns. Eight of the index’s 11 sectors are reporting double-digit growth in earnings.
European equities advanced with the Stoxx 600 posting a fourth consecutive monthly gain and reaching a new record high. Despite volatility driven by renewed US-Iran tensions and shifting expectations for energy prices, inflation, and interest rates, the region’s economic backdrop remained resilient. Earnings momentum broadened across sectors, while investors rotated away from crowded AI-related trades and toward more attractively valued segments of the market. This combination of resilient growth and improving market breadth supported continued gains in European stocks. Oil & Gas was the best-performing sector, benefiting from higher oil prices driven by escalating Middle East tensions, concerns over disruptions in the Strait of Hormuz, and strong earnings. Financials, especially banks, also delivered strong gains, supported by resilient results from Banco Santander (+1.9%), BNP Paribas (+7.4%), and Banco Sabadell (+7.3%). Despite encouraging earnings from semiconductor-related companies including ASML (+16.7%), ASM International (+19.9%), and Melexis (+12.6%), technology sector remained under pressure amid concerns over the sustainability of AI infrastructure spending. Meanwhile, Utilities lagged as investors rotated away from defensive sectors and toward more cyclical areas of the market.
South Korea’s AI-driven market boom has come under pressure, with Samsung and SK Hynix seeing their share prices fall 41% and 52%, respectively, since June, erasing roughly $1.2 trillion in market value. The two memory-chip leaders, alongside Nvidia, are still expected to generate more than $200 billion in free cash flow each next year, reflecting the enormous profits being created by AI infrastructure spending. However, investors are increasingly questioning how long the memory-chip cycle can last, with concerns that new supply could eventually drive prices and margins lower.
While AI-related demand from data centers and robotics remains strong, risks are mounting. Investors worry about the commoditization of memory chips, particularly as Chinese competitors gain market share in lower-end products. There are also concerns that customers may scale back or renegotiate long-term spending commitments if AI investment slows, raising questions about the durability of current earnings and valuation expectations. Overall, the debate has shifted from how high profits can go to how sustainable they will be over the coming years.
Bonds
Bond markets remained volatile in July as investors weighed persistent inflation pressures, resilient economic data, and uncertainty surrounding the Federal Reserve’s policy path. Treasury yields moved steadily higher during the month, with the 10-year Treasury yield rising from roughly 4.45% to 4.75%, while the 30-year yield reached its highest level of around 5.5% in nearly two decades, putting downward pressure on bond prices.
A key focus for investors was Fed Chair Kevin Warsh’s latest policy meeting, which sparked considerable debate. Although the Fed left interest rates unchanged, markets questioned whether policymakers were doing enough to address inflation, which remains firmly above target. As a result, rising long-term yields suggest that markets remain unconvinced that inflation risks are being adequately addressed, raising questions about whether the Fed Chair has fully gained control of the narrative. Markets currently expect at least one additional rate hike before the end of 2026.
European bond markets were driven primarily by the European Central Bank’s July meeting, where policymakers left the deposit rate unchanged at 2.25% following June’s surprise rate hike. The ECB maintained a cautious stance, citing continued uncertainty around energy prices and the inflationary impact of the Middle East conflict, while reaffirming its commitment to returning inflation to the 2% target. Despite the pause, investors interpreted the ECB’s communication as relatively hawkish, and government bond yields generally moved higher across the euro area during the month. German Bund yields rose from around 2.95% at the beginning of July to approximately 3.20% by month-end as investors reassessed the likelihood of further policy tightening. Overall, European government bond prices declined over the month, reflecting expectations that the ECB will keep monetary policy restrictive until inflation risks are more firmly under control.
Commodities & Currencies
Gold has remained under pressure in recent months, consolidating around $4,000/oz as elevated real yields continue to weigh on investor demand. However, much of the market adjustment to higher real-rate expectations appears to have already occurred, with gold ETFs and mining equities experiencing notable corrections. Looking ahead, the outlook remains constructive, supported by ongoing central bank purchases, geopolitical uncertainty, fiscal concerns, de-dollarization trends, and persistent inflation risks. While stronger speculative positioning and elevated real yields may limit near-term upside, easing rate pressures and clearer Federal Reserve policy could provide a catalyst for recovery. Our base case is for gold to rebound in the second half of 2026 and end the year near $4,600/oz, supported by robust official-sector demand and changing investor expectations. In this environment, high-quality gold producers with strong free cash flow, solid balance sheets, attractive growth prospects, and leverage to higher gold prices are likely to be the primary beneficiaries.
July 2026 proved to be one of the most volatile months for crude oil in recent memory, with WTI swinging nearly $24 a barrel from trough to peak. The month opened quietly around $68.70. However, renewed US strikes against Iran, escalating Strait of Hormuz shipping attacks, and a US blockade of Iranian ports drove prices relentlessly higher. WTI surged through the $80s and hit its monthly peak of $92.19 on July 23, as Iran-backed Houthi militants attacked Saudi tankers in the Red Sea, briefly pushing Brent toward $98. Supply buffers like emergency stockpiles and alternative routing were wearing thin, amplifying every escalation. The rally reversed sharply on July 27, when the US paused daily strikes against Iran and tankers resumed loading at the disrupted export terminal, sending WTI down over 8% in a single session.
The conflict remains unresolved; however, market participants believe that negotiations involving the United States, Iran, and other Middle Eastern countries are making progress and that an agreement is gradually taking shape.
EUR/USD opened the month near 1.138 and gradually moved lower during the first half of July. The currency pair was pressured by bearish positioning ahead of U.S. CPI data, increasing concerns over political uncertainty in Europe, and deteriorating terms of trade. However, the U.S. dollar regained momentum around July 23 as oil prices climbed above $100/bbl and markets fully priced in a Federal Reserve rate hike in September, driving EUR/USD back toward its monthly lows.
Source: www.bendura.li
Aleksei Andrievskii | Advisory Board Member, Bendura Bank AG | Liechtenstein