July has offered little respite from the geopolitical and macroeconomic uncertainty that has defined the first half of 2026. The Middle East conflict remains the dominant source of inflation and energy-market risk, despite attempts to establish a ceasefire and reopen key shipping routes. The initial improvement in sentiment following the peace agreement proved short-lived, with renewed strikes and threats on commercial vessels, sending oil prices higher and reviving concerns over the security of regional energy supplies.
At the same time, financial markets have increasingly turned their attention to the growing volatility in the AI and technology sectors. A semiconductor selloff deepened through late July as signs of progress in Chinese advanced chipmaking compounded worries about the sustainability of the AI spending boom. Chip stocks shed more than $1 trillion in market value.
The combination has produced a more fragmented market environment. The resulting divergence has been particularly visible across equity markets, with technology-heavy indices underperforming while more defensive and traditional sectors have proved more resilient.
United States
The US economy entered the second half of the year on relatively solid footing; however, the interplay between elevated energy prices, inflation and monetary policy has increasingly complicated the outlook. High borrowing costs and lingering cost-of-living pressures are moderating broad economic acceleration. Real GDP rose at an annualised 1.5% in Q2, down from 2.1% in Q1, well below the 2.1% economists expected.
Annual inflation fell to 3.5% in June from 4.2% in the previous month as energy costs eased the pressure. The Federal Reserve has kept the federal funds target range at 3.50%-3.75%, with its July Monetary Policy Report noting that economic activity remains solid, productivity and capital investment are strong, and the labour market broadly stable.
U.S. equity benchmarks, including the S&P 500 and Nasdaq Composite, experienced heightened volatility through July. The S&P 500 remains positive for the year, but its performance has broadened away from the mega-cap technology stocks that dominated the earlier rally. A rotational sell-off out of AI darlings and semiconductor stocks weighed heavily on broader indexes. Investors are questioning whether enormous spending on data centres, chips and computing infrastructure will generate sufficiently high returns. At the same time, advances in China’s domestic semiconductor capabilities have raised concerns about the durability of US technological dominance.
United Kingdom
The UK entered July with a slightly encouraging domestic growth picture than earlier in the year although, weak domestic business investment, alongside higher import tariffs and energy input costs, continues to weigh on manufacturing and consumer sentiment. Inflation has also moved in a more favourable direction. June CPI fell to 2.6%, from 2.8% in May, while core CPI remained at 2.6%. Services inflation eased from 3.7% to 3.6%, although it remains relatively persistent.
The Bank of England has kept Bank Rate unchanged at 3.75%. The decision reflects a balance between easing inflation and the persistent risks posed by higher energy prices following recent tensions in the Middle East.
UK equities have been relatively resilient this month compared to the technology-heavy global peers. The FTSE 100 has benefited from its greater exposure to energy, financials, commodities and defensive multinational companies while the broader mid cap indexes like the FTSE 250 remain subdued under the weight of tight financial conditions and weak domestic consumer confidence.
Europe
The eurozone economy expanded by 0.4% in the second quarter of 2026, accelerating from flat growth in the previous quarter and beating market expectations of a 0.2% increase, according to preliminary estimates. It marked the bloc’s strongest quarterly expansion since the first quarter of 2025, as robust AI-related investment, solid government spending, and one-off factors helped offset the impact of the conflict in Iran and higher energy costs.
Euro-area inflation fell from 3.2% in May to 2.8% in June, with energy inflation also easing. The ECB left its bank rate unchanged at its July meeting following a 25 basis points increase in June to 2.4%
European equities have held up comparatively well. The region has benefited from less extreme exposure to the US-style big AI names, while energy, financial and industrial stocks have provided support.
Japan
Japan’s economic growth remains moderate, supported by inbound tourism and mild domestic wage gains, though export demand is constrained by global trade fragmentation and rising commodity costs.
The BoJ held its policy rate at 1% on 31 July, warning that core inflation is likely to run “clearly above” 2% from the second half of the fiscal year, citing wage pass-through, higher crude prices and yen depreciation even as June core inflation came in at 1.6%. Inflation remains elevated compared with Japan’s historical experience, although price pressures have moderated from their earlier peaks. The combination of higher domestic rates, a relatively weak yen and increased energy costs creates a difficult environment for policymakers.
Japanese equities have experienced considerable volatility, reaching extremely high levels earlier in the year, supported by enthusiasm for technology and semiconductors; however, this month’s AI correction has exposed the index’s sensitivity to global technology sentiment. The Nikkei 225 is down 8% for the month, while the broader Topix proved more resilient
China
China has been one of the more important sources of both economic resilience and disruption during July. Official data showed that GDP grew 4.3% year-on-year in Q2 2026, bringing first-half growth to 4.7%. The services sector was particularly strong, expanding 5.1% in Q2, while manufacturing growth remained positive; the broader economy continues to contend with ongoing property market rebalancing and soft domestic consumer demand.
Inflation remains subdued. China’s CPI increased only 1.0% year-on-year in June. The People’s Bank of China (PBOC) has maintained an accommodative monetary stance, injecting liquidity into the banking system and cutting reserve requirement ratios to support bank lending and infrastructure financing.
China’s influence on global technology markets has become increasingly significant. Chinese advances in semiconductor equipment and domestic chip production have contributed directly to the recent global AI selloff, as investors reassess the competitive advantage and long-term profitability of established US and Asian chipmakers.
Chinese equities have consequently displayed an interesting divergence. The Shanghai Composite has been more restrained, while the Hang Seng has shown greater momentum. The offshore tech platforms and high-yield financials surged in Hong Kong, with the Hang Seng index gaining 13.13%, while onshore semiconductors, hardware, and small-caps collapsed on the Mainland due to the global AI rotation, causing the CSI 300 to fall 7.9% and SSE to slip 6.4%.
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The views and opinions expressed should not be construed as investment or financial advice. The information contained is for educational purposes only.