Market Compass July 2026

Highlights:

• The AI revolution is intensifying demand for both debt and equity capital just as governments face rising financing needs (ageing, defence, climate). This competition supports a regime of higher interest rates.
• While the Strait of Hormuz and Iran’s nuclear programme issues remain unresolved, the recent deal and the sharp decline in energy prices have significantly reduced downside risks to global growth. We now see risks skewed to the upside, particularly in the US.
• US inflation remains a concern in an economy that continues to run hot. While our Fed and ECB forecasts are respectively in line and less hawkish than market pricing, we see limited scope for lower long–term rates, especially in the US. Softer Fed forward guidance and the return of a positive stock–bond correlation both point to higher term premia.
• We continue to prefer Credit over Govies, even at this tight level of spreads. Public finances are a bigger concern than corporate balance sheets. We maintain a small overweight in Equities, with a geographically diversified and cyclical bias. To monitor the risk of the AI tide peaking, we track Capex and Tech margins.

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