July Market Update

July market view: oil retreats as central banks turn hawkish

Looking back at June’s dataflow and what it may mean for portfolio positioning.

Introduction

June delivered the relief markets had been waiting for on energy. A US-Iran interim framework took effect mid-month, Iran agreed to reopen the Strait of Hormuz, the US lifted its naval blockade, and Brent fell back toward the mid-70s, erasing nearly all of its war premium.

Central banks moved the other way. The Fed turned more hawkish under new Chair Kevin Warsh, the ECB delivered its first rate hike since 2023 and the Bank of Japan lifted rates to their highest level since 1995. The RBA paused, but with core inflation still rising it left the door open. The easing in oil has not yet translated into easier policy.

The energy shock is fading, but policymakers are not yet convinced the inflation it created will fade with it.

What moved the dial

Supportive signals

• Brent crude fell back toward the mid-70s, erasing nearly all of its war premium. The conditional reopening of Hormuz and the end of the US naval blockade convinced investors the disruption that had pushed prices above $120 was over, removing the dominant 2026 inflation threat.
• The RBA paused after three consecutive hikes, holding the cash rate at 35% on 16 June as headline CPI fell to 4.2% from 4.6%. The pause eases pressure on mortgage holders and signals the tightening cycle may be near its peak.
• Australia’s jobs market was firmer than feared. May unemployment edged down to 4% from April’s four-year high of 4.5%, with employment rebounding by 40,300 after a soft April, which may give the RBA room to stay patient.
• The US-Iran interim peace framework took effect mid-June, with Iran agreeing to reopen the Strait of Hormuz and the US lifting its naval blockade. Japan’s Nikkei and South Korea’s Kospi both jumped more than 5% on the news, the biggest risk-on catalyst of the month.
• US core inflation cooled at the margin. Headline CPI hit a three-year high of 4.2%, but core rose just 2% for the month and 2.9% annually, below estimates, with core goods prices declining, suggesting limited pass-through from energy.
• US nonfarm payrolls rose 172,000 in May against a consensus near 80,000, pointing to underlying resilience even amid the energy shock.
• UK headline inflation came in at 8% in May, below the 3.0% expected and down from a March peak of 3.3%.
• China’s deflation cycle eased, helped by the oil shock. Higher imported energy costs pushed Chinese prices out of outright deflation and forecasters lifted 2026 CPI projections, a modest positive for nominal growth and corporate earnings.

Watch-outs

• Australian inflation stayed well above target. Headline CPI of 4.2% remains far above the 2 to 3% band, and the trimmed mean rose from 3.3% to 4%, leaving the door open to further tightening.
• April’s rise in unemployment to 5%, above the RBA’s own forecast, came alongside weak GDP growth and a contractionary federal budget, raising the risk that policy is overtightened into a slowdown.
• The Fed turned decisively hawkish under Kevin Warsh. It held at 3.50-3.75% but lifted the 2026 median dot to 8% from 3.4%, flipping from an implied cut to a hike-leaning path.
• The ECB delivered its first rate hike since 2023, raising its deposit rate to 25% after eurozone inflation accelerated to 3.2% in May, and revised its inflation forecasts higher.
• Eurozone growth stalled toward possible stagflation. The ECB cut its 2026 growth forecast to 8% while lifting inflation to 3.0%, after a first quarter initially reported as a contraction and since revised to flat.
• The Bank of Japan hiked to 0%, its highest policy rate since 1995, with wholesale inflation at 6.3%, tightening global liquidity and adding a headwind for carry trades.
• UK services inflation re-accelerated to 7% from 3.2%, the gauge the Bank of England watches most closely, and two MPC members dissented in favour of a hike to 4.0%, keeping rate cuts on hold.
• China’s domestic demand and property sector stayed weak. Retail sales fell 6% year on year in May, the first decline since late 2022, property remained a drag on investment, and the IMF flagged entrenched deflationary pressure and over-reliance on exports.

Macro overview

June split the macro picture in two. On energy, the news was genuinely better: the US-Iran framework, the reopening of Hormuz and Brent’s slide toward the mid-70s removed what had been the dominant inflation threat of 2026. Underlying US data held up, with core inflation rising just 0.2% for the month and payrolls well ahead of expectations, and Chinese prices moved out of outright deflation.

Policy did not follow oil lower. With headline inflation at 4.2% in both the US and Australia and 3.2% in the eurozone, the Fed’s projections shifted toward a hike, the ECB and Bank of Japan tightened, and two Bank of England members voted to raise rates. The RBA paused, but with trimmed mean inflation still climbing it has not closed the door. The recovery now has to run against tighter policy.

Asset class outlooks

Equities: The US-Iran framework produced the month’s biggest risk-on move, led by Asia. We remain tilted toward companies with strong structural growth that are less exposed to renewed supply disruption. The rising cost of the chips, power and data centres needed to build AI is on our watch list: if those costs stay high and investors question the return, the highly valued technology names that have led the market are the most exposed.

Fixed income: The Fed’s shift is the key change. A median dot of 3.8% points to a hike-leaning path, and Chair Warsh has signalled a greater willingness to keep rates higher and to reduce the Fed’s roughly $6.7 trillion balance sheet, which withdraws money from the system. Our base case is that policy stays tighter for longer than markets had hoped, and we remain cautious on the outlook for interest rates until the Fed, ECB and RBA signal a greater focus on growth.

Alternatives and real assets: Energy remains the swing factor. Oil’s fall back toward the mid-70s is a clear positive, but the deal is not yet final, parts of the strait remain hazardous and the governing arrangements are unresolved, so the risk of renewed disruption has not gone away.

FX: The Bank of Japan’s move to 1.0%, alongside wholesale inflation of 6.3%, tightens global liquidity and adds a headwind for carry trades.

Implications for asset allocation and portfolio positioning

The improvement in energy is real but fragile, and central banks are leaning against it rather than with it. The job is to stay positioned for medium-term growth while respecting a tighter policy backdrop.

Practical implications:

• Keep the tilt toward structural growth exposures that are less exposed to any renewed supply disruption.
• Stay cautious on interest rates. With the Fed, ECB and Bank of Japan all leaning hawkish, tighter for longer is the base case.
• Treat liquidity as a tug of war. The oil drain is easing as prices fall, the Fed’s balance sheet reduction pulls the other way, and support from China and the US Treasury continues to underpin activity.
• Expect higher dispersion in returns.

Scenarios and probabilities

Scenario probabilities reflect our current assessment and are reviewed as new data emerges.

Base case: 72% probability

The conflict around Iran pushed energy prices sharply higher and disrupted the supply of essential goods such as fertiliser and sulphuric acid. The picture has since improved markedly: a ceasefire has held since April, and in June the United States and Iran signed a memorandum of understanding intended to end the conflict and reopen the Strait of Hormuz. Traffic is resuming and oil has fallen back toward the mid-70s, well below its wartime peak above $100. The recovery is real but fragile, with the deal not yet final, parts of the strait still hazardous and the governing arrangements unresolved. We entered this period from a position of strength, with healthy corporate profits, supportive government spending, relatively easy borrowing conditions and plentiful oil supply before the conflict.

Inflation had been slowing before the conflict, but energy prices have pushed expectations higher, and some central banks have shifted back toward raising rates. The change of Fed leadership sharpens this. Chair Kevin Warsh has signalled a greater willingness to keep rates higher and to shrink the Fed’s balance sheet. Our base case is that this keeps policy tighter for longer without derailing the recovery, and we remain cautious on interest rates until the Fed, ECB and RBA signal a greater focus on growth. Liquidity is a tug of war between an easing oil drain, a Fed withdrawing support, and continued funding support from China and the US Treasury.

Structural growth themes remain intact, with investment in AI, manufacturing and energy infrastructure expected to broaden profit growth over the medium term. We are watching the rising cost of building AI. Our base case is that this lifts the bill for the rollout without breaking it, as the companies leading the investment have the cash flows to fund it. Overall, resilient earnings, government spending and broad credit availability provide a reasonable foundation, within a more volatile environment and with higher dispersion in returns.

Bear case: 14% probability

The key risk is a meaningful pullback in consumer and business spending, particularly in the United States. With valuations already elevated, weaker revenues coinciding with a pullback in AI investment, persistent inflation and higher rates could see profit margins and market prices fall together. This becomes far more likely if the ceasefire breaks down or the 60-day deal collapses. A renewed closure of Hormuz and an oil spike of 50 to 100% above current levels, combined with a Warsh Fed that keeps shrinking its balance sheet as the economy weakens, would drain money from the system at the wrong moment. Rising AI costs add risk from the other side: if spending keeps climbing while the payoff is delayed, a sharp repricing of the expensive technology leaders could drag the broader market down.

China adds a further layer of risk. If its property sector weakens further and stimulus fails to restore confidence, Chinese growth could slow materially, directly affecting Australian national income and corporate earnings. In this scenario a more defensive approach would be warranted, with higher cash holdings, reduced share market exposure and a tilt toward healthcare, consumer staples and utilities.

Bull case: 14% probability

In the bull case the de-escalation gathers pace: the ceasefire holds, the 60-day deal is finalised and Hormuz reopens fully. Falling energy prices and easing supply pressures would support stronger growth while keeping inflation in check, and resolved trade disputes and continued AI adoption would lift profits across a wide range of industries. A Warsh Fed seen as genuinely committed to low inflation could help: if markets trust inflation will stay contained, longer-term borrowing costs can fall even as the Fed holds firm. Cheaper energy and rapid technological improvement could also bring AI costs down faster than expected, broadening its benefits beyond the companies building it.

Government spending would add support, and strong household and business balance sheets leave both well placed to respond. For Australia, government spending and the end of the current hiking cycle would support stronger domestic growth. If interest rates stay below inflation, a growth-oriented portfolio with low cash and more exposure to industrials, materials and financials would be well positioned.

Closing perspective

June gave markets the energy relief they wanted, with oil erasing nearly all of its war premium and Hormuz on a path to reopening. What it did not deliver was easier policy. With the Fed, ECB and Bank of Japan all leaning hawkish and Australian core inflation still rising, the recovery now has to run against tighter settings. The deal is not final and the strait is not fully safe, so we remain tilted toward structural growth, cautious on rates, and alert to the cost of the AI build-out.

This publication is prepared by Akambo Pty Ltd (ABN 16 123 078 900) AFSL 322056.

The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.

Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo’s Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.

Past performance is not a reliable guide to future returns.