US crude traded near $83 per barrel, while Brent spiked above $90 per barrel on news that the Houthis are considering a blockade of the Red Sea to prevent Saudi Arabia from exporting oil through the port of Yanbu. Remember, Saudi Arabia had diverted part of its oil exports from the Strait of Hormuz to the Red Sea, with exports from Yanbu reaching around 4 million barrels per day, helping cushion the near-standstill in traffic through the Strait of Hormuz. Now, these flows are under threat again.

The good news is that fresh reports suggest that a senior Iranian official said mediators had proposed a 10-day ceasefire to revive an interim US-Iran agreement, pulling oil slightly lower this morning. The bad news is that risks remain tilted to the upside.

The US dollar rises when oil does

In FX, the US dollar is being supported by renewed upward pressure on oil prices, although appetite is perhaps being tempered by renewed tariff chaos between the US and the countries that, in Washington's view, have "pissed them off."

Overall, however, the hawkish shift in central-bank expectations continues to favour the dollar, supported by relatively stronger US growth prospects than those of Europe or Japan. The USDJPY is little changed near 162.50, while the EURUSD is consolidating losses around the middle of its year-to-date descending channel ahead of Thursday's European Central Bank (ECB) decision, where rates are expected to remain unchanged. Across the Channel, sterling is swinging with political developments as Andy Burnham puts together his cabinet, trying to convince Britons that he can turn the country's fortunes around while reassuring investors that he can do so within existing budget constraints. Gilt investors remain sceptical, though. The 10-year gilt yield is once again above 5%, although that also reflects rising energy prices.

As such, the benchmark European 10-year yield closed above 3.16% yesterday, its highest level since 20 May—near the peak of the US-Iran conflict—while the US two-year Treasury yield, which best captures Federal Reserve (Fed) rate expectations, jumped to 4.23% before easing back towards 4.20% this morning. What's interesting is that smart money no longer wants to venture into long-dated government bonds because of the highly uncertain monetary policy outlook. Of course, it is not monetary policy itself that is uncertain; it is the news flow that drives it. It is the situation in the Middle East, the absurd diplomacy, the childish tit-for-tat attacks, the threats, and the inability of the US and Iran to find common ground—as Washington wants everything, while Tehran is naturally unwilling to concede much after four months in hell.

As such, many investors are reducing the duration of their bond holdings—duration being a measure of a bond's sensitivity to interest-rate changes—and are favouring shorter-term bonds to avoid making the wrong call and locking themselves into a multi-year position. This migration to the front end of the yield curve has broader implications: it keeps upward pressure on long-term borrowing costs, raises the discount rate applied to financial assets, makes it more expensive for governments and companies to finance themselves, and limits the amount of capital flowing into riskier assets until there is greater clarity on inflation and central-bank policy.

Spend or spend?

This comes at a time when investors are questioning whether the massive AI spending that has helped fuel markets remains justified. The industry is becoming increasingly leveraged and therefore increasingly sensitive to interest-rate moves. Meanwhile, the early euphoria surrounding Big Tech bond issuance has faded: Amazon's latest bond sale attracted notably weaker demand.

This week, we are seeing a tentative rebound across global chipmakers, which had been rattled by news that Chinese AI start-up Moonshot AI outperformed Anthropic's and OpenAI's leading models across several benchmarks. VanEck's Semiconductor ETF traded higher yesterday, although it spent much of the session giving back gains to close up just 0.41%—a relatively modest move for an ETF that has accustomed us to 3-5% intraday swings. Meanwhile, Korea's Kospi is rebounding by around 4% at the time of writing. Even so, volatility remains too high to call the rebound sustainable. On the contrary, elevated volatility is often a hallmark of a bearish market. The Kospi is also struggling around a critical Fibonacci level—the 38.2% retracement—which should determine whether last year's spectacular rally gives way to the medium-term correction that many would argue is overdue after an extraordinary 300% advance since April 2025.

In China, the Hang Seng is consolidating recent gains, supported by state-backed funds stepping in to stabilise the market. Local chipmakers are leading advances after reports that Zhipu AI, one of China's leading frontier AI companies, has built a data centre using only domestically produced chips.

Will that further unsettle non-Chinese chipmakers? NOT IF rising Chinese competition continues to justify the current pace of AI investment.

Spending Season

Speaking of spending, Alphabet is due to update investors on its capital spending plans tomorrow after the closing bell—oh, and it will also report its second-quarter earnings.

But chances are investors will remain focused on the spending outlook. They do not want Big Tech to keep increasing capital expenditure if the returns fail to materialise. Yet very few are asking the opposite question: what happens if Big Tech starts cutting back?

I believe that, from the market's perspective, it is currently better to hear that spending will continue—for the sake of the broader equity market—than to hear what may well be the more rational decision to slow it down.

Damned if you do, damned if you don't.