No summer break for investors in volatile markets

The holidays have begun, but for investors still at their desks there is no shortage of things to worry about. With volatility in tech stocks, oil and currency, it’s shaping up to be a hot summer in the markets.

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Tech bounce

Equities lurched from pessimism to euphoria last week, especially in the volatile tech sectors in Asia. Korea’s Kospi index fell 17% in three sessions before bouncing back by 18% on Friday. Despite the recovery, the Korean index fell by 22% in July.

The bounce was triggered by a remarkable rally in Wall Street’s Philadephia Semiconductor index, which rose by 8% last Thursday, pushing the tech-heavy Nasdaq up by 3.4% that day.

The obvious triggers were strong earnings releases from Microsoft and Amazon, which eased concerns that massive spending on AI infrastructure might not translate into revenues and profits.

Semiconductor stocks have been the key driver of markets in the first half of 2026 but they tumbled in July as investors worried that the rally had gone too far too fast.

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Gulf fears ease

The second major concern for investors - the conflict in the Gulf - also eased last week and over the weekend.

The oil price dropped by 5% as the new week got underway after Donald Trump said he had decided against major strikes against Iran after calls for restraint by US allies and in anticipation of a deal between Iran and Oman to re-open the Strait of Hormuz to shipping.

The oil price is a key determinant of inflation and therefore a big influence on interest rates, which in turn were a major focus for investors last week.

Where next for the Fed?

The job of assessing what the Federal Reserve will do next has become much harder since Kevin Warsh took over as chair of the Fed from Jerome Powell.

He has said that too much guidance from the central bank interferes with the market’s ability to respond to fundamental drivers like employment and inflation. He intends to say less in future than his predecessors, and investors are struggling to adapt to a more opaque monetary policy framework.

So, although the Fed left rates unchanged, as did the Bank of England and Bank of Japan, markets continued to focus on the prospect of higher rates ahead.

More uncertainty and less transparency is pushing markets to demand more compensation in the form of slightly higher bond yields and that is providing a headwind for equities.

In the so-called ‘danger zone’ where bond yields of 4.5% to 5% look increasingly competitive to shares, bonds and equities tend to become more correlated, rising and falling together and reducing the benefit of a diversified portfolio.

The silver lining

The good news for investors is that the threat of rising bond yields continues for now to be countered by the tailwind of strongly rising corporate earnings.

Just over half way through second quarter results season, profits are rising at a remarkable 29% year on year, about the same as the rate of growth in the first quarter and well ahead of expectations at the start of the current earnings round.

That in turn has kept valuations in check. At about 20 for the US benchmark index, these are not demanding - as long as bond yields do not rise much further. Were these to hit 6%, experts think a price-earnings ratio of 16 might be more appropriate for shares. And that would entail a sizeable correction in share prices in the absence of yet more strong rises in earnings. Markets are walking a tightrope.

Can the UK maintain its lead?

One of the biggest surprises of the summer so far has been the relative resilience of the UK stock market, which last week hit a new high.

Investors have warmed to the UK’s FTSE 100 benchmark for a number of reasons. With a low technology weighting, it has avoided the AI-related volatility in July. It also has a heavy oil and commodity weighting, which has enabled our home market to navigate the Gulf crisis with relative ease. And a high dividend yield and low valuation reduces the risk of a rotation into the UK yet further.

Key to the ongoing success of the FTSE 100 might be more domestic issues as summer turns into autumn. New Chancellor John Healey last week set a late October date for the Burnham government’s first fiscal statement. And that means that speculation about how big spending plans will be funded can only intensify over the next three months.

• Read: What can we expect in the Autumn Budget?

Land of the sinking yen

As if investors did not have enough to think about with bonds and shares, this week has seen currencies back in focus too. Often a trigger for big movements in markets can be something unexpected or poorly understood. And the Japanese yen looks like it might fit the bill this summer.

On Friday the US Treasury staged a highly unusual intervention, buying yen to support the Japanese currency as it dipped to its lowest level against the dollar since 1986. The US has not bought yen in this way for 30 years, an indication that it is concerned about the currency, which is reflecting worries about the impact of rising oil prices in Japan as well as the affordability of an ambitious fiscal stimulus plan under new Prime Minister Sanae Takaichi.

How these moves play out in financial markets is always unpredictable. But Japan looks like being an important focus as the summer unfolds.

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• Read: 6 reasons the FTSE 100 hit a new record high this week
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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Direct shareholdings should generally form part of a well-diversified portfolio of other investments. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.