The last week of July was another round trip for markets with the NASDAQ and chip heavy emerging markets indices off 4–5% earlier in the week before making most of it back in the final sessions. Over the month the pain was concentrated exactly where the year's gains had been: Korean stocks, mainly the chipmakers that now make up some 28–32% of the emerging-markets index, fell around 10%, moving in near lockstep with the NASDAQ. At the other end of the spectrum, the Australian market rose about 2%. Three things are feeding the uncertainty: geopolitics, a regime change in US monetary policy, and a US reporting season revealing a bifurcation in how investors view big tech's differing approaches to the AI rollout

The June-quarter CPI was the week's most important local release, and it broke the RBA's way. Trimmed mean inflation rose 0.8% in the quarter against a tightly clustered 0.9% consensus, taking the annual rate to 3.6%, down from 3.7% and below the RBA's May forecast of 3.8%, while the June monthly indicator actually fell 0.1%, pulling the annual headline pace from 4.0% to 3.8%. Lower fuel prices, softer domestic travel and a slowing in new-dwelling inflation did the work, the print was softer, and softer in the right ways. Governor Bullock's speech on Tuesday, "Monetary Policy in an Era of Shocks", had already framed the question as to whether the three hikes delivered this year are enough; she noted the labour market and housing had both eased a little more than expected. With inflation now printing below the Bank's own forecasts, and having arguably moved quicker than its peers, the RBA may have earned mortgage holders a reprieve well into next year, and markets duly pared back expectations of further tightening. The Aussie dollar finished the week back above 70 US cents (helped by a weaker US dollar), and the local 10-year yield ended roughly where it started, near 5%. 

The Federal Reserve held rates with three regional presidents dissenting in favour of a hike. Chair Kevin Warsh offered no forward guidance implying markets should "play the ball, not the referee", while insisting the 2% target is not negotiable, a firm line, not a fuzzy one, and a regime change we have been discussing with a number of fund managers in recent weeks. Bond markets responded with a sharp steepening: short-end yields fell as imminent-hike pricing was unwound, but 30-year yields jumped around 11 basis points to 5.2%, up 26 basis points over the month, a sign markets are uneasy  about inflation with a deliberately hands-off Fed and maybe losing confidence in the Fed's willingness to act as well as talk tough. Andrew Hunt's read is blunter still: Warsh "talked the talk but failed to walk the walk", no hike, a commitment to keep supplying "ample reserves", and no balance-sheet tightening, and for all the no-guidance rhetoric, revealed actions are themselves guidance. On Hunt's reading, Warsh is trusting the long end to do the tightening for him, so the curve should keep steepening in the near  term. However, the data gave the doves some cover: Q2 GDP slowed to 1.5% annualised (though private consumption rose a punchy 3.2%), and the PCE deflator eased to 3.3% year-on-year, as expected. The Bank of England also held, at 3.75%, while Japanese authorities and the Fed intervened to support the yen.

The heart of the US reporting season also delivered a clear verdict: markets are now paying for capital discipline, not spend. Microsoft jumped 17% after beating on revenue with capital spending below estimates, Azure grew 43% ex-currency and paid Copilot seats rose from 20 to 30 million in a quarter, while Meta fell 9% on otherwise very strong results, as costs rose 55% against 28% revenue growth, with a capex guide of US$130–145 billion and free cash flow becoming a genuine worry: they appear to be spending more than they earn. Apple topped a US$5 trillion market capitalisation on Tuesday, then gave up as much as 11% by week's end after beating on revenue and earnings but cutting its September-quarter outlook on memory-chip shortages Tim Cook likened to "a 100-year flood", a supply problem, not a demand one. Qualcomm also fell on component shortages. Blended S&P 500 earnings growth for the quarter is looking strong; it is the cost of producing them that markets are scrutinising, and with the destination far from clear, that is adding to volatility not just at the index level but cross-sectionally.

Oil remained the swing factor economically. Brent fell almost 9% on Monday to near US$88 and touched US$84 as the US–Iran truce held, before Iranian missile fire on US forces in Jordan sent it back above US$90; it ended the week just over US$89,below 100 and around that 90 level,with signs over the weekend that talks may be starting up again.

Equity volatility stayed concentrated in the AI complex: chipmakers sold off early in the week, Korea's KOSPI is down roughly a third this month, before rebounding late. Tellingly, the MSCI World index was barely 2% off its highs: this is a sector story, not indiscriminate selling. Hunt notes global liquidity growth may already be waning,"something Korea may already know" while June's money data showed Japanese and euro-zone banks stepping up sovereign bond purchases, offering relative valuation support to markets that did not accommodate the Gulf inflation shock.

Beneath the index moves, a theme we might call the backwater trade came to a head last month. For most of this year the best returns have required investing with liquidity, sentiment and momentum, while managers whose companies were delivering strong underlying results found the market simply didn't care. Last month the market started to care, and it was really only in the final week that the divergence opened up. A quality-growth small-cap manager many of our clients will recognise outperformed by around 8% over the month, though after a torrid stretch it remains well behind for the year. The story repeats in emerging markets, where active managers we follow closely rose 4–5% while the index fell 10% - they don't own Korea. A deep value manager added almost 8% in a month when the MSCI World fell 2%. Closer to home, Domino's popped 20% on a solid update, one of several similar moves locally. On the other hand Australian mid- and small-cap growth managers, who have also had a hard year, got little reprieve, because banks and resources led the local market. So the rotation is not everywhere, and it is genuinely unclear how much reflects fundamentals reasserting themselves and how much is money simply moving towards whatever is not tech, not volatile and not the thing people are worried about. Probably a mix of both, and a question we will be putting to managers, and to Hunt Economics on the liquidity front, as the US reporting season winds up.

On bonds, Andrew Hunt sketched out three scenarios in his latest missive: a slow sell-off that accelerates when politics finally forces tighter policy; a sharp sell-off followed by a decade-long rally (the Japan-then, China-now path); or, his base case, an initial sell-off, a rally of six to nine months once the credit boom cracks and policymakers panic, then a longer bear market. What does that say to us? We remain moderately underweight duration near term, but the long end is worth watching as things could go either way from here.

In summary, domestic inflation is finally moving the right way, giving the RBA room to stay patient ahead of its August meeting; that offshore volatility remains narrowly concentrated in AI-linked names and long-dated bonds; and that a strong US earnings season is rewarding companies that spend carefully. Overall though, real diversification is starting to pay its way in terms of upside as well as just lower volatility, and we are starting to see some of the managers that have had it the toughest in the last few months outperform by 5 or 10% in a matter of weeks. For much of the year that positioning has felt like FOMO; last month showed the other side, upside that arrives partly because fundamentals are solid, and partly from sitting out of the way of the big cross-currents in global liquidity.