July 2026 was another extraordinary month, even by the standards of recent years, as multiple overlapping developments collided to drive swings in both market sentiment and asset prices. This time we had at least four significant issues impacting the equity, bond and foreign exchange markets, as well as an important ‘answer’ to one of the big questions surrounding the technology sector.
The most dramatic event was the massive, global deleveraging in the high momentum parts of the equity markets. This meant, in effect, that the AI inspired technology sector which had such strong performance over the last few months and quarters, gave back a large chunk of that performance in July. One of the more obvious catalysts for this was the collapse of a large US technology focussed hedge fund, which had to ‘fire sale’ it’s positions into the market to meet margin calls.[1] This act battered sentiment, helping to accelerate a downward move in momentum stocks on a scale which ‘normally’ we would expect to see once every 14,000 years. Clearly markets don’t produce ‘normally’ distributed outcomes every month, but even so, this was something unusual in its speed and scale.
The bond market was also unsettled, with real government bond yields (i.e. the cost of government borrowing after inflation) moving up steadily over July to the top of their post Covid ranges.[2] This move reflected a wider unease about mispricing of the inflation and funding risks which the financial system currently faces, although we also believe that a resolution to the Iranian war and some relief on oil prices would go a very long way to reversing the current pressure.
In foreign exchange markets something important and dramatic also happened when the USA and Japan jointly intervened to strengthen the Japanese Yen against the US dollar, the first time such a joint exercise had happened for 20 or so years.[3] The facilities used to carry out the intervention also signalled intent to dial up the scale if needed. In the background, the Japanese government and central bank have additionally been manoeuvring to line up additional firepower, if needed, to calm unruly bond and fx markets (e.g. in our view, the giant government pension fund could perhaps step in to help). Overall, we think that the ‘authorities’ here and elsewhere are well aware of the risks of the recent equity and bond market volatility getting out of hand, and are signalling that they do have the tools to intervene to aid the smooth functioning of key assets, if needed.
