– Warren Buffett
“It’s only when the tide goes out that you learn who has been swimming naked.”
Last month, we noted the wide-ranging questions we were pondering as we entered a summer of unknowns, and a contentious North American World Cup. As Spain marched to footballing victory with methodical precision, markets remained largely in the dark: the new Fed Chair’s plans for monetary policy are little clearer; seismic volatility across asset classes, apparently triggered by a young prodigy flying too close to the sun, has kept alive questions over the continued dominance of AI stocks and the Magnificent Seven; a new British PM, despite a flurry of early announcements, has yet to reveal his true cards. In the Gulf, ceasefires give way to renewed hostilities every few days, with oil serving as the main risk gauge. There looks to be no rest for investors as we enter a (hopefully) quieter summer period.
Markets had priced in a 40% chance of a hike going into last week’s Fed meeting. The Fed held rates at 3.50-3.75% for a fifth consecutive meeting, but the 9-3 vote was closer than expected, with all three dissents favouring a hike. Chairman Warsh offered no forward guidance beyond confirming there would be none, framing the decision not as a pause but “a rigorous review of the economic situation,” and repeating his defining line: “we will deliver price stability.” Markets read it as hawkish, driving a bear steepening: two-year yields rose 12 basis points to 4.25%, ten-year yields 27 to 4.69%, and thirty-year yields 32 to 5.23%, the highest since 2007, while breakevens barely moved, pointing to real yields and term premium rather than inflation expectations. With the FOMC split and inflation above target, markets are now pricing hikes before year end.
Markets read the Fed’s hawkish pause as confirmation that policy would stay tight for longer, and the initial repricing showed up first in rates: the bear steepening we noted earlier, with real yields and term premium doing the work rather than inflation expectations, tightened financial conditions in its own right. That combined with an already jittery tape, AI capex concerns following Tesla and Alphabet’s earnings, and oil spiking on renewed Gulf hostilities, to produce the initial equity selloff on the 29th. The VIX jumped 13.5% to 20.66 that day, a move that on its own looks more like a rates and macro repricing than panic.
What sharpened this selloff was mechanical. On the 30th, Situational Awareness LP, an AI fund run at roughly four times leverage by 24-year-old former OpenAI researcher Leopold Aschenbrenner, was margin called as concentrated AI bets unwound, forcing a $16bn liquidation bought by Citadel at a discount. Korea saw a similar dynamic: after the Kospi more than doubled in the first half of the year, leveraged positions hit a record 29.2 trillion won in early July, and when memory names turned, over 1.2m accounts faced margin calls and roughly 360,000 were forcibly liquidated. MSCI Korea fell -23.7% on the month (though remains up +79% for the year).
The rebound that followed seemed to confirm this was technical, not fundamental. With two-thirds of S&P 500 companies reported, 87% had beaten expectations by an average of 14%, and earnings grew 22% year on year. Microsoft and Amazon both rose c.+16% on cloud strength, while Samsung and SK Hynix each gained over 20%. But dispersion told its own story: Alphabet fell -7% despite 82% cloud revenue growth, and Apple dropped -7% on chip-driven cost pressure. Markets remain willing to pay for AI capex, just far more selectively.
Credit barely moved throughout, with investment-grade spreads up 2bps to 72 and high yield up 7bps to 287. The old adage held: equities trade on narrative, fixed income on maths.
Perhaps the more consequential intervention of the month came in currency markets rather than equities. The yen slid to 163.73 per dollar on the 30th, touching nearly 164 at its worst, the weakest level since 1986. Japan appears to have sold as much as $59bn that day alone to defend it. On the 31st, Washington joined in, the first joint US-Japan operation to buy yen since 1998, and the currency recovered to 157.57 by the New York close. Both governments confirmed the action on the 3rd and signalled they would repeat it if needed.
What stands out is how this was done. Normally, defending the yen means selling dollars, but the New York Fed instead sold euros for yen on the Treasury’s behalf, keeping dollars out of the operation. The reason was the state of the Treasury market: ten-year yields had reached 4.735% and thirty-year yields 5.265%, the highest since the financial crisis, so selling dollars risked worsening the bond sell-off. Japan faced the same problem in reverse: as the largest foreign holder of Treasuries, a conventional intervention would mean selling some of them, again pushing yields higher. Instead, it signalled it would use the Fed’s FIMA repo facility to borrow dollars against its Treasury holdings rather than sell them, getting the dollars it needs without adding to US yield pressure.
The yen’s underlying problems remain: expansionary fiscal policy, high debt, and rates low relative to peers despite above-target inflation. Rising JGB yields once supported the yen by narrowing the rate gap with the dollar; now they read as a fiscal-credibility warning instead, a more troubling signal that could point to further intervention ahead.
Britain finally has a new government. Andy Burnham took the Labour leadership on the 17th and was appointed prime minister on the 20th, the seventh in a decade, promising a “circuit breaker for Britain” and a return to stability. John Healey, a former Economic Secretary and Financial Secretary to the Treasury was made Chancellor, helping ensure calm in markets, meanwhile presumed favourites for the role, Shabana Mahmood and Ed Miliband, were handed Home and Foreign Secretary roles respectively.
We asked last month how Burnham’s lofty wishlist would be paid for, and the answer has not yet arrived. For now, we have only PR moves, with major overhauls postponed until the budget. Devolution and reform of adult social care are already shaping up as bedrock policies for the new PM. The ban on new North Sea exploration licences stays in place, though the government’s unblocking of production at Rosebank and Jackdaw, fields already licensed but still awaiting development consent, was enough to draw praise from President Trump, who had earlier that week described the nation as a “poverty stricken disaster.”
He inherits an economy forecast for modest growth, inflation still climbing, and a Bank of England that held rates by a narrow vote even as gilts sold off and sterling rose. Soon enough, the Prime Minister will need to reveal his hand.
The Iran situation continues to lurch. June’s ceasefire lasted barely three weeks before strikes resumed and Washington reimposed a blockade of the Strait of Hormuz. Brent swung between $72 and $102 before settling at $88, with markets pricing in each de-escalation only to reprice from scratch on every relapse. Trade tensions also rumbled on, with one tariff regime replaced by another, though markets barely reacted: gold added just 1.3% to reach c.$4,061/OZ and remains -6% lower for the year.
We opened by saying many questions remained unanswered. That may be no bad thing, since this was a month with plenty to learn from. Leverage is dangerous, whether wielded by a retail trader chasing quick gains or a supposedly sophisticated hedge fund riding a secular trend. Markets will also need to relearn how to read data on their own terms, now that the Fed is offering little guidance. And by now, nobody should take President Trump at his word about what comes next.
We will not give outright answers either, beyond saying we prefer the credit market’s approach: ignore the noise and focus on the fundamentals. To return to football analogies one last time, and as shown in Spain’s World Cup final victory against Lionel Messi’s Argentina: strong system beats star power.
If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.com
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