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The week began with optimism, and some sharp falls in the oil price, as a result of a pause in attacks between the US and Iran. Mike Waltz, the US ambassador to the United Nations, said President Trump was giving “some space” for peace talks before deciding whether to resume strikes. Iran confirmed it had stopped “retaliatory operations”, although it continued to declare that the Strait remained “closed”. The situation deteriorated, however, after the US accused Iran of launching a “surprise attack” on its forces in the Gulf with missiles and drones being intercepted. The US retaliated with another wave of strikes against Iran. Despite the ongoing hostilities, President Trump told Fox News that talks were making progress. Conversely, Iran’s foreign ministry said no formal talks were taking place with the US but talks with Oman regarding the Strait of Hormuz were ongoing.
The Bank of England held interest rates at 3.75%, saying it could wait to see how the US-Iran war evolved given there was little evidence yet of the energy shock stoking broader price pressures. There was a 6-3 vote split in the Monetary Policy Committee, with the majority arguing that borrowing costs were already high enough to keep price pressures in check. Governor Bailey said there was “little as yet to suggest” that higher energy prices were translating into broader inflation pressures, but emphasised that “we cannot draw too much comfort from that at this stage”. Bailey said the size and duration of the energy price shock “is a key uncertainty for the outlook for UK inflation” but stressed that “nothing in what any of us has said today should be taken as evidence the BoE was preparing to increase interest rates”. The Bank forecasts inflation rising from the current rate of 2.6% to 3.2% by the end of the year, before easing to average 2.7% in 2027.
The US Federal Reserve’s policymaking committee voted 9-3 to keep rates on hold at 3.5-3.75%, with three dissenters voting for a rate hike. Fed Chair Kevin Warsh insisted policymakers’ decision to leave rates unchanged was not a sign of inertia at the central bank, which he reiterated is committed to tackling inflation. This was only the sixth time in the past 30 years that as many as three FOMC voters have dissented from the policy decision. In the press conference, Warsh urged patience in bringing inflation down and said the Fed would “not hesitate to act” when necessary. Warsh noted that “for some households, businesses and market professionals, five years of high inflation have left a mistaken impression – that’s hard to shake – that the Fed’s implicit inflation target is somehow above 2%. Let me reiterate there is no soft inflation target, there is no soft implicit target, not on this committee’s watch”.
Market movers
What is going on in South Korea? The KOSPI index has endured a torrid few weeks. After hitting a peak on 22 June, the index fell almost 39% before an impressive overnight bounce of 18.27%. The index is still up a stellar 57% this year, but well off the June peak, when the year-to-date return was 116%. The incredible performance of the index, following gains of 75% in 2025, has drawn in a huge number of domestic retail investors, encouraged by policymakers as the government tried to steer investors away from an overheating housing market.
The KOSPI index is highly concentrated, thanks to two chipmakers, Samsung Electronics and SK Hynix. Both dominate the market for memory chips used in phones, laptops and data centres. The two companies together account for almost 48% of the market capitalisation of the entire index. Such concentration is great on the way up, less so on the way down. Between June’s peak and Thursday’s close, Samsung’s share price had fallen by 43% while SK Hynix was down by 56%. Today’s rebound has seen Samsung bounce back by 24% while SK Hynix is up 26%.
Since April, regulators have allowed retail investors to access leveraged ETFs tied to individual stocks; at an emergency meeting on Wednesday, politicians promised to severely limit the use of such funds. Retail investors have been the biggest buyers of Korean equities this year; the number of active stock trading accounts is around 110 million – equivalent to two accounts for every citizen. Some retail investors, particularly those using leveraged products, will now be facing significant losses. The unwinding of the levered products tracking the semiconductor sector has sent ripples through the market, “amplifying market volatility” according to a joint statement from the finance ministry, central bank and regulator.
Despite the volatility, the fundamentals of the two companies in the eye of the storm remain strong. This week, SK Hynix reported profits of $41.6 billion in the second quarter, an increase of 557% year on year. The company also announced a 50% increase in AI spending to $31 billion – and this is what spooked investors. Samsung Electronics also reported results this week, with Q2 earnings of $62 billion, while profits from chip manufacturing are up 250-fold year on year. But increased AI capex from tech firms is unsettling investors who fear these super-normal profits cannot be sustained.
Data centre construction, AI adoption and the use of robotics suggest that demand for memory chips will outstrip supply for several more years to come. But there is a risk of new supply reducing the dominance of companies such as SK Hynix and Samsung – history shows that commodity cycles often end this way, and new entrants from China will ultimately ‘commoditise’ what has been a supply-constrained sector. So, the party moves on: ChangXin Memory Technologies (CXMT) came to the market this week, listing in Shanghai with a 470% share price surge on its first day of trading. The newcomer now has a valuation approaching $500 billion, instantly making it China’s largest company by market capitalisation.
As for Korean equities, the volatility will likely continue until such time as retail flows stabilise. The lessons from Korea, which no-one will ever learn, is that when market prices go parabolic, it rarely ends well. But, with the underlying demand for memory chips likely to stay strong for some time yet, Samsung and SK Hynix can continue to deliver strong earnings – until the competition begins to eat into their market share.
The investment lens
Recently appointed Federal Reserve Chair Kevin Warsh has touted dropping press conferences after rate-setting meetings. Judging by the reaction to this week’s meeting, he may be on to something. The Fed’s messaging via the statement accompanying the rate announcement was virtually the same as it was in June’s – economic activity is solid, uncertainty is elevated, employment is stable, inflation is elevated versus target, and the Fed is committed to delivering stability. Warsh has made it clear he will not be drawn into forward guidance, yet the press conference muddied the waters somewhat: Warsh failed to explain why the Fed chose to stay on hold and ended up hinting at more dovish outcomes, noting the central bank could consider other ways to measure and fight inflation, and highlighting that markets have already done some tightening for the Fed with higher yields. As a result, short-term yields fell on expectations that the Fed may not be as close to hiking rates as feared, while longer-term yields rose on concerns the central bank may not be getting to grips with inflation that remains well above target. Maybe Warsh should add some country music to his Spotify playlist – specifically Keith Whitley: “You say it best when you say nothing at all.”
I’ll be listening to French music radio in the car for the next few weeks (or anything to drown out the children’s phones) as we embark on a family road trip through France and Spain. Hopefully, August will allow for some downtime to enjoy some fine weather, and normal service – via these updates – will resume at the start of September.
