Please see the below article from Tatton Investment Management discussing cooling AI enthusiasm, softer US inflation, limited UK fiscal room, and rising government involvement in AI, received this morning – 20/07/2026
AI froth coming off
Chip stocks have swung from euphoria to despondency without any real bad news. Other than that, markets are in a lull, trading up and down over the same themes they have for months: war, interest rates, and the durability of the AI boom. Investors still don’t know what to make of them.
Oil prices went higher last week but not dramatically, despite the Strait of Hormuz closing again. Investors may be thinking that one or both sides will TACO (Trump or Tehran Always Chickens Out). The incentives would suggest that’s right: Trump has the midterms and Tehran needs the cash. But the war so far has been more like a game of chicken than a rational calculation. Things could still get worse, but at least games of chicken are usually short.
Softer US inflation data helped calm nerves too. Energy reprieve was expected to help lower June’s figures, but even core inflation eased, all but ruling out a Fed rate rise this month. Bond yields fell and equities rallied in response. The good mood faded somewhat once investors remembered the data predates the latest oil price bump, however.
The real story is in chips. TSMC and SK Hynix both sold off hard despite strong earnings, as doubts crept back in over how sustainable AI-driven growth really is. We’d call that a healthy sign rather than a warning sign: bubbles are built on exuberance, and it’s hard to argue investors are exuberant while valuations are falling.
Banks, meanwhile, are having a moment, with strong second-quarter profits on the back of a busy quarter for trading and dealmaking – prompting some to call them AI stocks by proxy. If that’s true, we suspect their turn in the spotlight won’t last: the AI theme has a habit of moving on just as quickly as it arrives.
Markets’ guardrails for Burnham
Reports this week suggested Shabana Mahmood could become Chancellor under Andy Burnham, and gilt yields duly fell. Some took this as gilt trader relief that the supposedly borrow-happy Ed Miliband won’t get the job, but as usual we would caution against political interpretations.
Yields fell mainly because US treasury yields fell first, after a succession of softer-than-expected US inflation data ruled out a July rate hike from the Federal Reserve. Gilts tend to follow US bonds especially closely, thanks to the UK’s heavier weighting towards long-dated and inflation-linked issuance.
But if gilt markets were worried about Miliband, why didn’t they react more to Mahmood reportedly getting the Treasury instead? We suspect that gilt traders were never as worried about internal Labour politics as the media narrative suggests.
Every recent UK government, Burnham’s included, has precious little room to loosen fiscal policy: any attempt at bigger gilt issuance would likely just push yields up enough to cancel out the extra borrowing. That reality was laid bare by Liz Truss’s 2022 “mini budget” crisis, which exposed gilts’ structural imbalance and put the UK at the mercy of foreign investors. It is why Rachel Reeves has focused on lowering interest costs rather than opening the spending taps – advice she all but repeated to her successor in her final Mansion House speech.
Some call the UK’s persistently higher yields a “moron premium”. We’d rather call it structural: a large stock of inflation-linked gilts means UK yields amplify global inflation swings, rising faster than most when sentiment turns – a “high beta”, in bond-trader speak. That’s why this week’s Strait of Hormuz tensions were awkwardly timed for the incoming government, even if the softer US inflation report balanced things out. Either way, we don’t expect Burnham’s government to shift the balance of UK borrowing by much.
National Artificial Intelligence
Governments want more control over AI development, but interventions – particularly Washington’s – have been erratic so far. The Trump administration ordered Anthropic to block non-US citizens from accessing its powerful Fable 5 model last month on national security ground. Anthropic pulled its newly released model entirely, before the White House finally cleared it. OpenAI was told to stagger ChatGPT 5.6’s release, giving a government-approved list early access first.
Some read Anthropic’s treatment as punishment for refusing to let Claude be used in weapons and surveillance, while OpenAI’s offer of a 5% stake to Washington ahead of its IPO looks like a bid for favourable treatment.
Security concerns are shared by policymakers and AI firms alike: Google DeepMind’s chief this week called for the same kind of US standards body Washington is reportedly building, and the ECB has told significant European institutions to plan for AI security risks.
The trickier question is over potential public ownership. If AI displaces workers while enriching shareholders, the public has some claim to the proceeds – but a US company returning profits earned in Europe to American citizens would not go down well with Europeans, and could invite more international restrictions.
Is government intervention a threat to AI stocks? Recent selling pressures might suggest so, but there’s still little sign that investors are overly worried. Over the long-term, though, government action could hurt the key things holding up AI companies’ high valuations: rapid technological development and profits.
A consistent regulatory framework wouldn’t be seen as a problem (AI leaders themselves are calling for it) but the chaotic approval or disapproval of models by Washington creates uncertainty. Even (part) public ownership need not be a problem for the AI companies; the government will take a slice whether through tax or earnings. The bigger problem is firms buying patronage with thinly-veiled share offers.
We will have to watch the government-AI overlap closely.
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Marcus Blenkinsop
20th July 2026