Please see the below article from Tatton Investment Management discussing the pause in market optimism, driven by oil price pressures, rising bond yields, hawkish central banks and concerns over whether AI investment can keep supporting equity market momentum, received this morning – 27/07/2026.
Hiatus in optimism
Markets had a rough week, as Brent crude oil pushed back above $100 per barrel and long-term government bond yields rose sharply. This week starts on a better note, with US and Iran ceasing their attacks at least for now. Brent spot is below $92, and bond and equity prices have recovered about half of their losses from last week.
Andy Burnham’s talk of fiscal flexibility unsettled the gilt market, but the new Prime Minister quickly projected a “fiscal discipline” message, and John Healey’s appointment as Chancellor calmed nerves slightly. The UK’s lower-than-expected 2.6% inflation figure helped too.
But gilts take their cue from global bond markets more than domestic politics, so were hurt by rising US and Japanese yields. Resilient US growth, rebounding employment, and enormous AI-driven spending (Alphabet posted a $5.9bn deficit last quarter) are pushing US money supply ahead of nominal GDP. Combined with higher energy prices, that’s a headache for the Federal Reserve, whose officials have turned surprisingly hawkish. Markets now price a 34% chance of a hike next week, up from 10%. As recently as April, a cut still looked more likely.
Oil’s spike came from Red Sea attacks on Saudi tankers, not the Strait of Hormuz. But the Houthis don’t have anything like Iran’s capabilities, and the US, UK, France and Saudi Arabia appeared ready to contain the threat. It will likely be resolved sooner than the US-Iran war, but the timing, just as the Fed turns hawkish, is unhelpful.
Big tech had a worse week than the broader market. Tesla and Alphabet shares fell sharply, even though Alphabet beat earnings forecasts. This was more than just referred pain from oil prices: investors are growing anxious about whether Silicon Valley’s vast AI spending will ever generate hard profits, especially after Chinese firm Moonshot released a competitive model for a fraction of the cost. With so many risks stacked up, questions about where AI’s productivity gains will actually show up – and for whom – are only getting harder to answer.
Oil rises but who wants it?
Brent crude broke back above $100 a barrel on Thursday after a series of escalations in the Middle East – particularly Houthi strikes in the Red Sea, through which many oil tankers have rerouted in recent months.
The strange part isn’t that oil prices spiked; it’s that prices stayed remarkably calm in previous weeks, despite the US-Iran ceasefire falling apart and the Strait of Hormuz closing again. That’s partly because oil traders expected one or both sides to back down, but also because of a sense that the previous Strait closure was not as bad for the world economy as feared.
A fifth of the world’s oil transited through the Strait before the war, but its closure hasn’t led to the doomsday scenarios predicted. That has been helped by strategic reserve releases, sanctions relief on Russian oil, and, above all, a sharp fall in demand.
China is central to that story. Its crude imports have fallen from over 12 million barrels a day before the war to under 8 million now, as Beijing draws down stockpiles and eases off its energy-intensive industrial base. Oddly, China hasn’t rushed to rebuild reserves even after Iran was cleared to sell to it again. Some of this looks structural: cheap electric vehicles were already denting Chinese petrol and diesel demand, a trend this price spike will likely accelerate.
So where does that leave us? The supply-demand balance is genuinely uncertain, and much depends on whether Beijing decides to restock. But we’d stress that this week’s rally, like the ones before it, is really about speculators piling back into energy markets on bets of undersupply, not a reflection of barrels actually going missing. It’s a risky bet – and, in the meantime, one that’s itself helping to destroy the demand it is betting against.
When momentum runs out
Chip stocks had a spectacular first half of 2026 but have sold off sharply in recent months, notwithstanding a small bounce for the Philadelphia Semiconductor index (Sox) last week. Most commentary has focused on how the AI investment boom is washing through a notoriously cyclical industry. We think there is another thread worth pulling on: what the episode says about the dynamics of momentum investing itself.
Momentum is one of the simplest investment factors: buy what is already winning, on the view that winners keep winning. Performance is typically measured on a 12-month rolling basis, but ignoring the most recent month to avoid short-term trend reversals. It somewhat contradicts the usual ‘buy low, sell high’ adage, but momentum has been the best-performing factor of the last decade, according to Bloomberg.
In 2026, momentum funds piled heavily into chips, amplifying the AI-fuelled rally. As chip stocks have sold off, so has momentum as a factor, with higher volatility prompting investors to trim their holdings.
The ’12-1’ measure of performance gives momentum strategies a structural blind spot. Ignoring the most recent month means momentum funds are slow to react to sharp turns. That tends to bite hardest after boom-or-bust periods, as in 2009 and 2020. That predictability is also a vulnerability: other investors can see the rebalancing coming and pre-empt it, buying new winners and selling them on to momentum funds a month later. Crowding compounds the effect, since momentum traders tend to look at the same data and rebalance at the same times, amplifying any sharp turn in markets.
Of course, betting against momentum investors requires deciphering meaningful trend reversals from short-term noise. That gamble has rarely paid off over the last decade. Whether chips and momentum both recover from here depends on one unresolved question: whether the AI theme itself is turning.
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Marcus Blenkinsop
27th July 2026