In Asia, India holds a crucial central bank meeting against a complex backdrop, while Friday’s U.S. non-farm payrolls report comes as traders grow increasingly convinced that the Federal Reserve may have to hike interest rates again.

1/AI-WATERING MOVES

The AI-driven bull run has gone from seemingly unstoppable to spectacularly volatile in a matter of weeks.

Investors are increasingly uneasy about profitability, competition and who’s paying ‌for it all. Unprecedented volatility ⁠in chipmakers ⁠and other AI-related stocks is the result. South Korea’s KOSPI, which jumped 18% on Friday after tumbling 40% over the previous six weeks, is the prime example.

Pressure is emerging elsewhere too. The cost of insuring against default by some AI hyperscalers has risen as debt levels climb, while earnings reports are triggering increasingly dramatic market reactions.

Live Events

More turbulence may lie ahead. Elon Musk’s SpaceX reports its first results since its blockbuster June IPO. Since then, its market value has slumped by an eye-watering $1 trillion.

2/WAR WORRIES

Markets will remain focused on the Middle East, where a U.S.-Iran ceasefire announced in mid-June now appears a distant memory and oil prices have climbed back towards $90 a barrel.
A drone strike on two U.S.-owned gas tankers in Egypt’s Mediterranean port of Damietta this week has opened a potential new front in the five-month conflict, raising concerns that traffic through the Suez ⁠Canal, one of ‌the world’s most important trade routes, could come under threat. In another first, Saudi Arabia publicly joined military strikes alongside U.S. forces this week, targeting Iran-aligned groups in eastern Iraq. The U.S. military also carried out what it described as a “heavy wave” of strikes against Iran after an attempted ballistic ⁠missile attack on U.S. forces in the region.

Diplomatic efforts continue, however. Saudi Arabia is seeking to lead a 14-country coalition to boost maritime defence in the Bab el-Mandeb strait, the Red Sea and the Gulf of Aden, all critical chokepoints for global energy supplies.

3/JOLT FROM JOBS?

Markets get a fresh read on the U.S. economy on Friday when closely watched non-farm payrolls data are released.

Economists polled by Reuters expect the July report to show payrolls increased by 91,000 jobs and the unemployment rate held at 4.3%. A stronger-than-expected reading could raise bets that the Fed may need to resume raising rates to contain persistently above-target inflation at its next meeting in September.

The central bank held rates steady on Wednesday, but three policymakers voted for a hike and Chair Kevin Warsh reiterated the Fed’s commitment to returning inflation to its 2% target.

4/ EUROPE’S BURNING ISSUES

Europe’s record-breaking heatwave looks set to ‌continue with fears mounting that wildfires that have devastated parts of Spain and France are spreading to Italy, Central Europe and Greece.

Markets should pay attention.

The economic costs are mounting, from healthcare spending and insurance claims to reconstruction bills and higher food prices, at a time when many heavily indebted governments are already grappling with the fallout of the Iran ⁠war. Adding to concerns, a ‘super’ El Nino event appears increasingly likely, raising the risk of further extreme weather globally.

In Britain, also facing wildfires and drought, major supermarket groups warn another food-price shock could be looming. In Germany, meanwhile, a contentious cabinet reshuffle has renewed pressure on Chancellor Friedrich Merz as the country also battles record temperatures.

DRUPEE

The Reserve Bank of India announces its latest policy decision on Wednesday, with most economists polled by Reuters expecting no change to the benchmark interest rate of 5.25%.

However, authorities will be attempting to prop up the rupee , one of Asia’s worst-performing currencies this year.

In June, the central bank unveiled measures designed to boost capital inflows and strengthen the balance of payments. The moves attracted more than $20 billion in their first month, but renewed strength in oil prices has since clouded the outlook.

For those thinking an interest rate increase might help, retail inflation has just breached the central bank’s target for the first time in over a year. Nevertheless, economists still expect the risks to growth to keep policymakers from acting, for now at least.