Friday's rally was bought on a misreading

The UK is in better shape than the commentary suggests. First-quarter GDP came in at 0.6%, services leading at 0.8%, and July's services PMI jumped to 51.7 from 49.4 — a five-month high and a return to expansion in the sector that carries the economy. The IMF is reported to have nudged its 2026 growth forecast up to 1.0% from 0.8%. Set against that, headline CPI at 2.6% in June — with core easing to around the same level — looks tolerable until you read the Bank's own August projection, which has inflation climbing to roughly 3.2% by the fourth quarter. A central bank forecasting a rise in inflation from here does not cut. The 6–3 hold on 30 July, with three members pushing for 4.0%, tells you the committee knows it.

The ECB is in a stranger position. It raised by 25bp in June because of Middle East energy pass-through, then held the deposit rate at 2.25% on 23 July, and does not meet again until 10 September. That is a five-week gap during which the Strait of Hormuz will either move toward reopening or back toward escalation, with no scheduled opportunity to respond. Frankfurt has effectively pre-committed to sitting still through the most consequential variable in the European inflation outlook.

In the US, the Fed held at 3.50%–3.75% on a 9–3 vote, three dissenters wanting a rise. June's disinflation was real — headline down to 3.5% from 4.2%, core to 2.6% from 2.9% — but it came almost entirely from energy prices falling after the April ceasefire, which makes it a borrowed improvement rather than an earned one. Wednesday's July CPI is the pivot. Consensus is 0.1% month-on-month after June's 0.4% decline; anything at 0.2% or above says the energy relief was a one-off and puts September back in play. Meanwhile the 10-year Treasury sits at 4.60%, well above the funds rate, because the OBBBA's projected $2.8–3.8trn addition to the deficit over the coming decade has to be funded by somebody.

The STOXX 600 rose 1.70% in local currency to a fourth consecutive record close. Beneath that, the dispersion was wide: Italy's FTSE MIB up 2.96%, the DAX up 2.69% to 26,319, the CAC 40 up 2.41% to 8,714.93, and the FTSE 100 up 0.30% to roughly 10,901. London's problem was Monday. When Trump called off the planned Iran strike, WTI fell about 5% to $80.34 and Brent to $83.77, and an index weighted as heavily toward BP and Shell as the FTSE 100 cannot rally on cheaper oil the way Frankfurt can. Friday's DAX gains were led by SAP at 4.30%, with Scout24 and Infineon behind it.

This is now the defining feature of European equity performance, and it cuts both ways. The FTSE 100's energy weighting is a drag while diplomacy is progressing and a hedge if it collapses — which is why the index has become, in practice, a geared bet on the Strait of Hormuz staying shut. The German index has the opposite exposure: Siemens raised its outlook on 6 August after a record third quarter, SAP is compounding cloud backlog at 26%, and Rheinmetall's order book keeps growing regardless of the oil price. Sterling has held firm on the Bank's hawkish posture, which helps FTSE 100 constituents earning at home and hurts the dollar earners that dominate the index by weight. The week's losers were instructive too: Zalando fell 16% on a growth downgrade blamed on weak sneaker demand, which is a small but real data point about the European consumer.

The headline weekly moves were tiny: SPY closed at 773.26, up 0.29%, QQQ at 723.03 up 0.40%, DIA up 0.17%, IWM up 0.37%. SPY's entire weekly range was just over half a percent. That flatness conceals a violent middle: Monday delivered a 1.48% S&P gain to 7,600.50 and a 2.1% Nasdaq surge on the Iran de-escalation, a Dow record, and then Friday's record close on a payrolls print that was, by any conventional reading, awful.

The internals are consistent with the rate story rather than the growth story. Nasdaq over Dow, and small caps outpacing the Dow as well, is what you get when the market decides the hiking risk has been removed — the Russell's constituents carry floating-rate debt and are the most direct beneficiaries of a rate ceiling. What you do not see is cyclical leadership, which is what a rally built on confidence in growth would produce. AppLovin's 19% single-day collapse on a 1.2% revenue miss, against 53% growth, is the honest read on how much perfection is embedded in the high-multiple end of this market.

Hormuz has been effectively closed since the February strikes on Iran, and the IEA calls it the largest supply disruption in history. It is a defensible description: the strait carried around 25% of seaborne crude and petroleum products and 19% of LNG in 2025. This week produced the most substantive movement yet. Iran and Oman agreed the geographical coordinates of a proposed safe shipping corridor, and Tehran immediately clarified that a completed framework would not mean reopening, and that US concessions come first. That pattern already has form — the two sides signed an MOU in June, and Iranian forces attacked vessels deemed noncompliant in July.

Lufthansa's results are the cleanest measurement of how this transmits into corporate earnings. Record revenue of €11.1bn, and adjusted EBIT down €490m to €383m, because fuel cost an extra €750m in a single quarter and the full-year bill is now guided at €8.7bn. The stock fell around 10%. The second-order point is that IAG, Ryanair, easyJet and Air France-KLM are buying the same kerosene into the second half, and Lufthansa's guidance range of €1.7–2.2bn — half a billion euros wide — tells you management has no confidence in forecasting its largest variable cost. Carsten Spohr added the detail that matters more for 2027: Gulf carriers have returned at near-full capacity and are redeploying it into transfer traffic, so European long-haul is absorbing a fuel shock and a competitive pricing shock at the same time.

The defence story fractured in an interesting way. Rheinmetall grew first-half sales 39% to €5.2bn, lifted second-quarter operating profit 115% to €562m, and expanded its backlog to roughly €80bn, most of it in fixed orders. It then cut full-year sales guidance by about €300m to €13.7–14.2bn because Germany cancelled the F126 frigate programme, and the shares dropped 15%. Nothing about European rearmament demand changed this week; what changed was the market's assumption that political commitment converts mechanically into revenue. BAE Systems and Leonardo are untouched by F126 specifically, and their broader spread of government programmes across multiple sovereign customers becomes more valuable if Berlin's procurement discipline is a preview rather than an exception. The other live geopolitical thread is the Houthi threat to Bab al-Mandeb, which is the route Saudi Arabia has been using to work around Hormuz — close the workaround and the diplomatic timeline stops mattering.

The energy trade is asymmetric and the market is only halfway there.

Brent at $83–84 sits well below April's WTI peak near $115 but comfortably above the post-ceasefire lows, which implies the market is partially discounting a reopening. If one arrives, the earnings BP, Shell and TotalEnergies just reported on elevated realisations erode fast, and the FTSE 100's composition turns from headwind to something worse. The mirror image is that BASF and LyondellBasell get input relief they have not had since February, and the airlines get a second-half guidance upgrade rather than the downgrade currently embedded. Anyone sitting long energy producers and short energy-intensive industrials is holding the same directional bet twice.

AI is being marked to earnings for the first time.

Airbnb's AI assistant now resolves nearly 45% of support issues without a human and cut support cost per booking by roughly 16% year-on-year — a measurable margin line, which is why full-year EBITDA margin guidance went to at least 35.5%. SAP put AI into more than 90% of its fifty largest deals and grew cloud backlog 26%. AppLovin, whose model is the product, missed by 1.2% because a model upgrade landed after quarter-end and lost a fifth of its value. Where AI is a cost lever the market pays; where AI is the revenue engine, the timing risk is now priced brutally. Booking Holdings and Expedia should show the same support-cost effect; Trade Desk carries the same model-cycle fragility.

The deficit is doing the tightening the Fed isn't.

The OBBBA adds roughly 0.9 percentage points to US GDP this year and $2.8–3.8trn to the deficit over a decade, and the 10-year at 4.60% is where that arithmetic is being settled. A term premium that stays elevated regardless of what the funds rate does hits anything financed with long-dated debt: UK housebuilders such as Persimmon and Taylor Wimpey, whose land banks are carried against a cost of capital that has not normalised, and regulated utilities like National Grid and United Utilities running large capital programmes on borrowed money.

China is softening quietly.

The Caixin manufacturing PMI eased to 50.9 in July from 51.7, a four-month low, with new orders and production both growing more slowly. Still expansion, but the direction matters for LVMH, Richemont and Hermès, whose Chinese demand recovery is the load-bearing assumption in every European luxury forecast, and for Glencore, Rio Tinto and Anglo American on the industrial side. Export orders returned to growth for the first time in three months, which complicates the picture rather than resolving it.