US equities extended the tech-led rally, with the S&P 500 setting another record and Micron reaching a $1tn valuation. The move rolled into Asia as SK Hynix crossed $1tn, supported by demand for AI-linked names and expectations of a swift end to the US/Iran conflict. In South Korea, Samsung and SK Hynix account for 40% of the Kospi, helping equities hold up even as the region absorbs an energy price spike.
European shares rose with risk appetite, while oil slipped 2% on the day; Brent fell back below $94 a barrel and is down 10% over the past week. Bonds firmed and 10-year yields fell across major economies, with the UK 10-year yield down 4bps on the day and 34bps since peaking at 5.17% on 18 May. That came despite Ofgem’s 13% rise in the household energy price cap from July—the highest in more than two years—adding £221 a year per household, alongside guidance that prices may stay elevated through winter. UK Gilts stabilised after an earlier sell-off; the FTSE 100 lagged as Shell and BP fell, while M&S and JD Sports outperformed, and US index futures pointed higher after Goldman Sachs lifted its year-end S&P 500 call to 8,000.
Tech Momentum and Tactical Plays
We see the current tech rally as a strong momentum play that is likely to continue in the near term. With the Nasdaq 100 already up over 12% year-to-date and volatility, measured by the VIX index, hovering near multi-year lows around 12, conditions are favourable for further gains. We are advising traders to consider buying call options on tech-focused ETFs or individual names like Nvidia to capture this upside.
The market’s optimism is heavily tied to falling oil prices, which are down on hopes of a US-Iran deal. We believe this makes the energy market vulnerable to a sharp reversal if diplomatic talks falter. A similar situation in early 2022 saw Brent crude prices surge by over 30% in just two weeks, so we feel it is prudent to buy cheap, out-of-the-money call options on oil futures as a hedge.
Markets Correlations and Relative Value Trades
This sharp drop in oil is directly impacting the UK bond market, pushing 10-year Gilt yields down. We have seen yields fall more than 30 basis points in the last ten days, a significant move for government debt. Traders should watch this correlation closely, using Gilt futures to speculate on further yield compression if oil prices continue to weaken.
There is a stark divergence between the booming, tech-led US indices and the lagging FTSE 100. The FTSE 100, heavy with energy and financial stocks, is up a mere 7% over the past year, while the tech-centric S&P 500 has surged by over 25%. This growing gap suggests a pairs trade, going long the FTSE 100 while shorting the S&P 500 or Nasdaq 100, could serve as an effective hedge against a sudden rotation out of tech.
