Semiconductors Lead Tech Lower

MACRO FRAME

The US and Iran have agreed to a framework deal to end their conflict, reopen the Strait of Hormuz, and move toward broader negotiations—though major issues (Lebanon conflict, nuclear program) are not fully resolved yet.

STOCK INDEX FUTURES

Equity index futures were mostly lower overnight with the Nasdaq leading losses. The renewed sell-off is being driven by concerns over soaring memory-chip costs and concerns that the AI-trade is near exhaustion. Apple’s announcement of price hikes for MacBooks and iPads underscored margin pressure from memory shortages, feeding worries about earnings sensitivity in big tech. Memory names (Micron, Sandisk, etc.) have been key performance drivers in 2026, but there is now growing fear that if a major AI hyperscaler signals reduced capex, it could trigger a new “trend” of curtailing AI spending and repricing across the theme.

Recent price action around major chip names has underscored how unstable leadership has become, with market cap swinging by hundreds of billions of dollars in hours. This kind of volatility is historically associated with market tops and bottoms. At the same time, parts of the semiconductor complex are now deeply embedded in AI narratives, amplifying flows and making the broader index more sensitive to a narrow slice of earnings and sentiment. The technical market structure is indicating historically overbought levels, and fundamentals that, while supportive and real, raise questions as to whether or not near-term earnings and future demand can justify current price levels. The backdrop of a higher-for-longer rate environment and a growing debt overhang in enterprise software have shifted the risk/reward profile for investors regarding concentration in the momentum-driven tech trade supports a rotation away from tech in recent sessions. The fundamental question for the indexes, mainly the tech-related momentum trade, is whether or not capex requirements outrun earnings estimates and demand as investors are try to price outcomes they cannot yet observe.

Defensive positioning could offer protection against these dynamics, especially as the Fed’s higher-for-longer stance weighs on near-term sentiment. The valuation discount in defensives relative to their own history and growth is historically wide, providing a margin of safety that momentum tech no longer offers.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure.

CURRENCIES

US DOLLAR: The USD index slipped 0.20% to 101.23, alongside a drop in oil prices overnight and profit-taking in the dollar. Thursday’s inflation data met expectations and easing oil prices, down more than 3%, have moderated rate-hike bets, albeit modestly, alleviating some near-term strength on the dollar, though the bias would appear higher. The two‑year Treasury yield has gained substantially on German and UK equivalents, underscoring the widening US interest rate advantage. The hawkish shift in Fed policy expectations has been supportive as investors are leaning into the idea that the Fed will back up its talk on inflation. Meanwhile, another source of demand has been speculative purchasing of dollars, as seen by the strongest net long in dollar positions in over 16 months, according to the CFTC. Traders are placing around a 64% chance of a hike in September and see 32 bps of tightening by year-end. The dollar is has been driven more by rates and macro factors than geopolitical developments over the last couple of sessions, as falling oil prices and direct US-Iran talks would otherwise see a flight away from dollar safety. Still, ongoing geopolitical uncertainty and Iran’s willingness to close the Strait are limiting the downside to the dollar.

Watch point: Thursday’s inflation data reinforced expectations that Fed policy will move higher before year-end.

EURO: The euro is 0.39% stronger at $1.1413, finding strength amid month-end profit-taking in the dollar. European money markets are pricing just 28 bps of further tightening by year-end, a drawdown from pricing earlier in the month and partially explaining the recent weakness in the currency. European Central Bank President Christine Lagarge recently downplayed the effects of second-round inflation worries. Traders are fully priced for a hike in December, though remain favorable to a move upwards at the October meeting.

The euro was previously benefiting from risk-on flows away from the dollar, though renewed expectations of Fed tightening has marked a sharp reversal from earlier dynamics. The dollar has advanced against foreign currencies, even on days where oil prices drop and risk sentiment is strong. This new dynamic is offering firm pressure against the euro as short-term rate differentials remain a strong basis for the trade in favor of the dollar. On the data front, PMI surveys showed that, input  and output cost inflation eased to its slowest pace since just before the outbreak of war in the Middle East. Notably, most responses were collected before the US-Iran ceasefire MOU was signed on June 17, meaning the data doesn’t fully capture any demand or sentiment uplift from that development.

Watch point: A peace deal, restoration of oil flows through the Strait, and easing services inflation are likely to push back tightening expectations, though policy expectations are still biased upwards.

BRITISH POUND: Sterling is 0.15% stronger at $1.3212. No new data out of the UK overnight has lent focus to politics and US-Iran negotiations. Meanwhile, profit-taking in the greenback is favoring the sterling ahead of the weekend.  Andy Burnham looks set to become the new Prime Minister lending focus to who the pick to become finance minister will be. Current finance minister Rachel Reeves is likely to leave her role if Burnham becomes PM, media outlets reported on Tuesday and Wednesday, with pro-business former health secretary Wes Streeting among the names tipped for the job. Broadly, the leadership succession is likely to have little effect on the pound as an orderly transfer of power looks set and as markets have priced in Starmer’s exit for some time. Still, markets remain highly sensitive to fiscal credibility, particularly given the UK’s elevated borrowing costs and structurally weak growth backdrop. For now, the rate backdrop is likely to be the significant driver in price action for the pound. Bank of England Governor Andrew Bailey said that it remains too early to call off the inflation risk during the BoE’s most recent meeting. Looking ahead, the bar for further tightening appears high and contingent on renewed energy or expectations, while a sustained easing in inflation and confirmation of a softer labor market would keep the debate focused on how long policy must stay restrictive rather than any tightening. Money markets are seeing 22 bps of tightening by year-end and a 15% chance of a hike at the July meeting.

JAPANESE YEN: The yen was little changed overnight at 161.65 yen per dollar. Traders in the yen appear weary of adding to bearish positions against the yen. The Japanese government have likely not intervened in the currency market yet because moves in the yen have been slower and less volatile than before previous interventions, like in April. A break above the 161.96 level would take it to its weakest level since 1986. Volatility in the yen should be expected from traders as the currency faces intervention risks from the government.  Fed pricing toward tighter policy, persistent rate differentials against Japan, and the lack of effectiveness of prior interventions without a sound Bank of Japan backdrop all continue to pressure the currency. Despite Japan’s Ministry of Finance signaling willingness to intervene, market skepticism of that effectiveness, largely resulting in a intervention vs. hawkish Fed and strong US data trade.

The BoJ’s recent rate hike offered the yen no support despite rates being at their highest level in 31 years. With policy rates in Japan still deeply negative in real terms, incremental moves are unlikely to deliver a durable yen rebound. Instead, markets are increasingly focused on Japan’s heavy debt load, while political support for a weaker yen, equity benefits from FX depreciation, and reluctance to tackle the debt overhang suggest any sustained yen strength will require more than rate hikes alone. The market sees a total of 20 bps of tightening by year-end. The yen has now sustained a break above the 160 support level.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.6905, holding near 11-week lows as dollar strength weighs on the currency. Australian data showed employment rose by 40,300 in May, though that was balanced by a sharp downward revision for April to a 40,600 drop. The unemployment rate eased back a tick to 4.4%. Headline Australian CPI fell 0.7% MoM in May (bigger drop than expected), pulling annual inflation down to 4.0%, but trimmed‑mean core rose 0.4% MoM and accelerated to 3.6% YoY, keeping underlying price pressures elevated. Recent pressure against the Aussie has come from stronger Fed rate hike pricing, which has led to a compression in interest rate differentials. Still, progress in US-Iran talks are largely supportive of the risk-sensitive currency. Markets are pricing around a 50% probability of another hike from the Reserve Bank of Australia this year. The Bias for the RBA remains toward further tightening as the bank is seen as having a lower threshold to hike again.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path.

TREASURY FUTURES

Yields inched lower at the front end and higher at the long end. Thursday’s PCE data reinforced expectations of Fed tightening and did little to change overall market odds on policy timing. While oil prices have dropped in recent sessions, yields have remained higher in the face of the hawkish shift in Fed expectations. Warsh characterized the inflation overshoot as supply-driven rather than demand-driven, leaving room for yields to eventually ease if oil prices continue to hold a substantial drop, though Thursday’s data and recent price action have suggested that the bond market is looking past any near-term drop in oil prices on the expectation that higher prices have already made their way into the economy.

Watch point: The Warsh-led Fed held on rates and signaled broad institutional change. Mainly, markets should expect fewer words from the Fed and less policy signaling, raising near-term rate volatility with incoming data.

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