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Issue 30 | Aug 2026 Your Monthly Guide on Global and Local markets from our Business Head’s Desk.

The Three Forces Driving Markets

Oil, AI and trade policy reshaped investor sentiment in July. Here's how these global developments are influencing markets and what they mean for investors.

Dear Clients and Stakeholders,

July was a month which had multiple stories dominating the equity market narrative. The ceasefire between US and Iran which was agreed in June did not hold, with progress giving way to renewed fighting around mid-July after Washington signaled that the truce was no longer in effect. Brent crude gained more than 20% over the month, briefly touching $100 a barrel reigniting inflation concerns resulting in treasury yield rising globally. However, by early August things have seemingly calmed again, with talks resuming and a proposal on the table to reopen the Strait of Hormuz transit and Brent crude trading around the $80 mark, though the earlier negotiations and subsequent flare ups continues to raise doubts on the durability of any deal.

AI trades which had caught the fancy of investors got a sobering reality check in July after Moonshot AI, a Chinese lab, released Kimi K3, a 2.8 trillion parameter model, matching several leading models in performance but at a fraction of the compute cost. While guidance from the large technology companies reiterated AI driven capex plans, concerns over pricing power and moat dampened optimism. AI and chip related equities witnessed a broad sell off during the month resulting in South Korean and Japanese indices registering monthly declines of -22.19% and -8.14% respectively, while in the US the tech-heavy Nasdaq shed -3.2%. India has been a relative beneficiary of this, with foreign investors who were net sellers for four straight months, turning net buyers of Indian equities in July, as global funds rotated out of crowded tech space. These flows were also supported by healthy earnings by corporate India which posted more hits than misses.

Further, tariffs which had dominated much of the headlines ever since President Trump assumed office was once again in the news following the introduction of fresh tariffs under Section 301 of Trade Act,1974 citing forced labour to replace the existing tariffs which were struck down by the US Supreme Court. India’s rate came in lower than feared and carved out some sensitive categories, as both countries continue to engage over a bilateral deal. Separately, the US administration announced a phased tariff framework for generic pharmaceuticals. Under the proposal, imports would attract 0% tariff until August 1 2028, followed by a 100% tariff for one year and a subsequent increase to 200%. While this is a significant concern for India, one of the largest suppliers of generic medicines consumed in the US, there remains scope for negotiations before the measures are fully implemented.

Taken together, these developments point to a market that remains constructive, albeit with an element of caution. July was marked by heightened volatility, and given the fragility of the situation in the Middle East, such volatility could persist in the months ahead. Oil prices and bond yields continue to respond to geopolitical developments, AI valuations are being reassessed in what has been the world's most crowded trade, and tariffs keep resurfacing in new forms. Each of these factors is capable of inducing market volatility. Even so, opportunities continue to emerge for investors willing to look beyond the noise and focus on business fundamentals. As we head into August, we reiterate our focus on identifying quality businesses available at reasonable valuations, anchored in fundamentals.

United States

Slowdown in economic growth amid Fed caution

The US economy lost momentum in the second quarter amid heightened geopolitical uncertainty. Advance estimates showed GDP expanding at 1.5% in Q2CY26, moderating from 2.1% in Q1 as a slowdown in business investment coupled with a surge in imports weighed on economic growth. Inflationary pressures showed signs of easing during the month with headline inflation moderating to 3.5% in June, the first such decline in five months, as energy prices softened following the stabilization of oil markets. Meanwhile producer prices also recorded their first monthly decline (-0.3% MoM) since August 2025, primarily due to a sharp fall in gasoline prices, suggesting a cooling inflationary environment. On the labour market front, the number of job opening declined by 178k to 7.36 million, well below market expectations of 7.40 million job opening. While labour market conditions remain relatively healthy, the decline in openings suggests moderating hiring momentum.

Reflecting these developments, the Federal Reserve kept the federal funds rate unchanged at 3.50%-3.75% for a fourth consecutive meeting while adopting a more cautious outlook under new Fed Chair Kevin Warsh. Policymakers revised their inflation projections significantly higher while modestly lowering their 2026 growth outlook, acknowledging that supply-side shocks continue to complicate the growth outlook.

Reflecting these developments, the US Fed maintained the federal funds rate unchanged at 3.50%-3.75% for a fifth consecutive meeting. While policymakers acknowledged progress on inflation, they reiterated that price pressures remain above the central bank's 2% target and emphasized their commitment to restoring price stability before considering policy easing.

Consumer demand, meanwhile, remained resilient. Retail sales rising 0.2% in June extending gain from the previous month and supported by continued spending across automobiles, online retail, electronics and leisure. Industrial production also increased modestly by 0.1%, with mining and utilities offsetting weakness in manufacturing activity.

On the trade front, the US trade deficit narrowed to $73.3 billion in June. Imports declined (-1.8%) driven by lower purchases of capital goods and consumer goods, particularly computers and pharmaceuticals. Exports, meanwhile, also witnessed a decline (-0.9%) amid weaker shipments of industrial supplies and capital goods.

Overall, the US economy continues to exhibit resilient consumer demand while inflation has shown signs of easing, although price pressures remain above the Federal Reserve's target, warranting a cautious policy stance. At the same time, softer labour market indicators, weaker investment momentum, and slowing exports suggest that growth risks are gradually building.

Euro Area and UK

Growth improves amid moderating inflation

Economic conditions across the Euro Area improved during Q2CY26 despite continued geopolitical uncertainty. Preliminary estimates showed GDP growth accelerating to 1.0% YoY, supported by resilient government spending, AI-related investment and stronger domestic demand. Inflation moderated further to 2.8% in June, its lowest reading since February, as energy and core inflation both eased. Producer prices, meanwhile, nudged up modestly by 0.2% MoM. Labour market conditions remained resilient with unemployment holding steady for the fourth consecutive month at 6.3% in June.

Retail sales rebounded modestly at 0.2% MoM in May following the previous month’s contraction while industrial production declined slightly at 0.2% MoM, reflecting weaker output across durable consumer and intermediate goods industries. Meanwhile, the Euro Area recorded its largest monthly trade deficit in more than two years at €7.8 billion in May as imports (+10% YoY) significantly outpaced export growth (+0.1% YoY). Against this backdrop, The ECB maintained policy rates unchanged at 2.4% following a 25 bps increase in June, adopting a more cautious “wait-and-see” approach as easing inflation and softer economic indicators reduced the urgency for additional tightening.

In the United Kingdom, economic conditions remained broadly stable. The Bank of England maintained the Bank Rate at 3.75%, balancing easing inflation against ongoing risks from higher energy prices. Consumer inflation slowed further to 2.6%, its lowest level since March 2025, supported by moderating transport, clothing and household goods inflation. Consumer spending remained resilient with retail sales rising 1.0% MoM in June, benefiting from favourable weather conditions and the World Cup. Industrial production, however, contracted by 0.5% MoM, largely reflecting weakness in mining and energy production. Labour market conditions also remained healthy with unemployment unchanged at 4.9%. On the trade front, UK’s trade deficit narrowed substantially to £1.04 billion in May, on the back of stronger exports (+2.8% YoY) and lower imports (-4.3% YoY).

Overall, Europe continues to present a stable macroeconomic backdrop. Moderating inflation and resilient labour markets have supported domestic demand, although weaker industrial activity and elevated geopolitical uncertainty continue to pose risks to the region’s economic outlook.

Asia

Diverging Domestic Demand Continues to Shape Regional Performance

Japan’s economic conditions remained broadly resilient, although signs of moderation in domestic demand emerged. Consumer inflation accelerated to 1.7% in June, while producer prices rose 7.1%, the fastest pace since March 2023, driven by higher energy and commodity costs. Despite this, the Bank of Japan kept its policy rate unchanged at 1.0%, citing broadly balanced risks to economic activity while monitoring inflation developments. Labour market conditions remained tight, with unemployment steady at 2.5%, though declines in employment and labour force participation suggested some underlying softening.

Meanwhile, retail sales growth slowed sharply to 0.5% YoY in June, indicating increasingly cautious household spending amid persistent price pressures. On the trade front, Japan’s trade balance swung to deficit of JPY 406.9 billion in June, as a surge in imports (+25.4% YoY), particularly energy-related purchases, outpaced strong export growth (+19.3% YoY), highlighting continued pressures on the external sector despite resilient global demand.

In China, annual inflation eased to 1.0% in June from 1.2% in April and May, driven by slower non-food inflation as transport costs moderated following cuts in domestic fuel prices. Core inflation also softened to 1.0%, highlighting subdued domestic demand. Against this backdrop, the People’s Bank of China (PBOC) kept the 1-year and 5-year Loan Prime Rates unchanged at record lows of 3.0% and 3.5%, respectively, in July, marking the 14th straight month of unchanged rates.

Overall, Asia continues to exhibit divergent economic trends. China remains supported by accommodative policy despite subdued domestic demand, while Japan continues to benefit from resilient labour market conditions even as inflationary pressures and softer consumer spending point to a gradual moderation in domestic demand.

India

Strong Industrial Momentum Offsets External Headwinds

India’s economy continued to demonstrate resilience in June despite rising imported inflation and a challenging global environment. Industrial production expanded by a stronger-than-expected 7.3% YoY, marking its fastest pace in nearly two years, supported by robust manufacturing activity alongside continued growth in electricity generation and a recovery in mining output. Infrastructure activity also strengthened significantly, with core sector output accelerating to 5% YoY, its fastest pace since January.

Inflationary pressures, however, intensified during the month. Consumer inflation accelerated to 4.38% in June, its highest level since December 2024, crossing the Reserve Bank of India’s 4% target for the first time in 17 months, though remaining comfortably within its 2%-6% tolerance band. Meanwhile, wholesale inflation also remained elevated at 9.87%, the highest since September 2022, reflecting sharp increases in fuel, crude oil and manufacturing input costs.

On the trade front, India’s merchandise trade deficit widened to a record $30.43 billion in June as imports surged 31% YoY, driven primarily by higher crude oil prices amid disruptions in the Middle East and elevated energy import costs. Despite healthy exports growth (+15.5% YoY), exports failed to offset higher imports. Meanwhile, labour market conditions remained broadly stable, with the unemployment rate unchanged at 5.5%, although urban unemployment edged higher during the month.

Reflecting the evolving macroeconomic backdrop, RBI maintained the repo rate at 5.25% while retaining its neutral policy stance. The central bank acknowledged the near-term inflationary risks arising from global developments but remained constructive on the domestic growth outlook, revising its FY27 GDP growth forecast to 6.7% while projecting inflation to average 5% over the fiscal year.

Conclusion

The global economy exhibits an increasingly complex macroeconomic environment. While inflation has generally moderated across major economies, geopolitical developments, evolving trade policies continue to reshape economic growth prospects. Central banks have consequently adopted a more measured approach, balancing inflation risks against signs of moderating economic growth.

Although near-term volatility is likely to persist, the underlying macroeconomic backdrop remains supportive in many regions. India’s domestic growth continues to be underpinned by strong industrial activity and infrastructure spending, the US economy remains supported by resilient consumer demand despite signs of slowing momentum, Europe continues to benefit from easing inflation and stable labour markets, while Asia presents a mixed picture as Japan and China navigate differing domestic challenges. Going forward, geopolitical developments, global trade negotiations and the evolution of inflation will remain key determinants of monetary policy and market direction.

At Chola Securities, we remain steadfast in our commitment to helping you navigate these complexities with clarity and foresight. As always, we aim to align your investments with evolving opportunities while ensuring resilience against emerging headwinds.

We sincerely thank you, our valued clients and investors for your continued confidence and partnership. Together, we look forward to embracing the challenges and opportunities of the months ahead, ensuring sustained growth and success.

Regards,

N Senthilkumarh
President, Chola Securities