Financial markets had a bumpy July, driven more by nerves around AI and oil prices than by any real change in the economy. AI-related tech stocks sold off sharply, with South Korea's main index falling 23% and the US semiconductor index dropping over 20% - its worst month since 2008. Yet broader markets held up, helped by strength in the UK and Europe. Closer to home, the Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate - OCR - to 2.50%, its first increase in three years, while the NZX 50 edged up 0.6%.

A volatile month, but not a crazy one

July was a reminder that markets can move sharply without the fundamentals changing underneath. Volatility centred on AI-related technology stocks and semiconductors (the companies that make the computer chips powering AI), which fell hard before partially recovering. Much of that movement was driven by investor positioning and technical factors rather than any shift in company fundamentals. Away from the tech wobble, broader share markets were relatively resilient, supported by both cyclical and defensive sectors.

Geopolitics added to the mix. Renewed military strikes between the US and Iran pushed Brent crude oil close to US$100 a barrel, reviving inflation concerns and pushing bond yields higher. Even so, investors appeared reasonably confident that tensions would not escalate into a broader conflict.

Central banks: cautious, and mostly on hold

Most major central banks left interest rates unchanged in July, but kept a cautious tone given persistent inflation risks, particularly from higher energy costs. The standout locally was the RBNZ, which raised NZ's OCR by 0.25% to 2.50%, its first increase in three years. The Bank of Korea also lifted rates by 0.25% to 2.75%.

Elsewhere, the European Central Bank, the US Federal Reserve (the Fed), the Bank of England and the Bank of Japan all held rates steady, while signalling they could tighten further if inflation stays elevated. The People's Bank of China kept its lending rates unchanged. The common thread was patience: policymakers are weighing still-solid activity against inflation that remains a little too high for comfort.

United States: softer data, a sharp tech sell-off

US economic data cooled during the month. Payroll growth (which represents employment) disappointed, inflation eased more than expected, and economic growth for the second quarter, measured by GDP (gross domestic product) slowed to 1.5%. Even so, consumer spending and business investment held up reasonably well.

The bigger story was in shares, where the rotation away from AI-related stocks continued. The semiconductor sector had its largest monthly fall since 2008, with the PHLX Semiconductor Index dropping more than 20%. Despite that, the broader market was surprisingly steady: the S&P 500 slipped just 0.1%, while the tech-heavy NASDAQ fell 3.2%. In other words, the pain was concentrated in one corner of the market rather than spread across it. Globally, the MSCI World Index hedged back to NZ dollars edged up 0.1%, while the unhedged version was down 2.9% in NZ dollar terms, a reminder that currency movements can make a real difference to returns.

Europe and the United Kingdom: value comes back into favour

Europe was among the brightest spots in July. Stronger economic activity, solid company earnings and a rotation into value-oriented sectors supported market growth. The UK stood out as one of the strongest markets globally, helped by its larger weighting towards energy and financial companies. The MSCI UK Index gained 3.9%, while the FTSE All-Share reached a record high, up 3.6%. Eurozone shares also went up, supported by company earnings and the same move back towards value.

Asia and emerging markets: tech-heavy markets bear the brunt

Asian markets bore the brunt of the semiconductor sell-off, particularly South Korea and Taiwan. South Korea's KOSPI index fell 23% for the month, its worst monthly decline since the global financial crisis in 2008. That single move weighed heavily on the wider region.

Not everywhere struggled. Australia, China, Indonesia and the Philippines showed relative strength, and India delivered a modest positive return despite higher oil prices. Even so, the broad emerging markets index fell 6.3% in NZ dollar terms, dragged down by heavy exposure to Asian technology.

Australia and NZ: steady closer to home

Australia had a good month, with the ASX 200 rising 2.3%, supported by strong employment data and gains in energy and financial stocks. Our own market was quieter but positive, with the NZX 50 Gross Index up 0.6%. The NZX 50 actually reached all-time highs during the month before drifting slightly back. There were also some early, encouraging signs that the domestic economy is beginning to improve, which sits alongside the RBNZ's decision to start lifting rates again.

Interest rates and bonds: yields rise, returns dip

It was a tougher month for bonds. Government bond yields rose across major developed markets, reflecting higher inflation expectations, elevated oil prices and growing government funding needs. Just a reminder, in simplistic terms, bond prices tend to fall when yields rise, and vice versa. The US 10-year Treasury yield climbed to 4.75%, while the 30-year yield reached 5.28%, its highest level since 2007. Yields also rose in the UK, Germany and Japan.

NZ followed the global trend. The local government bond index was down around 1.3% for the month, despite those early signs of a domestic recovery. Global bond values hedged back to NZ dollars fell about 1.25%.

What investors are watching next

A few things will likely shape the months ahead:

• The big AI question - whether the sell-off in semiconductors marks a genuine rethink of AI valuations, or simply a pause in a longer-running theme
• Oil and inflation - whether Middle East tensions keep oil prices elevated, and what that means for inflation and bond yields
• Central bank direction - especially at home, where the RBNZ has now started raising rates again after three years on hold
• The local recovery - whether those early signs of improvement in the New Zealand economy continue to build

TL;DR - July 2026 summary

• Markets were volatile, driven by an AI and semiconductor sell-off rather than by any real change in the economy
• The US semiconductor index fell more than 20%, its worst month since 2008, but the S&P 500 dipped just 0.1% and the NASDAQ fell 3.2%
• The RBNZ raised the OCR by 0.25% to 2.50%, its first increase in three years; the Bank of Korea also lifted rates, while most other central banks held
• The UK was one of the strongest markets globally, with the MSCI UK up 3.9% and the FTSE All-Share at a record high
• South Korea's KOSPI fell 23%, its worst month since the global financial crisis, and emerging markets were down 6.3% in NZ dollar terms
• The ASX 200 rose 2.3% and the NZX 50 Gross Index gained 0.6%, while bond returns dipped as yields rose (NZ government bonds down about 1.3%)

July was a useful reminder that a sharp move in one part of the market does not always mean trouble everywhere. While AI and semiconductor stocks fell hard, Europe, the UK and value-oriented markets held up well and the pain stayed largely contained. That's exactly why diversification across geographies, sectors and asset classes matters: a well-spread portfolio smooths out the peaks and troughs over time, so no single month, or single theme, carries the whole load.

The information provided and opinions expressed in this article are intended for general guidance only and not personalised to you. These materials do not take into account your particular financial situation or goals and are not financial advice or a recommendation. This article is not intended to convey any guarantees as to the future performance of any of the investment products, asset classes, or capital markets mentioned. Past performance is no guarantee of future performance. Information is current at the time of posting, and subject to change without notice. Simplicity NZ Ltd is the issuer of the Simplicity KiwiSaver Scheme and Investment Funds. For Product Disclosure Statements please visit our website simplicity.kiwi.