Weekly Newsletter July 6th to July 10th
RECAPPING LAST WEEK
Concerns over the durability of the artificial intelligence rally and renewed geopolitical tensions in the Middle East dominated global equity markets this week. Selloffs in memory chip companies early in the week were tied to Samsung’s preliminary earnings report, in spite of the fact that the company forecasted a nearly 20-fold year-over-year increase in profits. Shares sold off 10% over worries that hyperscalers’ demand could fall. Late in the week, SK Hynix—another South Korean memory chip maker—countered this narrative, raising $26.5B in a 7x oversubscribed offering that marked the largest ever offering of shares by a foreign company in the U.S. This provided support to the thesis that investors still have an appetite to fund the enormous capital needs of the AI infrastructure buildout. Renewed hostilities in the Middle East prompted by the IRGC firing upon three ships transiting the Strait of Hormuz led President Trump to declare the cease fire over. The next two nights saw intense attacks against Iranian coastal installations intended to degrade their ability to further disrupt shipping. Before these events, crude oil prices had eased all the way back to pre-war levels. They spiked on the news but eased somewhat after Trump claimed that Iran was still interested in making a deal. Understandably, this all led to a great degree of sector churn as defensive names and energy benefited early in the week before risk appetites resumed later. S&P 500 sector wise, Energy, Technology, and Communication Services were the strongest performers, while Materials, Healthcare, and Consumer Staples were the weakest. The rise in energy prices and release of the FOMC minutes, which expressed concern that a combination of energy prices and massive AI buildout expenditures could keep inflation elevated, affected Treasuries as well. Yields on the long end of the curve pushed through 4.5% on the 10 year and back above 5% for the 30 year. In other macro sectors, precious metals were flat, the dollar eased slightly and the late week resumption of risk appetites firmed crypto a bit.
THE WEEK AHEAD
Markets will turn their attention to the 2nd quarter earnings season kickoff, with reports from the major money center and investment banks. Investors will focus not only on the fundamental line items like interest margins and loan growth, but also on commentary concerning the health of the consumer amidst the broader economic backdrop. Midweek sees earnings announcements from AI/Tech supply chain bellwethers Taiwan Semiconductor and ASML, as well as Netflix’s announcement, which offers insights at the intersection of tech and consumer discretionary. The release of CPI on Tuesday will offer fresh inflation data, but the big news is expected to come from Fed Chair Warsh’s first semi-annual Humphrey-Hawkins testimony to the House Banking Committee, where he’ll deliver the Fed’s Monetary Policy Report and field questions. Wednesday offers additional inflation data with the release of PPI. The other notable events on the economic calendar are retail sales and pending home sales data on Thursday, with more housing data coming on Friday with the new home sales reading. The renewed uncertainty in the Mideast will surely keep energy markets on edge and could catalyze either risk-on moves into tech or a risk off move to defensive sectors like healthcare and consumer staples.
CHART OF THE WEEK
Credit Where Credit’s Due
Market headlines only tell us part of the story about our financial situation. It’s an important part, of course, but headlines tend to focus on big, eye-catching headlines that can attract readers. Think Fed policy updates, Iran war news, and AI capex spending records—they’re exciting to read and stoke fear in investors’ minds. And certainly, they could influence markets and lead to a downturn in equities yet haven’t to any meaningful degree. Credit spreads, on the other hand, are not very exciting, and at least recently haven’t stoked investor fears. Still, credit spreads reflect not just what could happen, but what’s happening now. And what’s happening now is that these spreads are scraping record lows. The ICE BofA US High Yield Index Option-Adjusted Spread below shows the difference between high yield bonds vs Treasuries over the last 3 years. After a rough 2022 the spread gradually narrowed to current levels over a period of years. But recently, only brief periods of concern over tariffs and the war have had an impact. When lenders start to worry about repayment, lower grade bonds start requiring higher rates to warrant the risk. These low levels indicate lenders have very little concern in corporations ability to satisfy their obligations, despite the large size of the loans. Volatility can ebb and flow in equities but as long as credit spreads stay small, further expansion is likely to push through the fear in the headlines.
Source: Charles Schwab Corporation
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