4 Issues Are Colliding to Test a Vulnerable Market

Markets are indicated lower Tuesday as semiconductor stocks reverse after holding up the indexes Monday.

The chip strength stalled in Asian trade overnight and the losses extended through Europe. The underlying action, and particularly the bonds, indicates that the challenges are building.

The Bond Market Is Not Subtle About This

The 30-year Treasury yield climbed to 5.326%, its highest level since 2007. The 10-year Treasury hit 4.742% in Asian trade, its highest since the end of July.

This is not confined to the United States. Japanese 10-year yields jumped to levels last seen in 1996, and German 10-year yields hit a 15-year high. A global bond selloff deepened overnight.

The drivers are a combination of concern about government spending, the lack of any progress in the Middle East, and pricing pressures in AI infrastructure.

Oil Is Back Above $91

A vessel was struck while leaving the Strait of Hormuz overnight. That happened after President Trump said Monday that he would not seek to extend the ceasefire and threatened to bomb Oman, which pushed Brent above $90. Crude held above $91 in early European trade.

Investors are now positioning for an extended closure of the Strait, with no advance in the peace talks and Houthi attacks escalating along the Red Sea coast.

There Is No Free Lunch

Monday the market ignored the issue of rising semiconductor prices. Rising chip prices may be good for chip companies, but not for anything else. Chips are needed everywhere and the fact they are costing more is directly feeding inflationary pressures.

Investors have been content ignoring this issue as they bid up the group on Monday. Higher prices for memory, servers, and components are exactly what makes the AI buildout more expensive, and that cost shows up in the inflation data. The bond market has been pricing it for weeks while equity buyers celebrated the pricing power.

There is no free lunch here. The same pricing power that produces the margins also produces the inflation that raises the cost of everything the industry is trying to finance.

Four Things at Once

Oil is rising with no resolution in sight. Chip-driven inflation is building. The rotational action that has been holding the indexes together looks tired, with breadth at 35% Monday and new highs and lows nearly even. Also, negative seasonality has been late in hitting but appears to be around the corner.

Market players have been anticipating a difficult period for a while, and I have written that the anticipation of a pullback has been preventing the pullback. That can persist longer than the bears expect but it does not persist forever. The conditions that would cause it to accelerate are accumulating.

Not Much on the Calendar

We have industrial production and housing starts Tuesday morning, and the big-box retailers report earnings through the week. Those matter more than usual after Friday’s weak retail sales number, but none of it is likely to be market changing.

That is the problem right now. There is no catalyst large enough to resolve anything, which leaves the market to drift on positioning and headlines until something forces the issue.

Game Plan

My positioning has not changed. Lots of cash and I am doing very little. The signs of a deeper pullback are building and I would rather be early to sit in cash than late in a market this thin. The names I want to buy have not come in far enough to be interesting, and August is not the month to force it. September is historically the weakest month of the year.

I am watching for the character change I described Monday. A sharp intraday reversal with a close near the lows, or a headline that finally makes people care. Tuesday morning has the second one in the making as bonds hit multi-year lows. We will see whether it holds through the session.

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At the time of publication, Rev Shark had no positions in any securities mentioned.