How to Navigate a ‘Chip-Wreck’; Watching the War Grow, Fed Day!
Fighting spreads after surprise attack, Fed Day lands, and let’s look at the rotation and what to make of the semiconductor crash.
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Well, that wasn’t very nice. Iranian forces launched a surprise ballistic missile attack against US forces in the Middle East late on Tuesday. The attack, which fortunately was unsuccessful as all Iranian missiles were intercepted, put an end to four days of peace where neither side has attacked the other. Earlier on Tuesday, Iran had rejected an Omani plan to safely re-open the Strait of Hormuz to commercial traffic in favor of their own plan that leaves Iran with more control over that passage.
These attacks came after U.S. Pres. Donald Trump had appeared on Fox News and said that U.S. strikes inside of Iran would likely resume if a deal could not be finalized. The president said, “They know I’m going to do that if they don’t make a deal. The bridges are going to be gone, literally in less than — I would say in two hours, most of the bridges, the major bridges will all be gone and the power plants in one day.”
Pres. Trump added that the Iranian government had already agreed to give up its nuclear weapons program but had not formalized such an agreement. This attempted surprise attack against the U.S. military, though unsuccessful, once again illustrates a serious disconnect between the Iranian government (or whomever it is that the Trump administration is talking to) and the Iranian military (or whomever it is that continues to launch missiles and drones against the U.S. and literally everyone else in the region).
The Problem: How to Respond?
What does the Trump administration do now? The Iranian military is trying to show the U.S. and the world that it can still take the initiative despite having taken a serious beating. The U.S. has tried to fight as polite a war as possible where U.S. casualties are light as are Iranian non-military casualties. It’s awfully difficult to fight any war without taking on increased risk and without accidentally causing collateral damage.
Pres. Trump will likely feel pressured to respond to aggression with aggression. Can the president let this surprise attack go unanswered? This attack may have failed, but still recent attacks against U.S. forces have been more successful, and though few in number relative to other wars, U.S. service members have paid the full price.
Crude oil futures prices and bond yields are trading higher overnight in anticipation of a U.S. military response. The U.S. naval blockade has and will continue. It is now clear though, that Iranian military leaders see any U.S. pause in offensive operations not as an opportunity to find a peaceful resolution to the conflict, but as a weakness on the behalf of their adversary.
The War Expands
Additionally, late on Tuesday, the Saudi Arabian government announced that its military had intercepted drones launched by Iranian-backed militia groups inside of Iraq. The U.S. and Saudi militaries responded with a joint strike against those groups and the sites of their weapons caches. These attacks against the Saudis from Iraqi soil by Iranian-tried forces, follow attacks against the Saudis in the Red Sea by the similarly Iranian-backed Houthi rebels in Yemen. Saudi forces are also engaged against those groups.
Elsewhere, the New York Times and other sources reported that over the weekend, Ukrainian forces targeted an Iranian vessel in the Caspian Sea that had been transporting weapons toward Russia. The Security Service of Ukraine reported that its drones had hit an oil platform in the northern Caspian Sea, along with a Russian missile boat and “cargo ships that are under international sanctions.” Supposedly, Iran is considering or at least had considered launching a “retaliatory” strike against Ukrainian forces.
Fed Day!
Just when you thought things couldn’t get any more complicated, the war in the Middle East is expanding, earnings season rolls on and today is Fed Day. The central bank’s Federal Open Market Committee will release an official policy statement this afternoon and follow that up with Fed Chair Kevin Warsh’s second press conference as America’s lead banker. No changes are expected to be made to short-term interest rates this afternoon.
That said, it’s not like there is simply no chance for a hike. I do not expect any changes today, but Fed Funds futures trading in Chicago are pricing in a 32% probability for a quarter-percentage point increase to be made to the target range for the overnight rate to come out of this meeting. That’s more than “no chance.” The fact is that these markets are now pricing in a 79% likelihood for a short-term rate increase at the next FOMC policy meeting on Sept. 16.
Remember, an increasing number of FOMC participants have supported the removal of the Fed’s official bias toward reducing rates in recent months. In addition, Fed Gov Christopher Waller, who was a Trump nominee, has floated the idea of pushing for a potential rate increase in coming months after having expressed dovish views earlier this year. Fed Chair Kevin Warsh has kept his views close to the vest since assuming the top job.
Readers should be cognizant that while Warsh was obviously this president’s selection to lead the Fed, in the past, during his first stint at the central bank, he was thought of as something of a policy hawk. Personally, as a Fed watcher, I think the recent surge in oil prices will prove too much for some voting members. Should the committee vote to keep rates where they are this afternoon, my guess is that there will be distention in favor of a hike. Most likely candidates to dissent would be Cleveland Fed Pres. Beth Hammack and possibly Dallas Fed Pres. Lorie Logan.
Marketplace
Given all of the balls still in the air, U.S. equity markets, with the exception of the semiconductors, hung in there pretty well on Tuesday. The Nasdaq Composite gave up just 0.22% for the session, despite the hit taken by the Nasdaq 100 (-0.98%) and the beating suffered by the Philadelphia Semiconductor Index (-4.49%). The S&P 500 actually put together a winning session, up 0.21%.
The tech / semi beat-down was again led to the downside by SanDisk (SNDK), Micron (MU) and Advanced Micro Devices (AMD). Those three names were down 14.3%, 8.9% and 8.2% respectively. Yes, I am long all three of these names. readers know that I took partial profits in SNDK and MU at much higher prices, so I’m good there. Readers also know that I have not reduced AMD, so that one hurts. AMD has dropped out of my top five holdings without me having sold any shares. That’s never a good thing.
Is The Chip-Wreck Meaningful?
There has been rotation, so overall market performance, while pressured and volatile, has not been awful. As a tech-heavy trader / investor, yes, I think it’s meaningful. That does that mean that I am running for the hills. It does mean that I am trying to manage risk intelligently without suffering too many body blows.
While the Nasdaq Composite appears to be breaking down from the triangle pattern that we had discussed over recent weeks that we understood foretold increased volatility, there are some positives. While the Nasdaq 100 has broken hard, even worse than the composite due to its tech-heavier nature, take a look at this:
Is that a breakdown from a “triangle pattern” or is it simply a bull flag? Bull flags are patterns of sideways to lower trade that ultimately prove to be patterns of bullish trend continuance. Food for thought there.
Meanwhile, the S&P 500 has posted three consecutive green (yes slightly green) daily candlesticks in a row, while continuing to respect the lower trendline of our “ascending triangle,” which is a bullish signaling pattern. See the 21-day exponential moving average and 50-day simple moving average running together? That’s a lot of wood to cut. It’s also a lot of pent-up fuel for a lift-off if the market can take something positive away from the Fed this afternoon. It would be nice to see professional managers and swing traders on the same side of the football again.
Economics (All Times Eastern)
07:00 – MBA 30 Year Mortgage Rate (Weekly): Last 6.69%.
07:00 – MBA Mortgage Applications (Weekly): Last 1.9% w/w.
10:30 – Oil Inventories (Weekly): Last +2.011M.
10:30 – Gasoline Stocks (Weekly): Last +765K.
The Fed (All Times Eastern)
2:00 p.m. – FOMC Policy Decision.
2:00 – FOMC Economic Projections.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: GD (3.98), HUM (7.00), LHX (2.83), SOFI (.11), VMC (2.49)
After the Close: ARM (.40), CMG (.32), LRCX (1.68), META (7.39), MSFT (4.24), QCOM (2.23), SBUX (.65)
At the time of publication, Guilfoyle was long SOFI, MSFT, SNDK, MU, AMD equity.
