Iran Breakthrough?
The markets appeared to make a U-turn for the better on Thursday on potential progress with Tehran. Also, where’s the beef with the China summit?
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Major U.S. domestic equity indexes jumped sharply around lunchtime on Thursday after having spent pretty much the entire morning trading in the hole. The indexes held onto those gains throughout the afternoon allowing both the S&P 500 and Nasdaq Composite to close very close to “unchanged” on the day and broader markets to close lower for the session, but up significantly from the day’s lows.
Equity index futures have shown some overnight life as well, suggesting that a Friday morning rally could be possible. The catalyst, apparently, is that it appears that the U.S. and Iran have actually been talking on the sidelines of the U.N. General Assembly in New York City in an attempt to reopen the rights of commercial maritime vessels to navigate the waters around Iran. Is the U.N. actually serving one of its intended purposes? Never thought we’d live to see that, but we’ll take it.
Yields on U.S. Treasury debt securities are finally taking a break this morning as well. As I work through the zero-dark hours on Friday morning, the U.S. Ten-Year Note pays less than 5.16%. That’s down from 5.19% around closing time on Thursday evening, which was up from roughly 5.11% 24 hours earlier than that. Front-month WTI crude futures have taken a similar journey. WTI is trading with a $92 handle early this morning after trading with a $96 handle on Thursday and with an $89 handle overnight Wednesday into Thursday.
What Gives?
The Financial Times and other outlets are reporting that Tehran has offered Washington a new seven-day proposal built upon the memorandum of understanding that the U.S. and Iran agreed to back in June. That agreement was meant to extend an April ceasefire for 60 days with the U.S. issuing waivers for Iranian oil to be sold externally. That memorandum was also meant to allow shipping to gradually return to pre-war levels while the two sides negotiated a lasting peace.
It is key to note that Iran is asking for something based on that memorandum when that agreement collapsed in early July simply because Iranian forces refused to stop firing upon civilian merchant vessels traversing the Strait of Hormuz. U.S. Pres. Donald Trump has already stated that there will not be a return to that exact agreement as the memorandum was highly criticized in the U.S. by both Republican party and Democrat party legislators.
The two sides are, however, talking. Iranian foreign minister Abbas Araghchi stated to the media: “We have introduced a plan to the United States through the mediators that if certain conditions are met, the strait will be open in seven days.”
It is believed that the removal of the U.S. naval blockade would be required in order for Iran to allow un-harassed passage through the area. Sticking points that the two sides are not likely to easily agree on would be permanent control over that narrow passage and the future of Iran’s nuclear weapons program.
Trump, Xi … and Thucydides
It is probably a net positive that the leaders of the two largest economies on the planet host each other and treat each other well. That said, this week’s “summit” where Pres. Trump hosted Pres. Xi in Washington was more ceremony than anything else. I don’t know what we expected. Markets did rally earlier in the week on optimism that this summit would go well. It’s a good thing that Iran-U.S. peace talks have picked up the football and run with it because this “geopolitical show” really did not come bearing market catalysts.
On artificial intelligence, Xi said, “We have both the capability and responsibility to develop and manage AI for good and ensure that a development of AI is always under human control and serves the well being of the people.” Somehow, that does not do much to reassure me. Pres. Trump has stated he wants to let AI develop the way it is as both these two countries race for supremacy in this frontier technology.
As for the issue of Taiwan’s independence, the Chinese state-run Xinhua News Agency is reporting that during the private meeting, Pres. Xi warned the U.S. to “adhere to the correct position of opposing Taiwan independence.”
In his opening remarks, Xi stated that the U.S. and China should avoid what he called “the Thucydides trap.”
For those uninitiated, the Thucydides trap is a term used by ancient historian Thucydides to explain why the Peloponnesian War was inevitable. Basically, the cause, according to the theory, was the rise of Athens as a power and the threat that Spart felt as a result. The idea behind it is that when a rising power threatens to displace an established power, the resulting structural stress often leads to war.
Beijing should probably keep in mind that Athens surrendered to Sparta in 404 B.C. ending that war. Washington should probably keep in mind that by 371 B.C., Sparta was no longer considered to be the dominant power in the ancient Grecian world.
Thursday’s Markets
While the S&P 500 closed down 0.02%, the Nasdaq Composite closed up 0.01% and the Nasdaq 100 closed up 0.03%. Does anyone understand how hard it is for these three equity indices to close virtually flat from the day prior in this high-speed, algorithmic, decimalized world? That’s incredible. More broadly, the KBW Banks were down small as was the Russell 2000. The Dow Transports still had their tails handed to them.
Despite the afternoon rally, eight of the 11 S&P sector SPDR ETFs still ended the day in the red, led lower by the Materials (XLB). Communication Services (XLC) led the winners for the session. Tech (XLK) finally took a break. That fund was down 0.32% for the day as the Philadelphia Semiconductor Index gave up 0.33%. The top semiconductor performer for the day was Intel (INTC), yet again at +3.9%. Arm Holdings (ARM) was the big loser at -7.9%, followed by SanDisk (SNDK) at -3.5%.
Breadth was rather negative for the session on Thursday. Losers beat winners by a rough two-to-one margin at the NYSE and by about thee-to-two at the Nasdaq. Advancing volume took just a 35.25 share of composite NYSE-listed trade and a somewhat more respectable 42.5% share of composite Nasdaq-listed activity. Aggregate trade was lumpy. Activity was slightly higher on a day over day basis across both NYSE-listings and across the membership of the S&P 500. That said, activity dropped fairly sharply on a day over day basis across Nasdaq-listings.
All in all, that makes Friday truly important. more so than usual in terms of how this market goes into the weekend. Headlines regarding peace negotiations between the U.S. and Iran will matter more than August Durable Goods Orders and more than anything that either Jeffrey Schmid or Beth Hammack say later on.
Economics (All Times Eastern)
08:30 – Durable Goods Orders (Aug): Expecting -0.4% m/m, Last 1.1% m/m.
08:30 – ex-Transportation (Aug): Expecting 0.5% m/m, Last 0.4% m/m.
08:30 – ex-Defense (Aug): Expecting -0.6% m/m, Last 1.3% m/m.
08:30 – Core Capital Goods (Aug): Expecting 0.1% m/m, Last 0.2% m/m.
10:00 – U of M Consumer Sentiment (Sep-rev): Flashed 47.8.
10:00 – U of M One-year Inflation Expectations (Sep-rev): Flashed 4.6%.
10:00 – U of M Five-year Inflation Expectations (Sep-rev): Flashed 3.4%.
1:00 p.m. – Baker Hughes Total Rig Count (Weekly): Last 595.
1:00 – Baker Hughes Oil Rig Count (Weekly): Last 452.
The Fed (All Times Eastern)
05:15 – Speaker: New York Fed Pres. John Williams.
05:15 – Speaker: Kansas City Fed Pres. Jeffrey Schmid.
2:00 – Speaker: Cleveland Fed Pres. Beth Hammack.
Today’s Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
At the time of publication, Guilfoyle was long INTC, SNDK equity.
