Market Indecision: War Uncertainty, Wacky Econ Data, Fake News?
Investors are stuck dealing with more questions over the state of the Strait, economic data that doesn’t quite make sense, and accusations of fake news.
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On Wednesday, the S&P 500 posted its first red-candle trading session of the week after what had been a four-day winning streak. Ditto for the Nasdaq Composite and Nasdaq 100. Those two “tech-heavier” indexes that had run further during the truly convincing (at least technically) four-day were hit harder throughout the day. The first hints of disappointment for the session came from the realm of national macroeconomics. In their monthly release, ADP reported that the U.S. had created a seasonally adjusted 44,000 jobs in July.
Goods-producing job creation came in at a loss of 3,000 for the month despite the ISM Manufacturing PMI survey for the month having posted a 52.8 print (up from 49.7. for the employment subcomponent). Want some more numbers that don’t make sense? ADP reported private sector job creation of 47,000 positions across service-providing industries. This came despite the employment subcomponent of the ISM Services PMI survey printing at 47.4 down from 51.2. For those new to the wonderful world of domestic macroeconomic data-points, when it comes to ISM PMI (purchasing managers) surveys, 50 is the line between expansion and contraction.
What does that mean? Well, simply put, as this is July “jobs week” it means that the ISM survey results told us that manufacturing demand for labor was heating up while service sector demand for labor was cooling. In contrast, the monthly ADP report told us just the opposite, that manufacturing demand for labor remained cold while service sector demand for labor remained, if not hot, at least warm enough. Making matters worse, the ISM service sector survey also showed prices having increased for a 110th consecutive month and accelerating to the upside at that. Markets did not enjoy that little tid-bit of information.
On Top of That…
Iran finally announced that an agreement had been reached on a proposed route for commercial vessels trying to traverse the Strait of Hormuz. The only thing is that the agreement appears to have been made, if it actually exists, because there has always been a disconnect between what Iran says and what Iran does, between that nation and Oman.
Iran and Oman are known to have been in discussions for several days concerning the production of some kind of a plan to reopen the Strait of Hormuz. This passage had emerged as the focal point of this on-again, off-again war between the U.S. and Iran. A joint statement has been released by Tehran and Muscat, that explained that a deal is under review. Iranian Foreign Ministry spokesperson Esmail Baghaei told reporters on Wednesday that negotiations between the two countries were “forward-moving” and a deal might be reached “if certain third parties do not obstruct this process.”
Baghaei did not mention any role for the U.S. or that Iran was even talking to the U.S. He did blame the Strait’s closure on attacks by the U.S. and Israel. Disappointing? Of course. Any peace deal would have to include the U.S. as it is the U.S. armed forces that have carried the initiative to the enemy in this conflict and the U.S. Navy in particular that is blockading Iranian ports.
Keep in mind that U.S. Pres. Donald Trump had said earlier this week that a deal to reopen the Strait was “imminent” as was a plan to curb Iran’s nuclear weapons program. The president also told Fox News that “If they back out again, they’re going to get hit really hard. They know that. They understand that. I have no choice. They can’t have a nuclear weapon. It’s very simple.” Does this “maybe” deal between Iran and Oman at least partially satisfy U.S. and global interests? Market participants obviously have their doubts.
Impact on Markets
Why is that news disappointing to financial markets? While any sane person would doubt the success of any peace process in that region of the world by now, algorithms are not sane people. Algorithms had started to price in a deal between Washington and Tehran. So far? No dice. The story of headline risk impacting market performance goes deeper than that though.
Back when dinosaurs roamed the earth and human traders controlled the point of sale, trades were larger in size and the idea was to get the best prices for your customers. Human traders tried to look like they were not taken advantage of in what we used to call the “crowd.”
Since algos took over, trades are much smaller, and prices are averaged over time so that customers generally have no idea that they have been taken advantage of. Oh, and the general idea is not to get the best price, but to force momentum in order to create price overshoot in both directions which expands trading ranges (and potential profitability). Maybe the powers that be do not want you to realize this, but I am not going to sugarcoat the reality they have created just to keep “our” peace.
Marketplace
It wasn’t ugly on Wednesday. Far from it. Markets simply showed some indecision as doubt was reintroduced to the process of price discovery. The S&P 500 gave back just 0.17% but had been higher earlier. The Nasdaq Composite and Nasdaq 100 were both down exactly 0.83%. It’s almost as if robots now run the place. Hmmm. Small caps performed with broader markets as did the Dow Transports. Banks rallied small, while the Philly semis took the brunt (-1.4%) of the market’s downward pressure.
Breadth, which had been more than just very strong for four days, turned negative, but not dramatically so. Five of the 11 S&P sector SPDR ETFs managed to close out the day’s regular session in the green, led by Health Care (XLV), which is a defensive-type sector. That was largely due to McKesson (MCK) and Eli Lilly (LLY). Three of the top four performing sector SPDRs were cyclicals as the defensives did not do well overall on Wednesday. This illustrates some underlying economic optimism in my opinion.
Losers beat winners at the NYSE by a rough seven-to-five margin at the NYSE and by about five-to-four at the Nasdaq. Advancing volume took a 45.9% share of composite Nasdaq-listed trade and a 44.3% share of composite NYSE-listed activity. Again, soft but not anemic. Aggregate trading volume was notably lower on day-over-day basis across NYSE-listings, across Nasdaq-listings and across the membership of the S&P 500. What does that mean? It means, simply, that professional managers were not major participants in Wednesday’s selloff.
Fake news?
Who knows? The Washington Post is reporting that at Camp David last weekend, Pres. Trump clashed with Defense Sec. Pete Hegseth over the reported munitions shortages. The president reportedly told the secretary that he thought the munitions issue “had been fixed.” The president is said to have demanded answers regarding U.S. stockpiles. Sec. Hegseth reportedly blamed his deputy, Stephen Feinberg, for the shortages and for not ensuring that the president was fully informed.
White House press sec. Karoline Leavitt stated, “This is 100% fake news. Literally never happened. And President Trump has the utmost confidence in Secretary Hegseth.”
A source reportedly had told The Washington Post that the shortages, particularly of long-range guided missiles and of air-defense interceptors, were at least part of the reason that the president had called off additional strikes against Iran in recent days.
The U.S. armed forces reportedly launched over 850 Tomahawk cruise missiles, which is an RTX (RTX) product and more than 1,000 Patriot (also RTX) and Terminal High Altitude Area Defense, or THAAD systems, a Lockheed Martin (LMT) product, in the first month of this war. Our forces also spent more than 1,300 tactical ballistic missiles in the initial weeks of fighting.
Pres. Trump posted to social media, “The U.S. has massive amounts of ‘munitions,’ especially of certain types. Additionally, large amounts are being manufactured and shipped to the U.S. as needed.” The president added, “Defense companies are building the largest number of plants and factories in our country’s history. The ‘leakers’ of these treasonous statements are being hunted down. Long term jail sentences will be sought!”
The U.S. has announced new agreements and contract awards with and to large defense contractors to rebuild its arsenal. That said, completing production fully could take years. Again, who knows.
Economics (All Times Eastern)
08:30 – Initial Jobless Claims (Weekly): Expecting 203K, Last 197K.
08:30 – Continuing Claims (Weekly): Last 1.782M.
08:30 – Non-Farm Productivity (Q2-adv): Expecting 0.7% q/q, Last 0.3% q/q, SAAR.
08:30 – Unit Labor Costs (Q2-adv): Expecting 2.3% q/q, Last 1.8% q/q, SAAR.
10:00 – Wholesale Inventories (June):
Expecting 0.3% m/m, Last 0.3% m/m.
10:30 – Natural Gas Inventories (Weekly): Last +28B cf.
The Fed (All Times Eastern)
5:30 p.m. – Speaker: St. Louis Fed Pres. Alberto Musalem.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: BDX (3.14), RL (4.30), ZTS (1.85)
After the Close: ABNB (1.22), LYFT (.40), ROKU (.56), TWLO (1.32)
At the time of publication, Guilfoyle was long RTX, LMT equity.
