No Time to Let Your Guard Down
As tensions with Iran escalate, major domestic equity market indexes trade close to all-time highs, and oil rises, you best be ready.
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I Won’t Back Down
No, I’ll stand my ground
Won’t be turned around
And I’ll keep this world from draggin’ me down
Gonna stand my ground
And I won’t back down
hey, baby
There ain’t no easy way out (I won’t back down)
Hey, I will stand my ground
And I won’t back down
– Tom Petty, Jeff Lynne (Tom Petty), 1989
Starting to Get Messy?
Monday felt a little different, didn’t it? Not disastrous. Not an all-out fire sale, no. That said, the general market direction was lower and trading volumes increased. No, trading volumes were not high, so to speak. They were just elevated from the day prior, which can be dangerous when the candlesticks are red. Ever see a man disappear under quicksand? I have. It happens much, much faster in real life than it does in the movies.
In real-life, one second, he’s there, the next second he’s not. (We were able to rescue that individual.) Not that I am running for the hills. I am not. I do, however, have my head on a swivel. Why? Simple. Our major domestic equity market indexes are trading close enough to all-time highs and the market sold off on Monday for good reasons. It would be a little reckless not to be alert to the likelihood that traders might take profits under these circumstances.
The Lay of the Land…
Crude oil prices and bond yields, at least at the long end of the curve have been rising together. (Remember, new kids… bond yields rise when bond prices move lower.) This would and should be an unwelcome recipe for our equity markets. On Monday, the U.S. Thirty-Year Bond paid as much as 5.31%. Overnight, we have seen the long bond yield more than 5.32%. This is the most that the US Thirty-Year Bond has yielded since 2007 when that series paid as much as 5.44% going into the “global financial crisis.”
On top of that, front month Brent crude futures have climbed back up to almost $91 per barrel while front month WTI crude trades at just about $85. Neither move is difficult to explain. It would be more difficult to explain why equities had not noticed these moves until the past few days. The slope of the yield curve is steepening.
While in theory, that would be a ground fertile enough to foster economic growth, with the weaker macroeconomic data for July than we had expected, it feels like this market may be pricing in more risk at the long end of the curve, while the short end may be anchored. These markets are starting to correctly price out interest rate hikes, but just as correctly are not pricing in any kind of stimulus in the near future.
Now, concerning oil prices, we do have a situation before us that does not appear likely to ease anytime soon. The “less than observed” ceasefire between the U.S. and Iran officially expired on Monday. Both sides used the occasion to escalate tensions in the region. On the Iranian side, officials threatened to go on the offensive while the Iranian media reported that an oil tanker had been “detained” in the Strait of Hormuz. That news, as far as I could tell, has not been verified. On the U.S. side, Pres. Donald Trump apparently threatened to bomb Oman if that nation “gets in the way” of a peace deal between the U.S. and Iran.
Bottom line? U.S. equity markets suffered what I would not call a “day one” bearish reversal as the trading volume was higher but not high. I would, however, call Monday a day of distribution, which for U.S. markets, was the first such day in quite some time. At zero dark-thirty on Tuesday morning, it looks like U.S. markets will open under pressure in a few hours.
Marketplace
Monday really was not that bloody. It did, however, potentially set the stage for more pressure. The S&P 500 gave up 0.52% for the day while the Nasdaq Composite gave back 0.32%. The small to mid-cap indexes all lost between 0.25% and 0.44% for the session, but the semiconductors did save the day. That’s how the Nasdaq Composite and the Nasdaq 100 (-0.17%) were able to outperform the S&P 500. SanDisk (SNDK), Applied Materials (AMA) and Marvell Technology (MRVL) led the semis on Monday.
Breadth was a bit sloppy. Nine of the 11 S&P sector SPDR ETFs closed out the regular Monday session in the red, led lower by communication services (XLC) and consumer staples (XLP), which is an odd pairing. Energy (XLE) easily led the winners for obvious reasons, while those semis carried technology (XLK) into the green. There was no clear-cut out- or under- performance across the cyclicals, defensives of growth sectors. The daily performance tables for Monday offer no such discernible pattern for observation.
Losers beat winners on Monday by a rough 11-to-five margin at the NYSE and by about five-to-three at the Nasdaq. Advancing volume took a nearly respectable 47.5% share of composite Nasdaq-listed trade, but just a 30.7% share of composite NYSE-listed activity. Why was Monday a day of distribution and not a day one reversal? While trading volumes were not heavy by any stretch, activity on a day over day basis, was up 7% across NYSE-listings, up 6% across Nasdaq-listings and higher across the membership of the S&P 500 as well. Activity was still considerably lighter than it was this past Thursday, which was a “green candle” session.
AI News
On Monday, we learned that Nvidia (NVDA) will be the exclusive AI compute infrastructure provider for SB Energy’s PORTS-Pike campus in Ohio, with OpenAI as the customer. SB Energy is a subsidiary of Japan’s Softbank Group (SFTBY). This facility is being built to provide large-scale AI computing capacity for OpenAI, using Nvidia’s graphics processing units, central processing units, and networking for next-generation AI workloads. Nvidia will invest $1.5 billion in SB Energy and provide credit support for the land, power, and shell buildout tied to the initial 4.25 IT-GW.
In addition, the Financial Times reports that Nvidia has agreed to provide more than $100 billion in credit support to backstop this new OpenAI data center in Pike County, Ohio. OpenAI has signed a 20-year lease with SB Energy to be the anchor tenant. Under the terms of this transaction, Nvidia will serve as the exclusive supplier of AI computing systems for the entire site, potentially generating $150 billion to $200 billion in hardware revenue as the facility expands to house more than a million chips designed by Nvidia.
Are You Going to Need Your Helmet Today?
I don’t think you’ll “need” your helmet. You can wear your soft cover for now. Just be ready for anything. Keep that helmet within arm’s reach. Wear your gas mask on your hip. Clean socks in your ruck. At least two sources (maybe three) of drinkable water on your person at all times. Otherwise, I think we’re good. Oh, bring your e-tools in case we have to dig in.
Economics (All Times Eastern)
08:15 – ADP Employment Change (Weekly): Last 8.25K.
08:30 – Housing Starts (July): Expecting 1.35M, Last 1.427M SAAR.
08:30 – Building Permits (July): Expecting 1.37M, Last 1.374M SAAR.
08:30 – Import Prices (July): Expecting 0.1% m/m, Last 0.3% m/m.
08:30 – Export Prices (July): Expecting -0.2% m/m, Last -0.6% m/m.
08:55 – Redbook (Weekly): Last 8.3% y/y.
09:15 – Industrial Production (July): Expecting 0.3% m/m, Last 0.1% m/m.
09:15 – Capacity Utilization (July): Expecting 76.3%, Last 76.1%.
10:00 – Pending Home Sales (July): Expecting 0.3% m/m, Last -5.4% m/m.
4:30 p.m. – API Oil Inventories (Weekly): Last +9.072M.
The Fed (All Times Eastern)
No public appearances scheduled.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: HD (4.73)
After the Close: TOL (2.92), ZTO (3.41)
At the time of publication, Guilfoyle was long NVDA equity.
