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London Quick Take - 12 Aug - Stocks tread water ahead of US CPI, oil holds around $90, CoreWeave & Super Micro Computer fizz
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Having touched $90 Brent crude oil turned negative for a while yesterday and European equity indices clawed back losses to turn flat as the Pakistan Defence Minister signalled to reporters that the US and Iran are “close to some arrangement”, which he said was “shaping up in favour of peace”. Moves remained tentative as investors assessed the latest developments as perhaps just the latest barrage of noise from the conflict; markets remain sensitive to headline risk but are not taking on any meaningful direction off speculative comments whilst the process looks to have stalled - we need something more concrete to move the dial off this level. Subsequently Iran reiterated its commitment to keep the Strait of Hormuz shut and attacks on vessels in the Red Sea and Gulf of Oman raised tensions a bit more and signalled it's still hard to see a resolution soon. European and US stocks closed the session lower, while crude prices are hovering around the $90 area again. Stocks started flat early Wednesday in Europe with Asian shares offering a bit of a mixed lead with Korean memory stocks rallying to send the Kospi +3.7% higher while Japan’s Nikkei gained +1% after reopening from a holiday and Hong Kong’s Hang Seng fell 1%. Gold broke out above $4,400 with the technical support and Treasury yields backing off a touch although the dollar remains well supported.
Today's US inflation data is the week's banner event as it will finetune how investors view the likelihood of the Fed hiking rates in September. It's expected to print +0.2% in headline CPI with the annual rate down to +3.4%, with the core reading are expected at +0.1% and +2.5%. Markets imply a September rate hike is a coin toss so this inflation reading really matters – particularly as the Fed has made it pretty clear that it's only looking at the inflation side of its mandate.
A hot print will present Fed chair Kevin Warsh with an early test of his mettle - will he follow up those tough words on inflation with action, or continue to lean on jawboning the market and higher bond yields due to oil/inflation dynamics? I continue to think the Fed will have to follow through with at least one hike this year as it remains short on the inflation side of its mandate, and it shouldn't have to worry too much about the employment side, despite those apparently weak payrolls numbers. Anything up to +0.2% for core and headline suggest inflation trimming back down, which pushes out the odds of a September rate hike in all likelihood and keeps the momentum in the stock market with the bulls after back-to-back days of losses for the S&P 500 in the wake of last week's rally. Anything above that presses the case for the Fed to move on inflation next month with deeds, not words.
Either way, Warsh cannot sidestep forever questions about the Fed's reaction function - either he has to answer them in more detail verbally or with action, which would take the form of a policy hike. The higher 30yr Treasury yield since Warsh last spoke indicates the market is maybe doubting his credentials – that he's trying to delay and use forceful language to avoid actually raising rates. Since the 29 July press conference following the FOMC's decision to hold rates, 2yr Treasury yields have fallen and the 30yr has leapt higher – a steepening the betrays the market's doubts about his inflation-busting rhetoric.
The reason for not just looking past temporary energy price spikes is AI – specifically the spending that is keeping pace with the rosiest assumptions for now about the investment thesis. AI trades have a positive tinge today with CoreWeave and Super Micro Computer delivering strong earnings updates. CoreWeave +15% higher in after-hours trading as the AI infrastructure provider topped estimates on the top and bottom line while it is "seeing demand, pricing and margin all expanding" Super Micro also raced +7% higher after-hours following its earnings, with the company raising guidance on strong demand for its AI-optimised servers. Meanwhile, overnight reports Temasek plans direct investments in Samsung Electronics and SK Hynix helped lift Kospi and AI-linked sentiment, with Samsung and Hynix extending gains and regional chip stocks trade higher.
European stock markets were chopping around but barely changed along with US futures ahead of key US inflation data while the ongoing concerns about the Middle East keep the oil price and its impact on inflation expectations and yields top of mind for traders.
Unravelling the Gordian knot of the US-Iran conflict...can stocks continue to make new highs when the risks to bond yields seem to be tilted to the upside as higher oil prices stokes inflation fears? The big questions overhanging the market today is the oil price and bond yields with the US inflation print squarely in focus. Still earnings growth means stock markets are climbing the geopolitical wall of worry - European shares have benefitted from some diversification out of chip stocks in July but earnings are also blistering, reigniting the focus on the region, particularly given these +20% earning growth-type numbers are coming against such a tricky geopolitical backdrop. Meanwhile, US earnings growth continues to power ahead because of AI – Yardeni out with earnings and price target hikes for the S&P 500 yesterday I note.
Unravelling the Gordian knot of the US-Iran conflict...can stocks continue to make new highs when the risks to bond yields seem to be tilted to the upside as higher oil prices stokes inflation fears? The big questions overhanging the market today is the oil price and bond yields with the US inflation print squarely in focus. Still earnings growth means stock markets are climbing the geopolitical wall of worry - European shares have benefitted from some diversification out of chip stocks in July but earnings are also blistering, reigniting the focus on the region, particularly given these +20% earning growth-type numbers are coming against such a tricky geopolitical backdrop. Meanwhile, US earnings growth continues to power ahead because of AI – Yardeni out with earnings and price target hikes for the S&P 500 yesterday I note.
Having touched $90 Brent crude oil turned negative for a while yesterday and European equity indices clawed back losses to turn flat as the Pakistan Defence Minister signalled to reporters that the US and Iran are “close to some arrangement”, which he said was “shaping up in favour of peace”. Moves remained tentative as investors assessed the latest developments as perhaps just the latest barrage of noise from the conflict; markets remain sensitive to headline risk but are not taking on any meaningful direction off speculative comments whilst the process looks to have stalled - we need something more concrete to move the dial off this level. Subsequently Iran reiterated its commitment to keep the Strait of Hormuz shut and attacks on vessels in the Red Sea and Gulf of Oman raised tensions a bit more and signalled it's still hard to see a resolution soon. European and US stocks closed the session lower, while crude prices are hovering around the $90 area again. Stocks started flat early Wednesday in Europe with Asian shares offering a bit of a mixed lead with Korean memory stocks rallying to send the Kospi +3.7% higher while Japan’s Nikkei gained +1% after reopening from a holiday and Hong Kong’s Hang Seng fell 1%. Gold broke out above $4,400 with the technical support and Treasury yields backing off a touch although the dollar remains well supported.
Today's US inflation data is the week's banner event as it will finetune how investors view the likelihood of the Fed hiking rates in September. It's expected to print +0.2% in headline CPI with the annual rate down to +3.4%, with the core reading are expected at +0.1% and +2.5%. Markets imply a September rate hike is a coin toss so this inflation reading really matters – particularly as the Fed has made it pretty clear that it's only looking at the inflation side of its mandate.
A hot print will present Fed chair Kevin Warsh with an early test of his mettle - will he follow up those tough words on inflation with action, or continue to lean on jawboning the market and higher bond yields due to oil/inflation dynamics? I continue to think the Fed will have to follow through with at least one hike this year as it remains short on the inflation side of its mandate, and it shouldn't have to worry too much about the employment side, despite those apparently weak payrolls numbers. Anything up to +0.2% for core and headline suggest inflation trimming back down, which pushes out the odds of a September rate hike in all likelihood and keeps the momentum in the stock market with the bulls after back-to-back days of losses for the S&P 500 in the wake of last week's rally. Anything above that presses the case for the Fed to move on inflation next month with deeds, not words.
Either way, Warsh cannot sidestep forever questions about the Fed's reaction function - either he has to answer them in more detail verbally or with action, which would take the form of a policy hike. The higher 30yr Treasury yield since Warsh last spoke indicates the market is maybe doubting his credentials – that he's trying to delay and use forceful language to avoid actually raising rates. Since the 29 July press conference following the FOMC's decision to hold rates, 2yr Treasury yields have fallen and the 30yr has leapt higher – a steepening the betrays the market's doubts about his inflation-busting rhetoric.
The reason for not just looking past temporary energy price spikes is AI – specifically the spending that is keeping pace with the rosiest assumptions for now about the investment thesis. AI trades have a positive tinge today with CoreWeave and Super Micro Computer delivering strong earnings updates. CoreWeave +15% higher in after-hours trading as the AI infrastructure provider topped estimates on the top and bottom line while it is "seeing demand, pricing and margin all expanding" Super Micro also raced +7% higher after-hours following its earnings, with the company raising guidance on strong demand for its AI-optimised servers. Meanwhile, overnight reports Temasek plans direct investments in Samsung Electronics and SK Hynix helped lift Kospi and AI-linked sentiment, with Samsung and Hynix extending gains and regional chip stocks trade higher.
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