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London Quick Take - 15 June - Let the oil flow: stocks jump, crude drops on US-Iran deal; SpaceX jumps 6% in pre-mkt trade after record IPO
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Stocks soared and oil prices slid after the US and Iran agreed a peace deal to reopen the Strait of Hormuz. “Ships of the World, start your engines. Let the oil flow!” President Trump posted. Iran confirmed the text of a memorandum of understanding had been finalised and said the war would end “permanently and immediately on all fronts”. The two countries will sign the deal in a few days, in Switzerland, after the G7 leaders conference in France this week. The deal is seeing investors take some geopolitical risk premia off the table.
European stock markets rallied, with the CAC and DAX jumping nearly 2%, while in London the FTSE 100 was up close to 1% to its highest in two months as risk appetite was restored. We're seeing reopening trades – Rolls-Royce, IAG etc rally sharply, while housebuilders climbed as the outlook for interest rates improved (ie bond yields fell) and miners rose as metals rallied with risk sentiment – copper, silver, gold all posting solid 1-3% gains. The broad Stoxx 600 rose nearly 1% to a record high while Japanese equities hit fresh record highs too. Wall Street rallied as the pop for SpaceX on debut, while US futures are sharply higher on peace optimism. Brent crude fell 5% and WTI slipped below $80 to its lowest since early March, just after the war started - almost all the war premium has been faded now which seems a little over optimistic...BP and Shell slipped over 4% in sympathy with crude futures, which is providing a bit of a drag on the FTSE 100 along with some defensives and bond proxies like utilities. Overall we are seeing equity markets in relief rally mode but it's maybe not as big a move as you might think - partly because the market has discounted the extreme left tail risk for ages, partly because there's so many false starts in recent weeks...nonetheless, the mood is decidedly risk-on.
Reopening the Strait significantly reduces inflation tail risks so we are seeing bond yields decline, but the realisation will dawn on markets that unwinding the Gordian knot of US-Iran relations will take time – energy prices will decline slowly rather than suddenly. Inflation remains elevated at the same time as optimism rises for the global economy, which means it’s not a good time for the Fed to cut. Now is perhaps the time of maximum risk for the macro backdrop for equities. The Fed is set to leave interest rates on hold this week but we could get some signals about what is to come next. For starters, the FOMC could drop its easing bias from its statement. We don’t know exactly how new chair Kevin Warsh is going to run things but do know that inflation is rising and the labour market remains incredibly robust. US PPI came in at 1.1% on the month, putting the 12-month inflation rate at 6.5%, while CPI inflation rose to 4.2% year-on-year, its highest in three years. All eyes will be on Warsh as he holds his first post-meeting press conference. More on this from John now.
CPI inflation data for the UK will be released, providing some context to the Bank of England meeting this week. On to the Bank of England, which should be set to leave interest rates on hold. At the last meeting there was sense that a majority of policymakers were keen to look through any temporary rise in inflation linked to the US-Iran war because the economy and labour market are under so much pressure. Latest GDP figures showing a contraction in April underline the stagflationary backdrop. UK unemployment data is released in the morning ahead of the rate decision and is likely to set the tone. Should it hold until Thursday, the peace deal between the US and Iran is the single biggest reason to believe the BoE will hold rates steady at 3.75% and justify the MPC's decision to play a wait-and-see game.
Finally...almost forgot about the SpaceX IPO: SpaceX ended the day up 19% with a decent pop on market debut. The IPO got off very well. It was very oversubscribed so a decent pop at the open was anticipated but the bankers have handled this one well to keep volatility in check. There are questions about whether it can hold the $2tn valuation now. A lot depends on passive flows and index inclusion. Astera Labs, CoreWeave, Nebius, and Teradyne jumped sharply news of their on inclusion in the Nasdaq 100...Rocket Lab is also NDX-bound but tumbled because SpaceX sucked oxygen from the space tech sector. SPCX shares jumped another 6% in premarket trading early Monday.
European stock markets rallied, with the CAC and DAX jumping nearly 2%, while in London the FTSE 100 was up close to 1% to its highest in two months as risk appetite was restored. We're seeing reopening trades – Rolls-Royce, IAG etc rally sharply, while housebuilders climbed as the outlook for interest rates improved (ie bond yields fell) and miners rose as metals rallied with risk sentiment – copper, silver, gold all posting solid 1-3% gains. The broad Stoxx 600 rose nearly 1% to a record high while Japanese equities hit fresh record highs too. Wall Street rallied as the pop for SpaceX on debut, while US futures are sharply higher on peace optimism. Brent crude fell 5% and WTI slipped below $80 to its lowest since early March, just after the war started - almost all the war premium has been faded now which seems a little over optimistic...BP and Shell slipped over 4% in sympathy with crude futures, which is providing a bit of a drag on the FTSE 100 along with some defensives and bond proxies like utilities. Overall we are seeing equity markets in relief rally mode but it's maybe not as big a move as you might think - partly because the market has discounted the extreme left tail risk for ages, partly because there's so many false starts in recent weeks...nonetheless, the mood is decidedly risk-on.
Reopening the Strait significantly reduces inflation tail risks so we are seeing bond yields decline, but the realisation will dawn on markets that unwinding the Gordian knot of US-Iran relations will take time – energy prices will decline slowly rather than suddenly. Inflation remains elevated at the same time as optimism rises for the global economy, which means it’s not a good time for the Fed to cut. Now is perhaps the time of maximum risk for the macro backdrop for equities. The Fed is set to leave interest rates on hold this week but we could get some signals about what is to come next. For starters, the FOMC could drop its easing bias from its statement. We don’t know exactly how new chair Kevin Warsh is going to run things but do know that inflation is rising and the labour market remains incredibly robust. US PPI came in at 1.1% on the month, putting the 12-month inflation rate at 6.5%, while CPI inflation rose to 4.2% year-on-year, its highest in three years. All eyes will be on Warsh as he holds his first post-meeting press conference. More on this from John now.
CPI inflation data for the UK will be released, providing some context to the Bank of England meeting this week. On to the Bank of England, which should be set to leave interest rates on hold. At the last meeting there was sense that a majority of policymakers were keen to look through any temporary rise in inflation linked to the US-Iran war because the economy and labour market are under so much pressure. Latest GDP figures showing a contraction in April underline the stagflationary backdrop. UK unemployment data is released in the morning ahead of the rate decision and is likely to set the tone. Should it hold until Thursday, the peace deal between the US and Iran is the single biggest reason to believe the BoE will hold rates steady at 3.75% and justify the MPC's decision to play a wait-and-see game.
Finally...almost forgot about the SpaceX IPO: SpaceX ended the day up 19% with a decent pop on market debut. The IPO got off very well. It was very oversubscribed so a decent pop at the open was anticipated but the bankers have handled this one well to keep volatility in check. There are questions about whether it can hold the $2tn valuation now. A lot depends on passive flows and index inclusion. Astera Labs, CoreWeave, Nebius, and Teradyne jumped sharply news of their on inclusion in the Nasdaq 100...Rocket Lab is also NDX-bound but tumbled because SpaceX sucked oxygen from the space tech sector. SPCX shares jumped another 6% in premarket trading early Monday.
This is an absolute whale of an IPO, a tough one for the market to swallow but there’s been more than enough interest to gobble up the shares. We can link the selloff in the tech sector over the last few days to the IPO – it's been a factor for sure along with Broadcom’s disappointment, Alphabet’s equity raise (plus perhaps Meta) and Fed tightening bets as inflation in the US hit a 3-year high. This IPO (plus Anthropic and OpenAI) has the potential to suck oxygen out of the market – just too much stock on offer...and I think we have seen a bit of that, but if it goes well can underpin further strength in the AI trade and the broader bull market. It’s a pivotal moment for the broader market – the culmination of the AI caravan coming to market or the start of a shakedown and cleaning up of the froth in the AI trade.
Indigestion may follow – we don’t really have a handle on who’s exiting and who’s buying. We do know that there are a lot of forced buyers in passive and index funds over the coming weeks; we don’t know the extent to which this is already discounted in the price. We also know that a heck of a lot of foreign investors have been excluded from the IPO process so there is a stack of potential demand there. We probably don't get a full price discovery until the lockups expire and owners who cannot sell today can exit...currently the price reflects a positive bull skew. And we need to see when the options start trade - which could be as early as Tuesday.
Lockup – more supply coming to the market: Investors who have owned the stock before IPO will be able to sell up to 20% of their holding from the second full day of trading after the company releases its earnings report after the end of the second quarter. There is an option to sell an additional 10% if the stock trades 30% above its IPO price for five of the 10 trading days after this earnings report is released. And they can sell 7% increments after 70, 90, 105, 120, and 135 days from today. And there is more – a further 28% could be sold after its third-quarter earnings. The rest unlocks at 180 days after the IPO today, but Elon Musk is tied in for 366 days, and he says several “significant” investors have also agreed to a one-year lockup.
The bull case is simple – you get a slice of the world’s dominant (if you think it is going to be as significant as the sellside says) space tech, communications and AI-infrastructure company. The bear case is chiefly resting on valuation and execution risks around some of the most fantastical estimates for earnings from space.
Indigestion may follow – we don’t really have a handle on who’s exiting and who’s buying. We do know that there are a lot of forced buyers in passive and index funds over the coming weeks; we don’t know the extent to which this is already discounted in the price. We also know that a heck of a lot of foreign investors have been excluded from the IPO process so there is a stack of potential demand there. We probably don't get a full price discovery until the lockups expire and owners who cannot sell today can exit...currently the price reflects a positive bull skew. And we need to see when the options start trade - which could be as early as Tuesday.
Lockup – more supply coming to the market: Investors who have owned the stock before IPO will be able to sell up to 20% of their holding from the second full day of trading after the company releases its earnings report after the end of the second quarter. There is an option to sell an additional 10% if the stock trades 30% above its IPO price for five of the 10 trading days after this earnings report is released. And they can sell 7% increments after 70, 90, 105, 120, and 135 days from today. And there is more – a further 28% could be sold after its third-quarter earnings. The rest unlocks at 180 days after the IPO today, but Elon Musk is tied in for 366 days, and he says several “significant” investors have also agreed to a one-year lockup.
The bull case is simple – you get a slice of the world’s dominant (if you think it is going to be as significant as the sellside says) space tech, communications and AI-infrastructure company. The bear case is chiefly resting on valuation and execution risks around some of the most fantastical estimates for earnings from space.
My other big question is around Tesla – how quickly does SpaceX take over the carmaker? There are a tonne of governance issues around such an acquisition but I think Musk is sure to be looking at this. Musk usually gets his way... roll on Anthropic and OpenAI.
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