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London Quick Take - 8 July - Sentiment hit by US-Iran re-escalation, oil up, semis still under pressure with Kospi in bear market
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
TL/DR: Kospi in a bear market as semis and memory rocked ahead of Q2 earnings season with SPX forward earnings expectations running super-hot and Fed looking to control inflation...US and Iran shooting at each other again...not a great setup heading into FOMC meeting 28-29 July.
Equity market sentiment is under renewed pressure from a jump in oil prices after the US and Iran traded strikes after Washington accused Tehran of attacking commercial vessels in the Strait of Hormuz. The US hit dozens of Iranian military targets hours after the Treasury revoked an oil export waiver allowing Iranian oil sales, in what is the sharpest escalation of tensions in more than three weeks. Brent crude futures leapt about 3% from $72 to $76, hitting a two-week high. With oil longs cleared out there is scope for another rally here, and clearly higher oil prices raises stagflation fears and weighs on the growth outlook, but I think it’s unlikely we see further escalation as it remains in both sides’ interests to cool it down. Bond yields have ticked up on a typical inflation worry reflex. It comes as Donald Trump tests the NATO alliance by saying the US could pull out all troops from Europe...underlines the long-term strucutral case for defence sector shares as a new fiscal compact emerges in Europe.
European equity markets opened sharply lower in response to the re-escalation in the Middle East. The FTSE 100 dipped about 0.8% while the DAX headed more than 1.1% lower early doors. Shell and BP did some heavy lifting as oil gained but this wasn’t enough to offset declines across miners, airlines and anything exposed to the housebuilding trade with another profit warning this morning from Vistry, which dropped –7.5% to the bottom of the FTSE 350.
It comes on the back of a weak session for Europe after a global chip selloff that continued to play into fears about an AI bubble. On Tuesday the Stoxx 600 fell 0.7%, the DAX dropped 1.4%, and the Euro Stoxx 50 lost 1.2% as Europe joined the global technology retreat. Weakness in semis and memory stocks drove losses on Wall Street. The S&P 500 fell -0.5% and the Nasdaq 100 was off -1.8%, as Samsung’s 19-fold leap in profits wasn’t enough for the market priced for perfection. Intel sank -9.7% and AMD fell -6.5%, with Micron –5%...some Mag7 names were a little stronger to offset, while Financials and Health Care saw some gains. Weakness in chips continues to play out today with Korea’s Kospi down another 5% to enter bear market territory – ie down more than 20% from its recent all-time high.
Couple of pointers for the Fed meeting, which I continue to think is ‘live’. The Atlanta Fed's GDPNow model points to Q2 GDP growth of 1.4%, dragged down by AI imports. But while trade 'imbalances' (rising imports, declining exports) is weighing on GDP, it's not hitting real final sales, which are up nearly 3%, while consumer spending growth is forecast +2% from +0.5% in Q1 and business investment runs +8.2% from +6.5% in Q1. The New York Fed’s one-year inflation expectations rose to 3.7% in June. Minutes from the June FOMC meeting are due up later this evening with the details more important than usual as a) it was Kevin Warsh’s first time in the chair, and b) he didn’t tell the market anything. Some thoughts here on the current Fed outlook.
Will Castlelake’s complex bid for easyJet get torpedoed? Pricing of easyJet shares since news of the 690p-a-share offer being recommended by the board suggests it might. But which way? Shares jumped on the deal but ended yesterday below 600p, well short of the deal price...so what gives? Maybe the complex nature of the way the deal addresses EU regulatory requirements is a factor. So, by this reckoning the shares are underpriced to the offer because markets don’t think it pass muster. It’s also reflective of a bigger concern – that if easyJet board caved after rejecting four previous offers it’s not just that an extra £300mn was enough to seal the deal. The board may also be concerned that a goal of £1bn in annual profits is pure pie in the sky; the Iran war has underlined the problems facing the industry and no amount of fuel efficiency from a newer fleet is going to help. But could a rival torpedo the deal? IAG and Air France-KLM could be waiting and anything north of 700p a share shouldn’t look too shabby.
SpaceX landed multiple bullish calls from analysts ahead of its inclusion on the NDX and the end of the quiet period for banks that had worked on the listing. Of at least 17 analyst ratings released Tuesday all but one were a Buy. Shares of SpaceX didn’t get off the ground though – down –5% amid the broad AI-related selloff.
Finally, lots of political noise in the UK - tomorrow sees nominations open for the Labour leader race - Andy Burnham should be crowned. Reform leader Nigel Farage wants his own moment in the sun, but no one wants to play, with Labour, Conservatives et al refusing to take part in the confected Clacton by-election.
Equity market sentiment is under renewed pressure from a jump in oil prices after the US and Iran traded strikes after Washington accused Tehran of attacking commercial vessels in the Strait of Hormuz. The US hit dozens of Iranian military targets hours after the Treasury revoked an oil export waiver allowing Iranian oil sales, in what is the sharpest escalation of tensions in more than three weeks. Brent crude futures leapt about 3% from $72 to $76, hitting a two-week high. With oil longs cleared out there is scope for another rally here, and clearly higher oil prices raises stagflation fears and weighs on the growth outlook, but I think it’s unlikely we see further escalation as it remains in both sides’ interests to cool it down. Bond yields have ticked up on a typical inflation worry reflex. It comes as Donald Trump tests the NATO alliance by saying the US could pull out all troops from Europe...underlines the long-term strucutral case for defence sector shares as a new fiscal compact emerges in Europe.
European equity markets opened sharply lower in response to the re-escalation in the Middle East. The FTSE 100 dipped about 0.8% while the DAX headed more than 1.1% lower early doors. Shell and BP did some heavy lifting as oil gained but this wasn’t enough to offset declines across miners, airlines and anything exposed to the housebuilding trade with another profit warning this morning from Vistry, which dropped –7.5% to the bottom of the FTSE 350.
It comes on the back of a weak session for Europe after a global chip selloff that continued to play into fears about an AI bubble. On Tuesday the Stoxx 600 fell 0.7%, the DAX dropped 1.4%, and the Euro Stoxx 50 lost 1.2% as Europe joined the global technology retreat. Weakness in semis and memory stocks drove losses on Wall Street. The S&P 500 fell -0.5% and the Nasdaq 100 was off -1.8%, as Samsung’s 19-fold leap in profits wasn’t enough for the market priced for perfection. Intel sank -9.7% and AMD fell -6.5%, with Micron –5%...some Mag7 names were a little stronger to offset, while Financials and Health Care saw some gains. Weakness in chips continues to play out today with Korea’s Kospi down another 5% to enter bear market territory – ie down more than 20% from its recent all-time high.
Couple of pointers for the Fed meeting, which I continue to think is ‘live’. The Atlanta Fed's GDPNow model points to Q2 GDP growth of 1.4%, dragged down by AI imports. But while trade 'imbalances' (rising imports, declining exports) is weighing on GDP, it's not hitting real final sales, which are up nearly 3%, while consumer spending growth is forecast +2% from +0.5% in Q1 and business investment runs +8.2% from +6.5% in Q1. The New York Fed’s one-year inflation expectations rose to 3.7% in June. Minutes from the June FOMC meeting are due up later this evening with the details more important than usual as a) it was Kevin Warsh’s first time in the chair, and b) he didn’t tell the market anything. Some thoughts here on the current Fed outlook.
Will Castlelake’s complex bid for easyJet get torpedoed? Pricing of easyJet shares since news of the 690p-a-share offer being recommended by the board suggests it might. But which way? Shares jumped on the deal but ended yesterday below 600p, well short of the deal price...so what gives? Maybe the complex nature of the way the deal addresses EU regulatory requirements is a factor. So, by this reckoning the shares are underpriced to the offer because markets don’t think it pass muster. It’s also reflective of a bigger concern – that if easyJet board caved after rejecting four previous offers it’s not just that an extra £300mn was enough to seal the deal. The board may also be concerned that a goal of £1bn in annual profits is pure pie in the sky; the Iran war has underlined the problems facing the industry and no amount of fuel efficiency from a newer fleet is going to help. But could a rival torpedo the deal? IAG and Air France-KLM could be waiting and anything north of 700p a share shouldn’t look too shabby.
SpaceX landed multiple bullish calls from analysts ahead of its inclusion on the NDX and the end of the quiet period for banks that had worked on the listing. Of at least 17 analyst ratings released Tuesday all but one were a Buy. Shares of SpaceX didn’t get off the ground though – down –5% amid the broad AI-related selloff.
Finally, lots of political noise in the UK - tomorrow sees nominations open for the Labour leader race - Andy Burnham should be crowned. Reform leader Nigel Farage wants his own moment in the sun, but no one wants to play, with Labour, Conservatives et al refusing to take part in the confected Clacton by-election.
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