Market Story Lines

Hello, I'm Michael Reinking, Senior Market Strategist at the NYSE, and this is Market Storylines. Every week we are here to keep you to date on the key trends and events driving global markets. We are recording on Thursday afternoon in what’s been a volatile week, so let’s dive right in.

For the last few weeks, the main topic within market circles has been the AI disruption trade which has methodically been rolling through sectors seemingly with the release of each new Claude Code plug in. As Eric highlighted AI-Anxiety seemed to hit a fevered pitch last week after the Citrini thought piece over the weekend, pointing to a dystopian future where adoption of AI ultimately led to 10% unemployment. This started to weigh heavily on consumer-facing companies, payment processors and credit card companies further adding to the weakness in the financial sector which had already been dealing with private credit concerns given exposure to software.

The Anthropic event during the week where the company highlighted partnerships as opposed to displacement calmed the waters but then on Friday the final trading day of the month, payments firm Block announced it would cut 40% of its workforce. Founder Jack Dorsey cited the improvement in AI models as the driver and with the Citrini scenario fresh on everyone’s mind this damaged psyche again. The reasoning for the layoffs has been hotly debated but it did raise concerns that after a period of a low hire low fire environment there could be a wave of job cuts with companies blaming or crediting the technology, depending on how you look at it, re-popularizing the term AI-washing.

As we’ve seen throughout the year the losses at the index level were contained with most major indices ending the week down ~1% but as we’ve noted there has been wild dispersion beneath the surface. Here are a couple of interesting data points to highlight this dynamic Ryan Detrick of Carson Group highlighted that 2.7% range in the S&P 500 through the first two months of the year is the smallest ever. While Barclays pointed out that the range for the average stock in the S&P 500 was about 7X that, the largest ratio since they started tracking the data in 1994. For the week and the month, financials and tech led to the downside with those sectors in the S&P 500 down between 4 - 5% in February, while defensive sectors like consumer staples, yield oriented sectors and energy led to the upside ending the week up ~2% and well over 5% in February.

Beyond the AI concerns some of that defensive posturing has been in response to the military build up in the Middle East and warnings from the administration over the last month. There was some mixed reporting coming out of the negotiations with Iran last week but over the weekend diplomatic efforts were called off as operation Epic Fury got underway. Before I go any further First and foremost, our thoughts and prayers are with all the service men/women and their families.

I'm not going to opine on the military or political situation — there are people far better qualified than me to do that. What I can do is help explain what we're seeing in markets and why they're responding the way they are.

The first takeaway is that volatility has increased with markets responding to each airstrike/response, the potential length of the campaign and reports of backchannel negotiations. At this point the administration has suggested the campaign could last up to 8 weeks so this is a dynamic that could be with us for a while.

At least initially we’ve seen markets institute most of the typical conflict playbook. Equities were under pressure, oil prices rallied, precious metals moved higher and the USD had a strong safe haven bid. However, the typical safe-have Treasury buying did not emerge with rising concerns of “war-flation” driven by the impact of higher energy costs and the potential closure of the Strait of Hormuz pushing yields higher.

These dynamics have evolved throughout the week so instead of giving the blow-by-blow reaction to each headline I’ll try to cover the response across each of these asset classes at a high level.

From a financial market perspective the key to this whole conflict revolves around the length of the conflict, its impact on energy prices and the Strait of Hormuz. Somewhere between 20-30% of petroleum liquids move through the straight. In addition about a third of LNG shipments and key fertilizer ingredients ammonia and urea move through the strait as well. It is important to note that this disproportionately impacts Asia, which imports nearly 90% of that oil and ~80% of the LNG. Europe takes in a about 15% of the LNG. The US has become much more energy independent over the last twenty or so years so it has less of an impact. Oil prices have been moving higher throughout the week up >15% while gasoline is up >25% adding to recent gains. US nat gas prices are modestly higher but a far cry from the >50% increases seen in Asia and Europe.

Moving to equity markets, this event didn’t come out of left field as we noted there has been some defensive posturing leading in and portfolios seemed reasonably well hedged. This caused some of the initial weakness to get bought as traders were quick to monetize hedges, and looked to buy the dip as markets have tended to shrug off these types of geopolitical catalysts recently with the saying “when the bombs fly it’s time to buy” making its way around.

Markets reacted positively to headlines that the administration would provide military support to tankers in the Strait of Hormuz and help to financially backstop insurance and reports that Iran had reached out through backchannels to negotiate but has that has been refuted and as investors weigh the possibility of a longer campaign markets have turned lower again.

Travel related stocks have been under pressure throughout the week while defense contractors and energy stocks have moved higher. As we’ve noted many times in the past, the increase in volatility across asset classes causes some systematic de-risking. There were some signs that this was happening even during the bounce as crowded trades were being unwound like long semis/memory short software. Consumer staples and materials which have been two of the best performing sectors YTD are both down >5% for the week. While mega-cap tech is modestly higher showing some of the defensive qualities that we’ve seen over the last few years. The S&P 500 is trading below its 100d moving average but is still holding within the range we’ve been highlighting down ~1.5% for the week. The December low ~6,720 is a key level to watch.

As we highlighted Treasury yields have been moving higher throughout the week driven by the war-flation concerns. 2-10yr yields are up ~20bps reversing a good portion of the YTD move lower and markets have started to push out the prospect of the first rate cut to the fall from the summer. This week’s economic data has been reasonably positive. ISM Manufacturing, Services and the ADP Employment Change all camein better than expected and there were no material changes in the claims data ahead of tomorrow’s BLS Employment report. The street looking for ~60k jobs to be added to the economy and the unemployment rate to hold steady at 4.3%.

One other interesting note is that we’ve seen crypto rally this week with Bitcoin up over 5% and trading back above 70k. After meeting with Coinbase CEO Brian Armstrong, President Trump warned banks to stop “undermining” the Crypto Agenda which helped sentiment but both sides seem to be dug in as it relates to the Clarity Act. We’ve highlighted the correlation with software recently and some of this could be short covering.

Quickly looking ahead we’ll close out the week with the jobs report and retail sales. Next week the key data will be CPI on Wed and January PCE on Friday but the Middle East will remain the focal point.

That’s going to do it for this week thanks for spending some time with us. If you liked today’s episode, please tell a friend or leave a comment wherever you listen to your podcasts. I’m Michael Reinking and we’ll talk to you again next week.

Coming out of the weekend traders instituted the typical conflict playbook with equities broadly under pressure with travel related stocks bearing the brunt of that selling while defense contractors and energy stocks moved higher. On Sunday evening oil prices were up >10% but gave up about half of the gains on Monday. Precious metals also initially moved higher but gold only ended modestly higher well off the best levels while other metals turned lower. The USD dollar had a strong bid. However, after rallying for the last month Treasuries did not catch the safe haven bid as inflation concerns sent yields higher.

S&P 500 holding the February lows around 6,780 with the S&P 500 ending the day around unchanged.

The tone shifted on Monday evening, as Iran fired on ships in the Strait of Hormuz and attacked energy and infrastructure targets across the Middle East and a cautious tone from the administration preparing the public for an operation that could carry on for weeks. The caused some broader weakness initially on Tuesday with energy prices and yields moving sharply higher overnight but as there were reports that the administration would provide military support for tankers in the Strait and help to financially backstop insurance energy and yields backed off and there was another big intraday bounce in equities with the S&P 500 bouncing ~2.5% off the lows to once again end around after testing the December lows and the bottom end of the ~250pt range we’ve been highlighting for months now.

Markets bounced Wednesday largely driven by a NYT times report that suggested Iran had reached out through backchannels to negotiate an end to the war but that has since been refuted and equities are under pressure again today.