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 another week volatile week. So let’s dive in….
Hopefully everyone enjoyed the long holiday weekend and some time with family. Before we dive in a quick congratulations to the UCLA women, and Michigan men’s basketball teams for their respective national championship victories. It is clear that the Big 10 is the dominant sports conference in the post re-alignment era with two teams in the weekend’s frozen four championship as well. Though as a Big 10 alum it still feels weird to refer to UCLA in that light.
As has been the case for the last month Iran headlines continued to drive much of the activity last week. As Eric highlighted there were signs that the administration was looking for a potential off ramp and the hopes for de-escalation helped most major US indices bounce ~3% with the S&P 500 breaking a 5-week losing streak.
While equity markets were closed on Friday the BLS Employment report was released and continued a string of volatile readings. On the surface it was a strong report with just under ~180k jobs added to the economy, nearly 3X the estimate and reversing the sharp decline in the previous month. In addition, the unemployment rate ticked down to 4.3%. However, the underlying metrics within the report were a bit more mixed with gains driven primarily by healthcare and social assistance, a weaker household survey which showed the labor force shrinking by 400k, a decline in average hourly earnings and the length of the workweek. On the surface it was a hawkish report easing some of the concern about the labor market with the prospect of an inflationary impulse on the horizon, with this week’s inflation data expected to start to shed some light on that. In a rare occurrence, equity traders were home while bond traders had an abbreviated session in which yields moved modestly higher reversing some of the week’s Treasury rally.
By the time markets re-opened on Monday this was old news once again overshadowed by Iran headlines with President Trump threatening to “obliterate” key infrastructure in Iran if a deal wasn’t reached before the impending deadline, which he ultimately pushed back to 8:00 on Tuesday evening. Iran said it would respond by sending Saudi Arabia and the entire region into darkness. While most global markets were closed S&P futures traded down >0.5% in the overnight session but US equities ended Monday’s session modestly higher amidst reports suggesting last ditch diplomatic efforts, though it was the lightest volume session of the year, with light attendance and traders largely sitting on their hands given the wide range of potential outcomes. With the time quickly running out on the clock on Tuesday markets were once again under pressure with situation remaining fluid as the two-side continued to exchange bellicose rhetoric. The US hit military targets on Kharg island and Israel struck bridges and railways. However, once again by the end of the day markets had recouped losses with hopes that diplomacy would prevail.
One of the themes on our podcast of the last few weeks has been the celebration of the anniversaries of some recent key market moments….and today is another one of those as it marks the 1yr anniversary of the tariff policy pivot which led to over a 10% intraday reversal in the S&P 500 sparking the rally that lasted throughout the end of last year and the ultimate creation of the TACO monikor. So it was fitting that, on a Tuesday night nonetheless, just minutes before the deadline President Trump announced that there would be a 15-day ceasefire. Which led to a sharp rally in global equity markets and significant declines in both oil and natural gas markets. The details of the agreement are murky at best with the two sides expected to meet on Friday in Pakistan. Given the lack of clarity there has been some skepticism about whether the ceasefire would hold as Iran continued to restrict passage in the Strait. Officials have said that would be limited to 15 ships per day, about 10% of the levels prior to the escalation of the conflict, and demanding payment for passage. In addition, Israel stepped up strikes on Lebanon which Iran claimed was a breach.
This afternoon Israel agreed to direct talks with Lebanon which has helped equities extend the rally and ICE Brent which had traded back up to ~$100 from the low 90’s yesterday pull back to $95 which is still over $20 above where it was trading before the start of the conflict. For the week the S&P 500 is up >3% for the second week in a row and back around unchanged levels for the year while global markets have outperformed given the well-documented reliance on energy from the region.
There has been pretty broad-based strength within equities with strength in consumer-facing and travel-related companies. Levis and Delta Airlines both had solid earnings report this week with the latter highlighting strong demand from both leisure and corporate customers. In light of the recent commodity volatility the company said it had reduced capacity and was increasing some fees.
Semis and AI infrastructure stocks have been some of the best performing with a stream of positive news flow within the space. There are no signs that demand is slowing down. In a shareholder letter Amazon’s CEO Andy Jasse defended the companies $200B spending saying, “they aren’t going to be conservative” in addition Meta announced a new $21B deal with neo-cloud company Coreweave along with its newest model Muse Spark.
The flipside of this trade has been the return of weakness in the software sector, which had a reprieve during the escalation of the conflict. This week Anthropic announced that it would not release the newest version of its Mythos model to the public as the company said it had “already found thousands of high-severity vulnerabilities” in key software and operating systems…….which if in the wrong hands could cause severe fallout. Instead, the company has started Project Glasswing sharing the frontier model with a select group of companies to help secure critical software. OpenAI is reportedly following suit with its most recent models. This once again is pressuring enterprise software companies with the sector down ~5% for the week.
As we head into Friday there are a couple of catalysts still ahead of us. First and foremost, the ceasefire negotiations but ahead of the open CPI will also be released. This will be the first look at the inflationary impact since the start of the conflict with the street expecting and m/m increase of nearly 1% on headline and an annual reading in the mid-3’s. Treasury yields have pulled back modestly this week down between 5-10bps across the curve while yields overseas have seen much more significant moves.
Looking out to next week the Middle East will remain the focal point. We can hope there will be some reprieve as earnings season officially gets underway with analysts looking for Q1 S&P 500 earnings to be up >13% y/y the sixth consecutive quarter of double-digit gains and one of the primary reasons that the pullback in equities over the last month has been reasonably subdued. We’ll have much more to say on this front in the coming weeks.
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.