Stocks Pressured as US-Iran Hostilities Resume

The S&P 500 Index ($SPX) (SPY) today is down -0.49%, the Dow Jones Industrial Average ($DOWI) (DIA) is down -0.96%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.19%.  September E-mini S&P futures (ESU26) are down -0.49%, and September E-mini Nasdaq futures (NQU26) are down -0.21%. 

Stock indexes are moving lower today as crude oil prices and bond yields jumped after President Trump declared the ceasefire with Iran is over. Mr. Trump called the ceasefire “a waste of time” after the US launched strikes against Iran in response to attacks on ships transiting the Strait of Hormuz.  The escalation of hostilities has prompted a flight from risk and some stock selling.  Limiting losses in the broader market is today’s strength in chipmakers and AI-infrastructure stocks, which are recovering some of Tuesday’s sell-off.

The escalation of hostilities in the Middle East has pushed crude prices sharply higher to a 2-week high, boosting inflation expectations and sending bond yields higher.  The 10-year T-note yield rose to a 1.5-month high of 4.58%. 

US MBA mortgage applications fell -2.2% in the week ended July 3, with the purchase mortgage sub-index down -0.6% and the refinancing mortgage sub-index down -4.1%.  The average 30-year fixed rate mortgage rose +1 bp to 6.58% from 6.57% in the prior week.

The outlook for strong Q2 earnings is a bullish factor for stocks. Forecasts compiled by Bloomberg Intelligence suggest Q2 earnings may increase by +23%, close to Q1’s blowout earnings of +30%, which was more than double the +12% analysts had expected. AI spending is expected to account for most of earnings, with AI infrastructure stocks set to contribute nearly 60% of the S&P 500's earnings-per-share growth in Q2.   

WTI crude oil (CLQ26) surged more than +4% today to a 2-week high after the US launched strikes against more than 80 targets in Iran in response to Iran attacking commercial shipping in the Strait of Hormuz.  Also, President Trump said the ceasefire with Iran is over, raising the prospect of renewed hostilities in the region that could disrupt energy supplies.  The US late Tuesday also revoked the Iran oil waiver that allowed buyers to purchase and transport Iranian oil legally.

The markets are discounting a 32% chance of a +25 bp rate hike at the next FOMC meeting on July 28-29.

Overseas stock markets are lower today.  The Euro Stoxx 50 fell to a 3.5-week low and is down -1.53%. China's Shanghai Composite slid to a 3.5-week low and closed down -0.49%.  Japan's Nikkei-225 Stock Average dropped to a 3-week low and closed down -2.11%.

Interest Rates

September 10-year T-notes (ZNU6) today are down -9 ticks, and the 10-year T-note yield is up +1.0 bp to 4.561%.  Sep T-notes dropped to a 1.5-month low today, and the 10-year T-note yield rose to a 1.5-month high of 4.581%.  Today’s +4% surge in WTI crude oil prices to a 2-week high has boosted inflation expectations and undercut T-note prices.  The 10-year breakeven inflation rate rose to a 2-week high of 2.276% today.  Also, supply pressures are weighing on T-note prices as the Treasury will auction $39 billion of 10-year T-notes later today. 

European government bond yields are moving higher today.  The 10-year German bund yield rose to a 3.5-week high of 3.077% and is up +6.3 bp to 3.056.  The 10-year UK gilt yield jumped to a 1.5-month high of 4.960% and is up +6.6 bp to 4.914%.

Swaps are discounting a 13% chance of a +25 bp ECB rate hike at its next policy meeting on July 23.

US Stock Movers

Homebuilders and building suppliers are under pressure today after the 10-year T-note yield jumped to a 1.5-month high, a negative factor for housing demand.  Builders Firstsource (BLDR) is down more than -4%, and Home Depot (HD) is down more than -3% to lead losers in the Dow Jones Industrial.  Also, DR Horton (DHI), Lennar (LEN), Pulte Group (PHM), KB Home (KBH), and Toll Brothers (TOL) are down more than -2%. 

Airline stocks and cruise line operators slid on Tuesday after WTI crude oil prices jumped by more than +4%.  United Airlines Holdings (UAL), American Airlines Group (AAL), Alaska Air Group (ALK), and Carnival (CCL) are down more than -2%.  Also, Delta Air Lines (DAL) and Norwegian Cruise Line Holdings (NCLH) are down more than -1%.

Software stocks are sliding today, weighing on the broader market.  Palantir Technologies (PLTR) is down more than -4%, and Atlassian Corp (TEAM), Intuit (INTU), Workday (WDAY), and ServiceNow (NOW) are down more than -3%.  Also, Thomson Reuters (TRI), Autodesk (ADSK), and Salesforce (CRM) are down more than -2%, and Adobe Systems (ADBE) and Microsoft (MSFT) are down more than -1%.

Chipmakers and AI infrastructure stocks are moving higher today, recovering some of Tuesday's sell-off.  The iShares Semiconductor ETF (SOXX) is up more than 1%.  Western Digital (WDC) is up more than +5% to lead gainers in the S&P 500 and Nasdaq 100.  Also, Applied Materials (AMAT), SanDisk (SNDK), and Broadcom (AVGO) are up more than +3%, and ARM Holdings Plc (ARM), KLA Corp (KLAC), NXP Semiconductors NV (NXPI), Seagate Technology Holdings Plc (STX), and Texas Instruments (TXN) are up more than +2%.  In addition, Micron Technology (MU), Microchip Technology (MCHP), and Qualcomm (QCOM) are up more than +1%. 

Energy producers and service providers are climbing today with crude oil prices up by more than +4% at a 2-week high.  Baker Hughes (BKR) and Valero Energy (VLO) are up more than +3%, and Occidental Petroleum (OXY), Marathon Petroleum (MPC), and Phillips 66 (PSX) are up more than +2%.  Also, APA Corp (APA), ConocoPhillips (COP), Chevron (CVX), Diamondback Energy (FANG), Haliburton (HAL), and SLB Ltd (SLB) are up more than +1%.

Lemonade Inc (LMND) is down more than -9% after Morgan Stanley downgraded the stock to equal weight from overweight with a price target of $75.

Navitas Semiconductor (NVTS) is down more than -6% after Wolfspeed filed a patent infringement lawsuit against the company, alleging that a broad range of Navitas products infringes multiple Wolfspeed patents. 

Bath & Body Works (BBWI) is down more than -6% after Goldman Sachs downgraded the stock to sell from neutral with a price target of $19.

Ollie's Bargain Outlet Holdings (OLLI) is down more than -5% after JPMorgan Chase downgraded the stock to neutral from overweight.

PayPal Holdings (PYPL) is down more than -2% after Barclays initiated coverage on the stock with an underweight rating and a price target of $42. 

Beazer Homes USA (BZH) is up more than +14% after Dream Finders Homes said it has submitted an all-cash proposal to acquire the company for $32 a share.

Dell Technologies (DELL) is up more than +2% after Evercore ISI raised its price target on the stock to $500 from $450. 

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