Stocks Retreat on US-Iran Jitters

The S&P 500 Index ($SPX) (SPY) today is down -0.79%, the Dow Jones Industrial Average ($DOWI) (DIA) is down -1.44%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.61%.  September E-mini S&P futures (ESU26) are down -0.77%, and September E-mini Nasdaq futures (NQU26) are down -0.60%. 

Stock indexes are sliding 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.

Stocks added to their losses today, and crude prices raced to their highs on comments from President Trump, who said the US will probably launch further strikes on Iran and could resume a blockade of the country's ports. 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 4.59%. 

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 +7% 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 33% 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 -1.54%. 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 -14 ticks, and the 10-year T-note yield is up +3.4 bp to 4.585%.  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 4.591%.  Today’s +7% 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 2.277% 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 3.083% and is up +8.0 bp to 3.073%.  The 10-year UK gilt yield jumped to a 1.5-month high of 4.961% and is up +10.6 bp to 4.954%.

ECB Governing Council member and Bundesbank President Joachim Nagel said he can't rule out another ECB interest rate increase due to the recent setback with Iran. 

Swaps are discounting a 17% 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 -6%, and DR Horton (DHI) and Pulte Group (PHM) are down more than -4%.  Also, Home Depot (HD), Lennar (LEN), and Toll Brothers (TOL) are down more than -3%, and KB Home (KBH) is down more than -2%. 

Airline stocks and cruise line operators slid on Tuesday after WTI crude oil prices jumped by more than +7%.  American Airlines Group (AAL) and Alaska Air Group (ALK) are down more than -5%, and Carnival (CCL) is down more than -4%.  Also, Delta Air Lines (DAL), Norwegian Cruise Line Holdings (NCLH), and United Airlines Holdings (UAL) are down more than -3%.

Software stocks are sliding today, weighing on the broader market.  Palantir Technologies (PLTR), Intuit (INTU), and Workday (WDAY) are down more than -4%, and Atlassian Corp (TEAM) and

ServiceNow (NOW) are down more than -3%.  Also, Oracle (ORCL), 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%.

Energy producers and service providers are climbing today with crude oil prices up by more than +7% at a 2-week high.  Occidental Petroleum (OXY) is up more than +5% to lead gainers in the S&P 500, and Valero Energy (VLO) is up more than +5%.  Also, Baker Hughes (BKR), Marathon Petroleum (MPC), and Phillips 66 (PSX) are up more than +4%, and APA Corp (APA) and Diamondback Energy (FANG) are up more than +3%.  In addition, ConocoPhillips (COP), Chevron (CVX), Devon Energy (DVN), and Halliburton (HAL) are up more than +2%, and SLB Ltd (SLB) is up 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 nearly 1%.  Broadcom (AVGO) is up more than +4%, and SanDisk (SNDK) and Texas Instruments (TXN) are up more than +2%.  Also, Western Digital (WDC), NXP Semiconductors NV (NXPI), Analog Devices (ADI), and Lam Research (LRCX) 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 -8% after Wolfspeed filed a patent infringement lawsuit against the company, alleging that a broad range of Navitas products infringes multiple Wolfspeed patents. 

Ollie's Bargain Outlet Holdings (OLLI) is down more than -7% after JPMorgan Chase downgraded the stock to neutral from overweight.

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.

PayPal Holdings (PYPL) is down more than -3% 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.

Dollar Tree (DLTR) is up more than +1% after Raymond James upgraded the stock to outperform from market perform with a price target of $140.

Dell Technologies (DELL) is up more than +1% after Evercore ISI raised its price target on the stock to $500 from $450. 

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