Stock Indexes Fall as Chip Stocks Sink and Crude Soars

Stock indexes settled lower on Tuesday, with the Nasdaq 100 falling to a 1-week low. The broader market was under pressure on Tuesday amid a selloff in chipmakers, following Samsung Electronics' blowout earnings that failed to impress. Samsung, the world's largest memory maker by market value, closed down more than -8% in South Korea today even after profit surged 19-fold. Semiconductor stocks are facing heightened scrutiny amid lofty valuations as investors question whether hundreds of billions of dollars in spending on artificial intelligence can be sustained.

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Heightened geopolitical risks also weighed on stocks on Tuesday as crude oil prices jumped to a 1.5-week high following attacks on shipping in and around the Strait of Hormuz, highlighting continued risks to vessels in the region. The higher crude prices also raised inflation expectations and boosted bond yields, as the 10-year T-note yield climbed to a 3.5-week high of 4.54% on Tuesday.

On the positive side, strength in software stocks on Tuesday shows investors are rotating funds into other sectors and is a supportive factor for the overall market. Also, Tuesday's surge in crude oil prices supported gains in energy producers.

Tuesday's US trade news was bearish for stocks after the US May trade deficit widened to -$77.6 billion, the largest deficit in 14 months and a negative factor for Q2 GDP.

Comments on Tuesday from New York Fed President John Williams were slightly hawkish for Fed policy, as he said inflation is still quite high and that he sees steady economic growth and labor market stability.

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) jumped more than +5% on Tuesday to a 1.5-week high following attacks on shipping in and around the Strait of Hormuz. Axios reported that a Qatari LNG gas carrier was hit by a projectile and a laden Saudi oil tanker suffered damage near the Omani coast as they exited the Strait of Hormuz. Axios also reported earlier that Iran fired at least two missiles at commercial ships transiting through the Strait. Crude prices raced to their high Tuesday afternoon when the US Treasury Department revoked the Iran oil waiver that allowed buyers to legally purchase and transport Iranian oil in response to renewed attacks by Iran on commercial shipping in the Strait of Hormuz.

The markets are discounting a 27% chance of a +25 bp rate hike at the next FOMC meeting on July 28-29.

Overseas stock markets settled lower on Tuesday. The Euro Stoxx 50 closed down -1.22%. China's Shanghai Composite fell to a 3.5-week low and closed down -1.26%. Japan's Nikkei-225 Stock Average closed down -2.12%.

September 10-year T-notes (ZNU6) on Tuesday closed down -10 ticks, and the 10-year T-note yield rose +6.6 bp to 4.535%. Sep T-notes fell to a 3.5-week low on Tuesday, and the 10-year T-note yield rose to a 3.5-week high of 4.545%. Tuesday's +5% surge in WTI crude oil prices to a 1.5-week high boosted inflation expectations and weighed on T-note prices. The 10-year breakeven inflation rate jumped to a 2-week high of 2.264% on Tuesday. Also, hawkish comments from New York Fed President John Williams undercut T-note prices when he said inflation is still quite high. In addition, weak demand for the Treasury's $58 billion auction of 3-year T-notes weighed on T-notes, as the auction had a bid-to-cover ratio of 2.60, weaker than the 10-auction average of 2.66.

European government bond yields moved higher on Tuesday. The 10-year German bund yield climbed to a 3-week high of 2.996% and finished up +4.6 bp to 2.993%. The 10-year UK gilt yield rose to a 2-week high of 4.851% and finished up +5.5 bp to 4.848%.

German May industrial production rose +0.9% m/m, stronger than expectations of +0.1% m/m and the largest increase in 8 months.

Swaps are discounting a 4% chance of a +25 bp ECB rate hike at its next policy meeting on July 23.

Chipmakers and AI infrastructure stocks sold off on Tuesday after Samsung Electronics reported preliminary earnings that fell short of high expectations. The iShares Semiconductor ETF (SOXX) fell to a 4-week low, closing down more than 4%. Astera Labs (ALAB) closed down more than -11% to lead losers in the Nasdaq 100, and Intel (INTC) closed down more than -9% to lead losers in the S&P 500. Also, Western Digital (WDC), Marvel Technology (MRVL), SanDisk (SNDK), and KLA Corp (KLAC) closed down more than -7%, and Applied Materials (AMAT), Lam Research (LRCX), Advanced Micro Devices (AMD), and ARM Holdings Plc (ARM) closed down more than -6%. In addition, Seagate Technology Holdings Plc (STX), Micron Technology (MU), and ASML Holding NV (ASML) closed down more than -4%, and Microchip Technology (MCHP), ON Semiconductor (ON), and Texas Instruments (TXN) closed down more than -3%. Finally, Analog Devices (ADI), NXP Semiconductors NV (NXPI), and Qualcomm (QCOM) closed down more than -2%.