Stocks Pressured as Middle East Hostilities Boost Inflation Risks
Stocks Pressured as Middle East Hostilities Boost Inflation Risks.
The S&P 500 Index ($SPX) (SPY) on Monday closed down -0.19%, the Dow Jones Industrial Average ($DOWI) (DIA) closed down -0.59%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.04%. September E-mini S&P futures (ESU26) fell -0.20%, and September E-mini Nasdaq futures (NQU26) rose +0.01%.
Stock indexes on Monday settled mixed, with the Dow Jones Industrials falling to a 3-week low. Stocks gave up early gains on Monday and settled mixed as rising crude oil prices boosted bond yields and undercut stocks. Crude prices rose to a 5-week high on Monday amid concern the US-Iran conflict will worsen and lead to higher inflation. The 10-year T-note yield rose +5 bp to 4.60%.
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The Nasdaq 100 settled slightly higher on Monday as short covering emerged in chipmakers and AI-infrastructure stocks ahead of earnings results of megacap technology stocks this week, beginning with Alphabet on Wednesday.
Geopolitical risks continue, as the US conducted a ninth straight day of airstrikes on Iran in an attempt to reopen the Strait of Hormuz, bombing military targets and communications networks. Iran retaliated by launching drones and missiles at US bases in Kuwait, Jordan, Bahrain, and Iraq and attacking tankers transiting the Strait of Hormuz. The New York Times reported on Monday that the US is sending more warplanes to the Middle East, including F-35 and F-16 fighter jets, a possible sign that US military operations could expand in the coming days. Also, President Trump on Monday vowed Iran "will pay" for killing three US soldiers in recent days.
Signs that the conflict in the Middle East is widening weighed on market sentiment on Monday and supported crude oil after Houthi rebels said they will impose a maritime blockade on Saudi Arabia in retaliation for what they say is the kingdom's siege on the Yemeni capital, a potential threat to Saudi Arabian crude exports through the Red Sea.
WTI crude oil (CLQ26) prices erased their gains and briefly fell into negative territory on Monday after Iran said it wouldn't abandon diplomacy and that Qatar and Pakistan had reached out to mediate an end to the conflict, proposing a 10-day ceasefire between the US and Iran.
The outlook for strong Q2 earnings, which begin in earnest this week, 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.
The markets are discounting a 17% chance of a +25 bp rate hike at the next FOMC meeting on July 28-29.
Overseas stock markets settled mixed on Monday. The Euro Stoxx 50 closed down -0.06%. China's Shanghai Composite recovered from a 10.5-month low and closed up +0.85%. Japan's Nikkei-225 Stock Average did not trade, with Japanese markets closed on Monday for the Marine Day holiday.
September 10-year T-notes (ZNU6) on Monday closed down -13 ticks, and the 10-year T-note yield rose +4.9 bp to 4.596%. Sep T-notes were under pressure on Monday amid a rally in crude oil prices to a 5-week high, which boosted inflation expectations and is bearish for T-notes. Losses in T-notes accelerated after President Trump, in a social media post, threatened a disproportionate response for any Americans killed by Iran.
European government bond yields moved higher on Monday. The 10-year German bund yield rose +2.4 bp to 3.150%. The 10-year UK gilt yield rose +8.1 bp to 5.032%.
German Jun PPI fell -0.3% m/m and rose +1.8% y/y, right on expectations.
Swaps are discounting a 5% chance of a +25 bp ECB rate hike at its next policy meeting on Thursday.
Home builders and suppliers fell on Monday after the 10-year T-note yield rose by 5 bp to 4.60%, a negative factor for housing demand. DR Horton (DHI), Pulte Group (PHM), KB Home (KBH), Toll Brothers (TOL), and Builders Firstsource (BLDR) closed down more than -2%. Also, Lennar (LEN) and Home Depot (HD) closed down more than -1%.
