RECAPPING LAST WEEK
A sharp selloff in global memory chip stocks accelerated through the week, sparking concerns over
the sustainability of the artificial intelligence investment cycle, while renewed hostilities in the
Middle East and shifting Federal Reserve expectations drove broad sector rotation across global
equity markets. A glance at the S&P 500’s recent performance would indicate we’re in the summer
doldrums, beneath the surface, though underlying market action reflected significant sector
rotation. For proof, look no farther than option pricing, where the spread between the average
implied volatility of individual equities compared to the S&P 500 (VIXEQ–VIX) has hit a record high.
The move underscores a market increasingly driven by company and sector–specific factors rather
than broad macroeconomic themes. Nonetheless, investors did pay attention when Fed Chair
Warsh gave his first Humphrey–Hawkins testimony to Congress: he reiterated the central bank’s
commitment to restoring price stability, emphasizing that policymakers have “no tolerance” for
persistently elevated inflation, but provided no explicit guidance regarding the timing of future
interest rate decisions. Fed Funds futures pricing now reflects only a 10% chance of a 25–bps hike
at the July 29th meeting, down from 30% only a week ago. This change resulted from the release of
CPI and PPI reports that showed inflationary pressures easing. This data lent some support to
Treasuries, which also benefited from Friday’s equity selloff. Nonetheless, yields remained above
4.5% on the 10 year and 5% on the 30 year, levels which caused some consternation when they
were first breached mid–May. Hostilities escalated between the U.S. and Iran, keeping shipping
through the Strait of Hormuz constrained–and crude oil above $80 per barrel. Although oil remains
well below the $120 it spiked to early in the war; refined products—especially diesel—are a different
story, much closer to their wartime highs than the lows they saw in late June. The elevated refining
margins reflected in the crack spreads* led the S&P 500 Energy sector to rally 5% on the week
while Technology lost a similar amount. This spread can serve as a loose proxy for refining margins
and is now over $90 per barrel. Other macro sectors like currencies, precious metals and crypto
saw quiet consolidation, sitting on the sidelines while the equity intramarket churn remained the
dominant theme.
*Note: The “heat crack” is calculated by multiplying the price of a gallon of heating oil (that is, diesel) by 42 representing a
barrel, and then subtracting the price of a barrel of crude oil from the result.
THE WEEK AHEAD
U.S equity markets will turn their attention to the heart of second–quarter earnings season, as
results broaden beyond the major banks and begin to offer a clearer picture of the health of
corporate America. Market watchers will focus on technology and semiconductor companies
following last week’s sharp selloff in memory chip stocks. Highlights include Alphabet on Tuesday,
Tesla on Wednesday and Intel on Thursday. As earnings season accelerates, markets will
increasingly reward companies that exceed expectations and provide optimistic forward guidance
while punishing even modest disappointments, which should continue the trend of elevated
volatility in single stocks contrasted against the broader indices. On the international economic
calendar, inflation data in the form of CPI numbers are released for Canada on Tuesday and the
UK on Wednesday. The European Central Bank is widely expected to hold rates steady on
Thursday. Friday sees the release of PMI data from the U.S. and a host of other major economic
powers. The domestic calendar is otherwise light, though new home sales also come out Friday. Of
course, investors will also be on the lookout for any unexpected developments in the Middle East.
(Schwab)
