Ships Don't Lie
Major US stock indexes finished the week mixed, as renewed weakness in large-cap technology and AI-related shares weighed on the Nasdaq and bellwether S&P 500 index, whilst smaller companies and perceived ‘value’ sectors fared better as capital continued to cycle out of last year’s winners into new areas.
Newly crowned Federal Reserve Chairman Kevin Warsh will be breathing slightly easier following positive developments on the inflation front. Domestically, core PCE (personal consumption expenditures), the Fed’s preferred measure of inflation, increased +0.3% month-on-month, and +3.4% year-on-year. This remains far above the Fed’s stated 2% target, but markets had been bracing for a nasty surprise on the high side.
Separately, the Donald took to Truth Social to extol the many virtues of the still-fragile US-Iranian truce. This included ‘news’ that Iran has agreed to keep the Strait of Hormuz fully open with no external tolls, fees, or shipping charges being levied, the release of US controlled Iranian funds, and a 60-day license that permits Iran to produce and sell oil to America. Advantage Iran.
Crude oil prices tumbled, continuing their round trip to levels below where they were when the US-Iran conflict began. For context, the market has effectively priced a clean resolution to one of the largest geopolitical energy shocks in history, one that has seen the removal of more 1 billion barrels of oil from the market due to ongoing supply disruptions.
A critical factor to monitor over the coming weeks will be tanker traffic flow through the Strait of Hormuz. The rolling twenty-four-hour count illustrates that activity has increased markedly from collapsed levels but remains well below pre-war levels at approximately 20% of peak activity.
Turning to corporate America, the strong momentum generated by an exceptional earnings season hung in the balance mid-week with the key earnings report for the quarter. Memory chip (the components that allow computers, smartphones, and AI systems to store and rapidly access data) maker Micron Technologies has taken the baton from Nvidia in arguably becoming the most important company in the world, with results and guidance considered to be a real-time barometer for the health of the AI investment boom.
Wednesday was no different, with the stock ripping 17% higher after hours following one of the biggest beats in semiconductor history. Top-line revenue of $41.4 billion and gross margins of almost 85% translated to almost 365 million dollars of profit every single day of the quarter. Astonishing.
However, all is not rosy in tech world, with investors becoming increasingly more discerning over who will be the ultimate ‘winners’ and ‘losers’ of this AI cycle. Apple CEO Tim Cook announced earlier in the month that price hikes were ‘unavoidable’ given the skyrocketing costs of AI memory chips, and the company duly obliged this week with sticker price increases of $100-$300 across Mac and iPad products. Could this be the start of another inflationary wave?
Closer to home, former mayor of Manchester, and ‘King of the North’ Andy Burnham looks well positioned to succeed Sir Keir Starmer as UK Prime Minster, marking the 7th different leader of Britain in less than a decade. He has vowed to put energy, housing, water, and transport under ‘stronger public control’ and backs nationalising Thames Water. Markets are not amused.
Chart of the Week: Tanker Traffic through the Strait of Hormuz
