Things you need to know
- Markets under pressure as the conflict heats up again.
- Fed mins reveal a new tougher Fed….Expect less forward guidance.
- Oil up, Gold up, Bonds down, Yields up.
- Try the Umbrian Mussels
Well, yesterday was a perfect 10 on the Cape…but less so for the markets.
The Dow lost 576 pts, the S&P down 21, the Nasdaq gained 52 pts, the Russell lost 26 pts, the Transports gave up 39 pts, the Equal Weight S&P got whacked – losing 102 pts while the Mag 7 gave bac 183 pts.
The headlines will tell you stocks got sold because of the latest drama with Iran. Well…that’s true, but it’s only part of the story.
Yesterday wasn’t one story. It was two stories that suddenly became one. A renewed flare-up in the Middle East sent oil surging just as investors were digesting Chairman Warsh’s first Fed minutes. Together, they forced investors to rethink inflation, interest rates and risk all at the same time.
Let’s start with Iran. Look, we’ve been here before. This relationship—or truce, depending on the day – has been an on-again, off-again story for months. But yesterday felt a little different.
Speaking from the NATO summit in Ankara, Trump said the U.S. had struck Iran hard overnight and suggested we’d probably do it again. Those comments came just hours after fresh U.S. strikes and the decision to revoke the waiver allowing Iran to continue selling oil on the global market – a direct response to IRGC attacks on commercial shipping in the Strait of Hormuz.
When asked what comes next, Trump didn’t leave much to the imagination.
“We’ll probably hit them hard again tonight.”
And that’s exactly what happened. The U.S. launched another round of strikes against Iranian military targets, while Iran retaliated with attacks on U.S. military facilities in Kuwait and Bahrain.
He had more to say…but you get the picture? That’s not exactly de-escalation. The market reacted exactly the way you’d expect. Stocks sold off, bond prices fell, yields rose and volatility picked up. Later in the day, Trump suggested he did not expect the situation to evolve into a broader regional war, and stocks recovered some of their losses.
Remember this – while geopolitical headlines can create sharp, emotional moves in the short run, history tells us they rarely determine the market’s long-term direction. What ultimately matters is whether those headlines become an economic problem and in this case that means the price of oil – which spiked higher – ending the day at $73.50– which is up $6 or 9% move off of the recent lows of $67 ish.
So if oil begins marching back towards $100 a barrel, then inflation expectations change, corporate margins come under pressure, consumer spending gets squeezed, and suddenly this becomes much more than just another geopolitical headline. Now if oil prices settle back down, then this argument goes away, but until that happens, expect the markets to remain anxious.
Next up – the Fed mins and they hit the tape at 2 p.m., but the media had been talking about them all day. Everyone speculating on what they would reveal. And what they revealed is that Warsh did exactly what he told us he would do – he stripped away virtually all forward guidance. He wants the Fed to say less and let the economic data say more.
Now a handful of officials argued there was a legitimate case for raising rates immediately. (we kinda of knew that). But they didn’t win the argument—the Committee voted to leave rates unchanged at 3.50% to 3.75%—but that’s not really the point. The bigger takeaway is that inflation remains the Fed’s primary concern and yesterday’s spike in oil prices only reinforced that concern.
Famed strategist – Ed Yardeni warning us that ‘a real rupture in the ceasefire risks reaccelerating price growth, which would force the Fed’s hand toward hiking rather than cutting’ and Fed Fund futures agree…. they are now assigning roughly a 50% probability of a September rate hike—a dramatic shift from where investors were just a week ago.
More importantly, the minutes reinforced what we’ve been discussing ever since Kevy became Chairman. He’s trying to break investors of the habit of expecting to be rescued. No promises. No forward guidance. No hint that rate cuts are automatically coming just because Wall Street wants them.
And if inflation refuses to cooperate—or gets another boost from higher energy prices – the Fed appears perfectly willing to leave policy restrictive for longer and tighten further if necessary. To me, that’s a return to the Greenspan era.
For years, investors have been conditioned to believe that every market decline would eventually be met with easier monetary policy – a mindset born during the great financial crisis and reinforced repeatedly during and after the pandemic. I don’t think that’s the playbook anymore. If Kevy is taking the Fed back toward a more traditional framework -where inflation comes first and markets are expected to stand on their own two feet -that’s ultimately healthier for both the economy and the capital markets. Will it always feel comfortable? Probably not. Will it mean more volatility? Probably yes.
And that means valuations will matter more, earnings will matter more, and investors are going to have to become much more selective than they’ve been over the past decade.
Now today the media will continue discussing and digesting yesterday’s Fed minutes while keeping one eye firmly fixed on developments in the Middle East. If oil continues climbing, expect inflation concerns and bond yields to remain front and center. If tensions begin to cool, some of yesterday’s fears could fade just as quickly as they appeared.
Bonds came under a bit of pressure – and that kept yields elevated…the 2 yr is yielding 4.19%, the 10 yr is at 4.58% while the 30 yr is at 5.08% – all levels that will keep a short-term lid on stocks….
Oil is up again – trading at $74.30 – after trading as high as $75.13 – after the second round of strikes on Iran and with Trump saying that he is no longer interested in negotiating with whoever is in charge – the market is being forced into repricing the risk of a disruption thru the Strait as well as a renewed escalation of the conflict. We are now between trendline support at $70.45 and resistance at $81.40. So my idea of $65 before $75 just got blown up. The risk now is to the upside again…. since it is clear that Iran is not interested in playing ‘nice in the sandbox’.
Gold is catching a bid this morning, up $28 to $4,105 after successfully holding the $4,000 level we’ve been discussing. The move higher suggests a move into the safety trade as the geopolitical uncertainty intensifies. If the conflict broadens then expect both oil and gold to move higher. If tensions ease, then some of that safety premium could unwind just as quickly.
Eco data today includes the usual suspects – Initial Jobless Claims and Cont. Claims along with Existing Home Sales – expected to be up 1%.
European markets are all up.
US futures are mixed – Dow futures down 70 pts, the S&P up 7 pts, the Nasdaq is up 135 pts, while the Russell is flat.
The S&P closed at 7482 down 21 pts…..trendline support is 7,410 with short term resistance at 7,560 and then the all time high at 7,620. My gut says – we will hold the support line, but if we break that then expect us to test the June lows – 7,280.
Remember – the lesson here is don’t focus on the bombs. Focus on what the bombs do to oil. Don’t focus on oil prices. Focus on what oil prices do to inflation. And don’t focus on inflation. Focus on what inflation forces the Fed to do. That’s the chain reaction that matters—and that’s exactly what the market spent yesterday repricing.
Give me a call at 561-931-0190 to discuss your goals and your timeline. Let’s assess the risk in your portfolio and your tolerance for volatility – happy to do a complimentary portfolio review and risk assessment.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Umbrian Style Mussels
This is an easy dish to make and should be served with toasted garlic bread, a big salad and a glass of chilled Rose – You can serve it as an appetizer or a main dish – However you like.
For this you need – 2 lbs of fresh mussels…now if they are really fresh you will need to scrub them to remove any sand and make sure that you remove the ‘beard’. Once you clean them – strain and then set aside in a pot of cool water –
You will also need, olive oil, onion, garlic, dry white wine, ½ cup of diced sun dried tomatoes in oil, red pepper flakes, fresh parsley and this preparation calls for diced sopressata as well. (Sopressata is an Italian dry salami that you can buy in any butcher of in a large grocery store – It is NOT pepperoni).
Anyway – for this dish – it is really quite simple. Begin by heating the oil in a large pot. Once the butter is all melted – add in the chopped garlic and diced onion – sauté for 5 mins…
Next add the diced sopressata and the diced sun dried tomatoes. Sauté for another 5 mins. (Now add some red pepper flakes – if you want a little spice). (Some people will use pancetta instead of the sopressata – that’s ok – but the sopressata gives it a whole different flavor and texture.)
Next add in about 1 ½ cups of the wine – bring to a boil. Once it boils – add the mussels, cover the pot with a tight lid and reduce the heat to med hi and cook for about 5 – 8 mins. Remove the lid and stir the mussels a bit – cook for another 5 mins. Once done – check for any unopened mussels and discard.
Add in some chopped parsley – this adds color and finishes the dish.
While the mussels are cooking – make the garlic bread with slices of fresh Italian Pane di Casa bread….Toast in the oven and then slice in half – Serve in a basket in the center of the table for your guests to enjoy. Have plenty of Rose wine to enjoy.
Delish –
Buon Appetito