Weekly Letter (7/20 - 7/24)
The drivers behind this week's markets in a quiet week of economic data reports turned out to be geopolitics that caused major Fed repricing, earnings reports, and a new round of Trump tariffs.
This week the S&P 500 moved -0.6%, the Nasdaq moved -2%, and the Dow moved -0.4%. The indices were driven by earnings reports and geopolitics out of the middle east where the Houthi rebel group out of Yemen carried out strikes on Saudi Arabian oil tankers in the Red Sea, another oil chokepoint in the region and a major escalation at a separate oil passage adding to the already ongoing conflict happening in the Strait of Hormuz. The major losses in the S&P and Nasdaq happened overnight between the 22nd and 23rd, driven by a selloff in Tesla and Alphabet Inc. (Google) after reporting earnings, heavily affecting the market cap weighted indices. Tesla beat revenue predictions by $2.68 billion but reported EPS at $0.33 missing the estimate of $0.50 causing shares to drop 14% the next morning. Alphabet Inc. beat the estimated earnings per share with a revenue of nearly $120 billion but had a negative free cash flow of $5.9 billion caused by high AI infrastructure spend causing the share price to drop 7% the next morning of the 23rd. Although the negative free cash flow number isn’t bad because it's been invested for future growth, investors have been growing increasingly worried in the recent months about whether the high spend on AI infrastructure will generate enough money to offset the outflow from investments.
The Dow also took a loss overnight between the 22nd and 23rd due to the strikes in the Red Sea causing the price of oil to climb which more heavily affects the companies in the Dow index who are sensitive to the price of oil.
The 2 year yield rose 16 bps to 4.33% and the 10 year treasury yield rose 14 bps to 4.68% this week to 18 month highs. The 2s10s yield spread closed by 2 bps flattening the curve, an indicator of economic uncertainty as the conflict in the middle east continues with no end in sight. The rise in yields were driven up over the week by a new round of tariffs from the Trump admin and the rising price of oil that was up 12% topping $100 a barrel and the upcoming Fed rates decision next week. The rise in oil prices fueled more worries over inflation and increased the odds that the Fed will have to hold rates higher for longer and even hike rates in the future if the conflict in the middle east doesn’t let up. Additionally the new tariffs put in place by Trump added a 10% tariff on Canadian, Mexican, Indian, European, Taiwanese, and goods from the UK, as well as a 12.5% tariffs on goods coming from Japan, South Korea, and Switzerland. The tariffs raise the price of goods coming into the US, adding to the existing inflationary pressure from oil. Combined, it caused investors to sell bonds in anticipation for the upcoming Fed interest rate decision next week.
USD climbed over the course of the week due to the chances of higher for longer rates that will bring more foreign investment into US treasuries and the rise of oil prices to over $100 a barrel forcing countries to convert more of their local currency to dollars.
Gold gained 1.3% last week driven by the conflict in the Middle East as gold is seen as a safe haven asset in economic and geopolitical uncertainty. It spiked overnight on the 22nd after the Houthis escalated the conflict into the Red Sea.
