Weekly Letter (7/6 - 7/10)
During a quiet week of US economic reports, Tech and AI confidence, Fed repricing, and geopolitics took over the spotlight, turning out to be the main drivers of markets.
In equities this week the S&P 500 and the Nasdaq both experienced gains with the S&P climbing 1.2% and the Nasdaq climbing 1.7%. Both indexes experienced an increase on the back of chipmaker hype as Sk Hynix, a memory chip maker, had a successful IPO raising 26.5 billion dollars, the most from any non-US IPO. This is important because the money raised will go to increasing the future production and distribution capacity of SK Hynix which will help to close the gap between GPU chips and memory chips which are two separate supply chains but both vital to each other for operations at scale. The successful IPO launch signaled future AI confidence, helping to drag up other large chip maker names in the market cap weighted indexes. The Dow was down this week by 0.5% with the most of the loss coming from the Wednesday session after oil prices jumped back up to $75 a barrel with the week high of almost $80 as renewed strikes in the middle east between the US and Iran caused the US to place sanctions on Iran’s oil sales. The Dow is made up of industrials, travel and transportation companies, and large credit card names that are all sensitive to the price of oil as an increase affects production costs and consumer spending due to inflation.
The 2 year yield closed at 4.21% with a 7.8 bps increase (0.078%) and the 10 year yield closed at 4.56% with a 9.1 bps increase (0.091%). The 10s2s spread is 35 bps and narrowed slightly by 3 bps this week indicating a slight flattening of the curve. Additionally CME FedWatch showed a probability of a Fed rate hike for September at 54% last week while this week it projects a 69.6% chance of a rate hike, a noticeable increase from the previous week. The shifts in projections followed the price increase of oil due to the sanctions imposed on Iranian oil sales over July 7 and 8. This was consistent with how the markets priced this in, where yields spiked mid week, indicating a sell off of bonds with anticipation of higher for longer rates, although yields did slightly backtrack on some of these gains.
Gold fell 1.5% this week closing close to $4100 an ounce. Although we might expect the price of gold to rise this week due to geopolitical instability, the drop in the price can be explained by the expectation of higher for longer rates, making gold less attractive to investors as gold doesn’t pay any interest compared to bonds that pay a fixed rate. USD also held relatively flat with a net increase of 0.1% on the week. Its price movement can be attributed the both the geopolitical instability in the middle east and the rate expectations in the US, both of which drive demand for the dollar, though the geopolitical driver was stronger as the dollar rose early in the week during peak tensions and eased later in the week as news of renewed peace talks came out.
