Iran strikes and Strait tensions ignite Oil surge

Oh boy…..Last night, we launched a new round of strikes against Iran after the IRGC attacked commercial ships moving through the Strait of Hormuz. And just like that — the Middle East is back on the front burner.

So yes — brace yourself. We should expect more volatility as investors try to figure out what this means for oil, inflation, the Fed, and the broader risk trade. Because any threat of a Strait closure is never just a regional story — it is a global market story.

But let’s be clear — the chop did not start last night.

The AI trade was already showing signs of exhaustion before the latest headlines hit the tape. Some of the hottest names (think those memory names – all in bear mkt territory now (down more than 20% off their highs) ….MU, SK Hynix, WDC, STX and Samsung were already under pressure, valuations were already being questioned, and investors were already rotating out of the high-flyers ahead of earnings season.

The narrative has been that this wasn’t just another speculative bubble. The case has been simple: earnings were growing even faster than stock prices, and those stronger fundamentals justified the premium valuations. Yesterday Samsung essentially validated that argument with another strong blowout quarter. And what happened? They sold it and the whole group anyway….

And all that says is that this selloff wasn’t really about Samsung. It’s about positioning, profit-taking, and investors again asking whether expectations have simply gotten too high heading into earnings season. (we discussed this on Monday).

And then Reuters threw gas on it... reporting DeepSeek is developing its own AI chip. Doesn’t matter how far along it actually is. The market heard “potential Nvidia alternative” and started asking questions about the whole AI infrastructure trade all over again and that sent the semi’s reeling…the SOXX down more than 5%.

Now while the indexes all ended lower when the bell rang – the Dow did make a new intraday high – before giving it all back…And while the S&P ended lower – there was still underlying strength in the broader market with 6 sectors ending the day higher…. Utilities, Consumer Staples, Communications, Energy, Healthcare, and Real Estate were all up – again suggesting more rotation in the sectors that have been waiting patiently.

This is the rotation thesis playing out in real time, and it is exactly what I’ve been telling you to watch for. The ‘generals’ get tired while the troops keep marching. Equal-weight S&P up 12% ytd is holding up better than cap-weight S&P which is up 9.6% ytd.

Now layer in the oil headline. Treasury revoking the license that allowed Iranian crude to flow is not a small thing... it tightens the supply optics right as the Strait of Hormuz risk premium was starting to fade from our memory banks. Oil surged $2 yesterday and is up another $3.50 this morning at $74/barrel. Recall what I said on Monday – the path of least resistance is down UNLESS we get an unexpected Iran headline – guess what? We got the headline! And this morning Trump says that ‘the deal’ is off – Iran doesn’t want this to end and so, it won’t – which means expect more volatility in oil as well as the broader markets.

Today brings the FOMC minutes from Kevy’s first meeting as Chair...and I think they could give us our first real look at how he intends to run monetary policy.

I’ve said it before, and I still believe this is where he’s headed.

My gut tells me that while the Fed may provide some relief (rate cuts) at the short end of the curve when conditions warrant, he has no intention of returning to the easy-money policies that defined much of the past 15 yrs. Balance sheet discipline is likely to remain front and center, which means liquidity isn’t going to come flooding back into the system anytime soon.

That’s an important distinction because financial conditions can remain restrictive even if short-term rates begin to move lower. We talked about this last month when we discussed quantitative tightening and the shrinking of the Fed’s balance sheet. Long-term Treasury yields, credit spreads and the overall availability of liquidity all matter just as much. My sense is that Warsh is comfortable letting the market do more of the heavy lifting rather than relying on the Fed to support asset prices at every turn.

So, for investors that means the days of buying every dip because the Fed has your back may be behind us. Investing is likely to become more selective. Valuations will matter more. And companies are going to have to earn the premiums investors have been willing to pay.

And I suspect it’s going to be an adjustment for an entire generation of investors and market professionals who came of age during the Bernanke, Yellen and Powell years, when extraordinary monetary accommodation became the norm. This environment is different. Liquidity won’t be as abundant. The Fed may not be as quick to ride to the rescue. And that means fundamentals, earnings, cash flow and valuation once again become the primary drivers of investment success.

Frankly...that’s the way markets are supposed to work – Welcome to a market driven by fundamentals.

Bonds took a hit yesterday – the TLT lost 1% while the TLH lost 0.9% and that sent yields UP…. The 2 yr is now yielding 4.20%, the 10 yr has pierced 4.5% and is now yielding 4.57% while the 30 yr is now at 5.07% - putting us further into the danger zone.

Today brings little in the way of market-moving economic data, so investors will likely turn their attention to Wednesday’s release of the June FOMC meeting minutes and we have already discussed it.

Gold is plunging….it lost $58 or 1.4% yesterday and is down another 1.3% or $52 today…. trading at $4,050/oz…. a direct result of the change in tone…and the expectation of what we will see in the FOMC mins. Technically, the chart still suggests gold will find support at $4,000. If we break that – then $3,500 is the target and we discussed this as well last week. So, this is not a surprise.

So overnight – the Kospi got hit again…down 5.3% and that is not helping the overall tone for the AI trade.

European markets are all down – Spain getting whacked – down 2.5% while the UK is only down 1.3%...everyone else is somewhere in between.

US futures are getting smoked…. Dow futures down 580 pts or 1.1%, the S&P down 70 pts or 1%, the Nasdaq is down 400 pts or 1.6% while the Russell is down 45 pts or 1.7%.

The S&P closed at 7503 down 33 pts…..trendline support is 7,410 – and if we break that over the next couple of sessions – then expect us to test the June lows – 7,280…. down 3% from here.

Ribollita – Tuscan ‘reboiled’ soup

Given the action, this recipe makes sense…. The name comes from the Italian word ribollire, which means “to reboil.” It was born out of necessity in the Tuscan countryside, where families would make a large pot of vegetable soup, then reheat (”reboil”) it over the next several days. In fact, many Tuscans will tell you that ribollita tastes better on the second or third day than it does when it’s first made.

For this you need: carrots, celery, onions, cannelloni beans, fresh garden tomatoes, garlic, Kale (or spinach), olive oil, day old (stale) bread, chickens stock, and then parsley, sage, rosemary and thyme!

Begin by sautéing chopped onion, carrot, and celery in olive oil until soft. Add a few cloves of chopped garlic and let it all come together.

Next - add in chopped fresh tomatoes (or a can of crushed tomatoes if you can’t get fresh). Let that cook down for 10 minutes,

Now add the cannelloni beans (some whole, some mashed for body) and the kale (or spinach).

Now cover with chicken stock, season with s&p and the herbs - simmer low for 45 minutes.

When serving - Layer in torn day-old crusty Tuscan bread at the bottom of the bowl, ladle the soup over it, let it sit for five minutes to soak in, then finish with a generous drizzle of olive oil.