Several chip names have reported spectacular earnings but the stock prices fell like a rock

Outlook

The Reuters opening paragraph is a little too cute, if accurate—"We can’t seem to get away from semiconductors and straits.”

At least we can see that the textbooks are wrong when they insist earnings are the top key determinant of stock prices. That is true only some of the time and this is not one of them. Several chip names have reported spectacular earnings but the stock prices fell like a rock, anyway, notably TSMC. This reflects worries about overspending on capital projects and Reuters points out “the volatility in Asia likely also reflects the unwinding of leveraged positions.”

The second shock driving risk aversion is the war and its far-reaching implications. Top of the list is the oil traders continuing to bet on TACO. If they were not fearful of Trump backing down and out, we would not have backwardation, wherein the current contract is more expensive than the farther out contracts. A normal structure has the later contracts more expensive on uncertainty alone.

Then there is the inventory issue. The US is running out of stored supplies and presumably so are many others. Japan is mum on the subject. China has so much in storage it was able to cut imports over the past month. Ah, but does it have similar stockpiles of refined products? Reuters points out “One thing does seem clear: the Hormuz crisis has revealed how much China’s role in the global energy system has changed, as it has shifted from being a price taker to a price maker.” And Trump thinks that’s his power.

As for fresh news, today we get import/export prices, June housing starts, industrial production, and the U Michigan flash July reading. Again we comment that these surveys involve only a few thousand persons and none of them are well-educated in economics, so if inflation expectations fall, don’t be surprised.

Forecast

Broken record time—all the economic factors favor the dollar over the other majors except the pound, and that is likely to be short-lived. Although US yields retreated while others mostly went up—see the table from Trading Economics—but the US is still near the top of the list and of course has unmatched size and liquidity.

Having said that, de-Americanism does exist. Chandler writes “Canada reports May portfolio flows today. Foreign demand for Canadian stocks and bonds has increased markedly in the first four months of the year. Foreign investors have accumulated about C$104 bln of Canada’s financial assets compared with net sellers of about C$17.3 bln in Jan-April 2025.”

However, the negative dollar factors make up a sizable list, too. At the top is the unstable, chaotic and possibly half-mad Trump. Nobody knows what he will do next about the war in Iran, including him. That leads to the second factor—the economic consequences of the war that could become catastrophic, if less so for the US because of self-sufficiency in energy. That won’t help on the inflation front, of course. At some point inflation expectations will become realistic and dump a load on capital and consumer spending, potentially leading to a slowdown—not a recession, but some form of stagflation.

Then there’s that stock market. Nobody knows whether it becomes a contagion, and nobody really understands contagion in financial markets, anyway. Old-timers remember Thailand leading to Argentina to Russia and the downfall of Long-Term Capital, which broke a lot of bones in the US system (and LTC was populated by Nobel prize winners). Note that if and when the war is ended, equity markets will celebrate with a complete recovery and more silly highs. 

Bottom line, risk aversion is growing and it should. If it becomes much bigger, we can’t see any currency benefitting except the dollar, however painful that may be. If the worst-case scenario develops, expect talk to resume of the Fed cutting, not hiking. That’s the offset, if we need one.

Things probably won’t get that far. Trump is going to do something. Heaven only knows what it will be. The extreme right wants him to destroy the Iranian regime and economy and especially the Guard, leading to the equivalent of Hiroshima without the nuke--unconditional surrender. This is not entirely unrealistic, since the Iranian economy is thought to be hanging on by its fingernails.

We are not recommending a long dollar position. We are recommending really small positions in anything.