ORLANDO, Florida, July 23 : European and U.S. stocks slumped while bond yields shot higher on Thursday, with global markets rocked by oil’s surge above $100 a barrel and earnings reports from two U.S. “Big Tech” companies that showed they are burning through cash at an alarming rate.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
1. Alphabet’s cash burn raises alarm for Big Tech as AI spending climbs
2. Trump vows to punish Iran for Houthi attacks in Red Sea; oil surges over $100
3. ECB keeps rates unchanged but September hike stays in play
4. Warsh’s no-guidance approach confronts a hawkish world and hawkish Fed colleagues
5. U.S. Treasury bill issuance grows, heightens long-term risk
Today’s Key Market Moves
• STOCKS: South Korea +4 per cent, Japan +0.5 per cent. Europe -1.3 per cent, UK -0.7 per cent. S&P 500 -1.2 per cent, Nasdaq -2.2 per cent.
• SECTORS/SHARES: “Mag 7” shares, consumer discretionaries -5 per cent, biggest falls since April last year. Industrials +1.8 per cent. Tesla -15 per cent, T-Mobile -11 per cent, Alphabet -7 per cent, Amazon -5 per cent. Lockheed Martin +10 per cent, Intel +12 per cent after the bell.
• FX: Dollar/yen shoots up towards 164.00, a new 40-year high. Euro 3-week low after ECB, South African rand world’s worst performer, -3 per cent, after central bank keeps rates on hold.
• BONDS: 2-year JGB yield hits 1.50 per cent, highest since 1995. 2-year German yield highest in two years. U.S. yields hit highest in 18 months, 30-year U.S. real yield highest since 2008. Ugly 10-year TIPS auction — highest yield since 2008.
• COMMODITIES/METALS: Oil leaps 6-7 per cent, now +40 per cent y/y. Brent tops $100, WTI over $90. Gold -2 per cent.
Today’s Talking Points
* Running hot
Relief from the June U.S. CPI and PPI inflation reports last week has surely evaporated. Oil is soaring again as war in the Middle East flares up — Brent is over $100 a barrel and WTI is above $90 — and the latest weekly jobless claims figures suggest the U.S. economy is humming along just fine (for now). Initial claims fell to 187,000 last week, the lowest since the summer of 1969.
Little wonder Treasuries are tanking. Two- and 10-year U.S. yields are the highest in 18 months, and the 30-year yield is close to a new post-2007 high. The 30-year “real yield” is the highest since 2008, nudging 3 per cent. Rates traders are now pricing in 60 bps of Fed hikes by April. Wall Street, especially Big Tech and big borrowers, doesn’t like it one bit. Main Street won’t either — gas is above $4/gallon and 30-year mortgage rates are the highest in a year. Both are rising too.
* No-flow zone
Alphabet and Tesla results after the bell on Wednesday confirmed what analysts had been warning — and investors had been doing their best to ignore — for a while: they’re burning cash. Alphabet’s free cash flow in Q1 turned negative for the first time since the company floated more than 20 years ago, and Tesla’s FCF turned negative for the first time in two years.
Once prized for fat margins and cash gushers that could easily fund new bets, Big Tech is now relying on debt and share sales to bankroll AI spending, which is set to top $700 billion this year as their cash flows fall short. Microsoft, Meta Platforms and Amazon report results next week — buckle up.
* No changing of Lagarde
The world’s second-biggest central bank kept interest rates on hold on Thursday, but is on track to raise them at its next meeting in September. That is how markets interpreted post-decision comments from European Central Bank President Christine Lagarde, who noted that a move today was discussed and the full extent of the second oil shock underway has yet to be felt.
That’s certainly true. Not only is oil on a tear, European natural gas prices have exploded 60 per cent in the last month, and on Thursday hit their highest level since just after the U.S.-Iran war started. Rates traders are pricing in a 70 per cent chance the ECB hikes again in September, and are anticipating around 75 bps of tightening in total over the next year or so. Can sluggish euro zone growth withstand that?
What could move markets tomorrow?
• PMIs for Japan, euro zone, UK, U.S. (July)
• Japan CPI inflation (June)
• UK retail sales (June)
• European Central Bank chief economist Philip Lane speaks
• U.S. earnings, including American Express, Verizon
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