Geopolitical tensions are once again driving markets this morning after reports suggested the conflict surrounding the Persian Gulf could expand toward Yemen and the entrance to the Red Sea. The prospect of further disruption to global energy supplies has sparked another strong rally in crude oil, with WTI climbing above US$90.00/bbl and Brent approaching the US$100.00/bbl mark. The move higher in energy prices is also reviving concerns that inflation pressures could begin building again, pushing Treasury yields higher and weighing on equity markets.
Technology stocks are under pressure following disappointing earnings from two members of the Magnificent Seven. Alphabet* reported earnings per share that fell just short of expectations despite stronger-than-expected revenue, while management raised capital spending forecasts as investment in AI infrastructure continues to accelerate. Tesla also missed earnings estimates, reported negative free cash flow and outlined increased capital spending as it continues shifting its focus toward autonomous vehicles. The results have renewed investor concerns that spending on artificial intelligence may be growing faster than the revenue it is expected to generate in the near term.
Away from the technology sector, the broader economic picture remains constructive. U.S. weekly jobless claims came in well below expectations at 187,000 versus forecasts of 212,000, signalling continued strength in the labour market. Headline retail sales met expectations with 1.1% growth, although sales excluding automobiles fell short of analyst estimates. Earnings also offered some encouraging signs outside of technology, with railroad operator CSX reporting better-than-expected results, while Texas Instruments also exceeded earnings expectations despite weaker premarket trading.
U.S. equity futures are pointing to a softer start to the session, with NASDAQ futures down 1.3% and Dow futures lower by 0.9%. Overseas markets were mixed overnight as Japan’s Nikkei gained 0.5% and Hong Kong’s Hang Seng advanced 1.3%, while European markets are weaker this morning with Germany’s DAX down 0.8% and London’s FTSE off 0.3%.
Commodity markets continue to reflect growing geopolitical uncertainty. WTI crude oil is up 4.6% to trade above US$90.00/bbl, while Brent crude has gained 5.2% to trade near US$100.00/bbl. Gasoline futures are also higher, while gold, silver and copper are all trading lower. Treasury yields continue to climb, with the U.S. 10-year yield moving above 4.70% and the 30-year yield topping 5.20%. The U.S. dollar is stronger on speculation that higher commodity prices could reignite inflation pressures and potentially keep the Federal Reserve on a more restrictive policy path. The euro is lower, while the Canadian dollar is little changed.
Looking ahead, earnings season continues after today’s close with Intel and Newmont Mining reporting results, followed by Canadian National Railway on Friday morning. Investors will also be watching Friday’s Flash Manufacturing PMI and Flash Services PMI reports from around the world for the first broad indication of July economic activity.
* Shares of Alphabet are held in certain portfolios managed by SIA Wealth Management.