In his first official address this week, new Fed Chairman Kevin Warsh delivered a hawkish shift in no uncertain terms; “this committee will deliver price stability”. Rates were left unchanged as expected, but nine officials now foresee at least one hike before the year is out, marking a significant change in forecast. The risk off sentiment generated by Warsh’s strong debut was short-lived however. Concerns over sticky inflation and higher interest rates were outweighed by positivity surrounding the reopening of the Strait of Hormuz, and the signing of an interim peace deal between the US and Iran. “Oil down, stocks up” proclaimed the president at a meeting of global leaders shortly after a birthday cage fight on the White House lawn. And indeed they were: oil fell over 10% on the week, gold dropped around 1%, the VIX pulled back to around 16, and the Nasdaq is up 2.4% at time of writing. “The stock market is quite brilliant”, mumbled DJT as it bounced once more with peace on the table. The looming energy crisis caused by the conflict, is as good as solved according to the markets. Do we believe them?
The last two days has seen a 8.3% drop in SpaceX’s stock price. That leaves the juggernaut officially finishing its first week of trading up 37% from its IPO price of $135/share. It now sits at sixth place in the list of largest companies in the world by market cap, behind Amazon after overtaking it briefly. A gamma squeeze, previously a phenomenon tied predominantly to meme stocks in the Covid era, was blamed for a run up in the price on Tuesday, after close to a million call options traded on the day they launched. Traders of the stock will be marking their calendars with more impactful milestones to come with eyes on their likely impact: after 15 days of trading SpaceX will be eligible for inclusion in the Nasdaq 100 index, which will trigger another wave of passive investing; a $20 billion bond offering is predicted to kick off next week; later in the year the staggered unlock windows will begin to open, whereby insiders will be able to cash in on their investments, likely triggering waves of selling.
It was hard not to detect a smirk on the visage of now experienced statesman Emmanuel Macron, as he presided proudly over the early signing of the memorandum of understanding to end the war. After gifting a bicycle to each of his fellow leaders earlier in the G7 meeting, the French president went about orchestrating the inking of the deal ahead of schedule. DJT lapped up his opulent surroundings at Versailles, “not a gold leaf”, and put pen to paper in a surprisingly early move. Meanwhile observers were naturally taken by the irony of the location of the signing, in its association with surrender and reparations. The reparations this time around are said to be primarily in the form of a $300 billion “Reconstruction and Development Fund”, designed as a key economic incentive for the Iranian administration in negotiations. J.D. Vance has firmly denied that the US is “giving up a cent of money to Iran”, explaining rather that the fund will be sourced from a “Gulf Coast Coalition”. Wherever the money is coming from, even prominent republicans have derided the plan as “utterly indefensible”.
As the gold dust settles, we ponder now whether 60 days will be long enough for the two sides to lock in a deal. After all this is not so much an end to negotiations as an official beginning. The blockade on the Strait of Hormuz has been lifted, but will it remain toll-free in the longer term? Will the Iranian administration agree to dilute its existing nuclear material under supervision? Will Israel reinject itself into the negotiations, verbally or physically? The countdown begins.
It is as close to a long weekend as it gets for markets these days. US equity markets are off for the Juneteenth holiday, while China and Hong Kong markets pause for the Dragon Boat Festival. Beware as always of reduced market liquidity and the possibility of exaggerated moves as a consequence. With that in mind, naturally thoughts turn back to the yen. It is now trading within a whisker of its weakest level against the dollar since the last time the World Cup was hosted by Mexico, 1986. Japanese authorities took advantage of thin trade in their Golden Week in April /May this year to support the currency, sparking a swift 3% drop in USDJPY at one notable point. Earlier this week, the Bank of Japan hiked rates to 1%, the highest there since 1995. But that policy shift provided only a very small boost, which was quickly retraced as the Fed discussed its own hikes to come later this year. Finance Minister Satsuki Katayama warned anew yesterday that she and her team “can take bold action against excessive speculative moves in the foreign-exchange market”. This is not as strong as the rhetoric we heard back in April, before they commenced a record $72.8 billion round of spending. Nonetheless, traders stand ready with their preferred yen pair charts on the screens, watching for signs of intervention.
“Inflation is still too high”, said the RBA after its meeting this week, where it held the official cash rate steady. Next week’s CPI release is an important one, with more hikes still on the table if the 4.6% y/y consensus is topped. Australian unemployment rates will also be in focus, following last month’s unexpected rise to 4.5%. Similarly in the US, core PCE, the Fed’s preferred measure of inflation, will be hugely significant in determining the likelihood of a follow-through to Chairman Warsh’s hawkish debut.
One of the most eye-catching US stocks of late, Micron Technology (MU) will release its quarterly earnings report on Wednesday in the after-market session. Its share price is up ~300% year-to-date, on the back of soaring AI demand and tight supply. But analysts are split on whether further upside its justified. Thus the release will be closely watched, both in its own right and as a broader signal amid the AI supercycle.
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