Key facts
- SpaceX and AMD shares declined despite revenue beats, raising concerns about AI spending durability.
- Oil majors reported strong refining profits, driven by high demand and limited supply, but this 'golden era' is unlikely to last.
- OPEC+ agreed to a modest production increase for September, signaling a potential ramp-up when the Strait of Hormuz reopens.
- The U.S. and Japan intervened in currency markets, stabilizing the yen, though underlying monetary policy concerns persist.
- U.S. nonfarm payrolls are expected to show modest job growth, with futures pricing in a slightly over 50% chance of a Fed rate hike in September.
This week's market recap highlights mixed earnings results, particularly in the tech sector, and fluctuating oil prices influenced by geopolitical developments. SpaceX and AMD shares fell despite revenue beats, with investor concerns lingering over the sustainability of AI spending. Meanwhile, the prospect of an interim U.S.-Iran deal initially pushed down crude prices, though optimism appeared to wane by the weekend.
Beyond tech, major companies like Eli Lilly, Merck, ConocoPhillips, Caterpillar, and Disney reported earnings, largely impressing investors. However, post-earnings stock slides were notable, with AMD closing 7% lower and data storage firms Sandisk and Western Digital also experiencing significant drops. SpaceX shares saw a nearly 14% decline after its first earnings release as a public company, reflecting anxieties about its AI outlays, though it later rebounded.
Energy sector profits, particularly in refining, have been exceptionally strong. ExxonMobil reported its strongest downstream profits since 2022, and Chevron's downstream earnings reached a decade high. BP's refining-indicator margin surged to $30 per barrel. These high margins are attributed to a shortage in refining capacity, exacerbated by supply disruptions from the Strait of Hormuz, attacks on refineries, and strikes on Russian energy facilities. However, the long-term outlook for refining profits is uncertain.
In a move that signals future production increases, seven OPEC+ members agreed to raise output by 188,000 barrels per day in September. This increase is contingent on the reopening of the Strait of Hormuz, with Iran signaling progress on a deal with Oman for waterway oversight. Such an arrangement, if accepted by U.S. President Donald Trump, would represent a significant concession to Iran and could lead to a fragile deal. Despite these developments, oil markets appear to be betting on a resolution, with Brent crude prices returning to around $80 a barrel, though attacks by Yemen's Iran-aligned Houthis on Saudi Arabia caused a modest price increase.
The currency markets saw stabilization after late last week's U.S.-Japan FX intervention calmed markets, with the yen trading around 158 per dollar. However, Japan faces underlying issues of loose monetary and fiscal policy and central bank credibility. The simultaneous pressure on U.S. Treasuries, Japanese government bonds, and the USD/JPY exchange rate, coupled with rising central bank credibility concerns in both countries, suggests an increased risk of an "accident" in the financial system.
Leading up to the July nonfarm payrolls report, ADP figures showed private employers added only 44,000 workers in July. Economists polled by Reuters expect the U.S. economy to have added 80,000 jobs in July, with the unemployment rate holding steady at 4.2%. Futures markets now price in a slightly over 50% chance of a Federal Reserve rate hike in September, down from previous expectations. Despite reduced crude prices and mixed signals from the Fed, inflationary pressures may persist due to elevated fuel costs, loose financial conditions, and fiscal stimulus.