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Wall Street is on edge as escalating conflict in the Middle East puts the world’s oil supply chain at risk and raises more doubts about inflation cooling and central bank rate cuts this year.
For those that missed the headlines, Iran over the weekend launched an attack of over 300 drones and missiles toward Israel in retaliation for an Israeli strike earlier this month that killed several Iranian military officers in Syria. Military experts are worried that this recent escalation could possibly ignite a wider regional war. Additionally, Iran’s Revolutionary Guard on Saturday boarded and seized control of a container ship with Israeli ties near the Strait of Hormuz, the world's most important oil chokepoint.
About a fifth of the world's total oil consumption passes through the Strait on a daily basis. What happens next depends on whether Israel and Iran continue to exchange fire.
If cooler heads prevail this week, investors’ nerves and oil prices both should start to settle. On the other hand, if Israel responds and/or Iran keeps up its attacks, concerns about oil supplies could easily send crude prices much higher.
The risk to oil is twofold - Iran could block oil tankers passing through the Strait of Hormuz, which it has previously threatened to do; and the US could enforce sanctions against Iran’s crude oil.
Keep in mind, global oil supplies are already tight and many traders believe the world could be in a supply deficit by the second half of the year. Oil insiders say OPEC+ has more than enough spare capacity to offset any potential loss of Iranian production. However, experts also say OPEC+ may prefer to let oil prices push closer to $100 per barrel or higher before stepping up. Higher oil prices could obviously mean higher gasoline and energy prices here in the US at a time when investors are already worried that inflation is trying to make a comeback.
Wall Street insiders are also concerned that escalating Middle East tensions could see investors shifting more money away from stocks and into so-called “safe havens” like Treasuries and gold.
Beyond geopolitics, investors have a pretty packed calendar of earnings and economic data this week as well.
On the earnings front, big Wall Street banks kicked things off on Friday with mixed results. On the positive side, JPMorgan, Citibank, and Wells Fargo all topped Wall Street earnings estimates and reduced provisions for potential loan losses.
The not so positive was lower-than-expected “interest income” and disappointing profit outlooks due to higher interest rates that are forcing banks to pay up for deposits. Focus on banks and the wider financial sector continues today with results due from Charles Schwab and Goldman Sachs.
Results from Bank of America on Tuesday and U.S. Bancorp on Wednesday will wrap up results for the big Wall Street banks. A slew of midsize and regional banks are in the earnings mix this week also.
Netflix reports earnings on Thursday, which may have some spill over impact on the bigger tech stocks.
Turning to economic data, today’s highlights include the NAHB Housing Market Index, Empire State Manufacturing, and Retail Sales. There are some worries that Retail Sales could come in stronger-than-expected and add fuel to Wall Street’s inflation worries.
Bottom line, a lot of traders and investors are eager to see both the domestic and global inflation data out this week. I
f the inflation data is hotter than expected and geopolitical tensions remain elevated bulls will have a tough time convincing the market of more than a couple of Fed rate cuts in 2024. In fact, they might have a tough time convincing the market of any Fed rate cuts in 2024 if Middle East tensions don't start to deescalate sooner than later...
Let's also not forget, reports are circulating that Russian troops are advancing much more rapidly in Eastern parts of Ukraine.
Iran's Military Attack on Israel: Saturday’s Iranian strike on Israel was huge by any standard. Tehran launched more than 170 explosive-laden drones, around 120 ballistic missiles and about 30 cruise missiles, according to Israel. The damage could have been catastrophic. As it turned out, almost all were intercepted. That success was due to a combination of Israel’s sophisticated air-defense system and critical assistance provided by the U.S. and other Western and Arab partners. American, British and Jordanian warplanes played an especially important role in downing drones. Most of the Iranian drones and missiles were destroyed before they even reached Israeli airspace. This was Iran’s first direct military attack on Israeli territory since the Islamic Revolution of 1979 Source WSJ
White House Approves $7.4 Billion in Student-Debt Relief: More than a quarter of a million student-loan borrowers who have been in repayment for at least a decade will have their debt canceled, the Biden administration announced Friday. The 277,000 borrowers who will have $7.4 billion in debt wiped out will receive emails starting today indicating they’ve been approved for debt cancellation. The borrowers eligible for this relief have been in repayment on their student debt for at least 10 years, and some have been repaying their loans for more than two decades. Friday’s announcement marks the latest round of debt relief that’s coming through changes made by the Biden administration to existing programs. Officials have approved $153 billion in debt cancellation for 4.3 million people through these efforts so far. Source MarketWatch
JPMorgan’s Dimon Warns Markets are “Too Happy”: Investors are underrating the potential for an economic mishap, JPMorgan chief Jamie Dimon said, doubling down on similar warnings he's made in recent days. Speaking with reporters on Friday in a call, the prominent CEO characterized markets as "too happy," saying that "the chance of bad outcomes is higher than people think." For now, the economy appears to be doing fine, Dimon acknowledged, citing support from excess savings, low unemployment, and the record-setting stock market. But difficulties are starting to emerge among lower-income earners, and the bank has noted fractures in subprime auto loans, he said. In a related press release, Dimon celebrated the bank's strong quarterly performance, but issued warnings about "significant uncertain forces," including geopolitical tensions, inflationary pressures, and the unknown effects of large-scale quantitative tightening. Both the call and press release echoed cautious sentiment in a letter to shareholders Dimon released just four days prior: in it, he warned the world was entering its most "treacherous" era since World War II, and disagreed with markets about the odds of a US soft landing. Source Business Insider
Strait of Hormuz Oil Choke Point in Focus: Commandos from Iran’s paramilitary Revolutionary Guard rappelled down onto a container ship near the Strait of Hormuz and seized the vessel Saturday, authorities said. Iran since 2019 has engaged a series of ship seizures and attacks on vessels have been attributed to it amid ongoing tensions with the West over its rapidly advancing nuclear program. Since November, Iran had dialed back its ship attacks as the Houthis targeted ships in the Gulf of Aden and the Red Sea. Houthi attacks have slowed in recent weeks as the Muslim holy fasting month of Ramadan ended and the rebels have faced months of U.S.-led airstrikes targeting them. In previous seizures, Iran has offered initial explanations about its operations to make it seem like the attacks had nothing to do with the wider geopolitical tensions — though later acknowledging as much. In Saturday's attack, however, Iran tellingly offered no explanation for the seizure other than to say the MSC Aries had links to Israel. The US Energy Information Administration (EIA) estimates that 82% of the crude oil and condensate that moved through the Strait of Hormuz went to Asian markets in 2022. US imports from the Persion Gulf are minimal. A volatile Middle East is adding a risk premium to a market where robust demand is mixing with a disciplined OPEC+ production policy to draw down global stockpiles and push prices higher. Vitol Group, the world’s largest oil trader, said last week that demand growth is likely to outpace most forecasts this year. Meanwhile, Seb Barrack, the head of commodities at hedge fund Citadel said he expects oil market to get “extremely tight” later this year. Source Bloomberg |
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Baltimore Port Access Could Be Restored by End of April: As the U.S. Army Corps of Engineers (USACE), Baltimore District continues working with local, state and federal partners to clear the wreckage along the Fort McHenry Channel following the collapse of the Francis Scott Key Bridge, engineers have determined a tentative timeline for the restoration for safe navigation in and out of the Port of Baltimore. After detailed studies and engineering assessments by local, state and federal organizations, in collaboration with industry partners, USACE expects to open a limited access channel 280 ft. wide and 35 ft. deep, to the Port of Baltimore within the next four weeks. By the end of April. USACE said this channel would support one-way traffic in and out of the Port of Baltimore for barge container service and some roll on/roll off vessels that move automobiles and farm equipment to and from the port. USACE said its engineers are aiming to reopen the permanent, 700-ft.-wide by 50-ft.-deep federal navigation channel by the end of May, restoring port access to normal capacity. Source Feedstuffs
Generative AI Coming for Healthcare: Generative AI, which can create and analyze images, text, audio, videos and more, is increasingly making its way into healthcare, pushed by both Big Tech firms and startups alike. Collectively, generative AI in healthcare startups have raised tens of millions of dollars in venture capital to date, and the vast majority of health investors say that generative AI has significantly influenced their investment strategies. But both professionals and patients are mixed as to whether healthcare-focused generative AI is ready for prime time. Andrew Borkowski, chief AI officer at the VA Sunshine Healthcare Network, the U.S. Department of Veterans Affairs’ largest health system, doesn’t think that the cynicism is unwarranted. Borkowski warned that generative AI’s deployment could be premature due to its “significant” limitations — and the concerns around its efficacy. “One of the key issues with generative AI is its inability to handle complex medical queries or emergencies,” he told TechCrunch. “Its finite knowledge base — that is, the absence of up-to-date clinical information — and lack of human expertise make it unsuitable for providing comprehensive medical advice or treatment recommendations.” Several studies suggest there’s credence to those points Source Techcrunch
Boomers Aren’t Ready to Give Up Their Big Homes: Baby boomers bought up many of the big homes across the U.S. when they were raising their families. Now they’re staying put, even though their kids are all grown up. Many of these older homeowners paid off their mortgages on properties that have appreciated tremendously in value. Some are happy with their big houses. Others would like to downsize, but are deterred by the same high costs that are restraining other prospective buyers on lower rungs of the housing economy. Many are working longer or planning on an active retirement, and are in no rush to move to a retirement community. About 28% of all U.S. homes with three or more bedrooms are owned by people between the ages of 60 and 78 living by themselves or with another adult. Millennials living with children own just 14% of these bigger homes. A recent Fannie Mae survey found that most Americans 60 and older don’t intend to ever move. Many just don’t see a better alternative to their big homes. Smaller properties with amenities that might appeal to older homeowners, such as no stairs and close proximity to services, are scarce in many areas. People also have big financial incentives to stay put. More than half of boomers have no mortgage. That group pays a median $612 in monthly housing costs, which includes insurance and property taxes. Homeowners whose properties have appreciated dramatically might also face a big capital-gains tax bill if they choose to sell. Source WSJ
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