The Morning Call
7/17/26
The
Market
Technical
Thursday in the
charts.
Summary:
Mixed macro (hard data weak, soft data strong), mucho
micro (earnings starting to accelerate and look solid), and mideast
mayhem ('infra for infra' attack threats) left markets meandering
with stocks, bonds, bitcoin, gold (<$4k) all lower; oil flat-ish
as the dollar edged higher. Korean
chaos reinforced the ongoing rotation out off Semis (into
MegaCaps) and momo meltdown stood out. That semis and
memory still traded lower in the face of such a constructive catalyst
underscores that perhaps positioning and factor dynamics, and not
fundamentals, are currently dictating price action... and perhaps
suggesting the (earnings) bar for hardware is high.
On
the back of this morning's economics releases, Goldman Sachs boosted
their 2Q26 GDP growth tracking estimate by 0.2pp to +2.4% (quarter-over-quarter
annualized) - and their 2Q domestic final sales estimate stands at +2.3%. ...all
of which pushed left a July rate-hike off the table and September back at a
coin-flip...
But Treasury yields
tracked oil prices (higher then lower), ending the day modestly higher
(1-2bps)...
The
reverse in the 30Y occurred at yesterday's high yields (but the long-end
remains notably above the 5% Maginot Line still)...
US futures drifted higher initially overnight
despite a mixed session in Asia, where Korea and Japan were dragged
down by continued AI hardware weakness (and Korea is pressuring levered ETFs).
Then as Europe opened, the pain in Semis/AI accelerated, dragging Nasdaq lower.
The US equity open sparked a brief bid but sellers re-appeared to leave Nasdaq
as the day's biggest loser again with some modest buying right at the close to
lift stocks 'off the lows'...
Thursday
in the technical stats.
https://www.barchart.com/stocks/momentum
https://www.barchart.com/stocks/market-performance
https://www.barchart.com/stocks/sectors/rankings
https://www.barchart.com/stocks/signals/new-recommendations
Friday morning
setup. A surprise breakthrough from Chinese AI startup Moonshot (which is
now at the top of
the Frontend code benchmark on Arena) rumbled through global
markets, sending chip stocks reeling, as queasiness returned about the
industry’s unprecedented spending spree (something we have been warning about
for the past year). Moonshot claims its new Kimi K3 model rivals top offerings
from OpenAI and Anthropic in a release reminiscent of last year’s “DeepSeek
moment.” It came as President Xi Jinping appeared at China’s premier
AI summit, underscoring how rapidly the nation’s AI developers are closing the
gap with US rivals (discussed
here a month ago). Meanwhile, delays by Alphabet to the launch of
the latest Gemini model has also dented tech sentiment. As a result as of
8:00am ET, S&P futures are 0.8% lower with Nasdaq futs tumbling
1.7%; pre-market, Mag 7 are all lower with NVDA (-2.8%), AMZN (-2.1%),
and META (-1.8%) among the most notable decliners. AI and Semis concerns
continued to dominate the market narrative overnight ahead of Mag 7 earnings
next week. What is different from the past few weeks of momentum selloff is
that both Mag 7 and Semis were being sold overnight and
yesterday, pointing to "concerns over hyperscalers’ AI CapEx and
the sustainability of the AI rally" according to JPM. Moonshot’s AI model
release also led to further concerns in China AI model competition and
questions on AI CapEx (“DeepSeek 2.0” concerns): overnight, Asia AI baskets and
China AI baskets (which include Moonshot’s competitors Z.AI and MiniMax) fell
5-8%. Bond yields are lower across the curve: 2y and 10y are 2.1bp and 2.8bp
lower, respectively. Oil added another 1.8%; WTI now at $80.47 this morning after
Kuwait said power and water plants were attacked by Iran as hostilities in
the Gulf escalate with every passing day. Both base and precious metals are
higher this morning. US economic data calendar includes June import/export
price index, and June housing starts (8:30am), June industrial production
(9:15am) and July preliminary University of Michigan sentiment (10am).
Single stock vs
index volatility spreads near dot.com level.
Summary.
As various US equity sectors and factors gyrate sharply and AI-related
bubble-like price action builds further, single stock realized
volatility has risen to historically elevated levels (now in the 92nd
%ile since 1990), last seen in the build-up of the late 90s dotcom bubble. Given
the historically low implied correlation and elevated single stock vol
backdrop, the risk of a sharp rise in index vol from a correlation uptick
looks acute.Importantly, this is less a call for an imminent macro shock
than a recognition that correlation at these lows looks increasingly stretched,
leaving index vol exceptionally sensitive to a normalization in correlation.Summer
illiquidity could further amplify this fragility, increasing the risk of an
abrupt index-vol repricing.
Fundamental
Headlines
The
Economy
US
June pending home sales
fell 5.4% versus forecasts of -0.5%.
The July housing
index came in at 34 versus projections of 35.
June housing starts
rose 19.0% versus consensus of 0.0%; building permits fell 3.0% versus -0.7%.
International
The June EU CPI was down 0.1%, in line.
Other
Is the bottom in for US China trade?
https://politicalcalculations.blogspot.com/2026/07/a-bottom-is-in-for-us-china-trade.html
The boom in consumer spending.
Iran
Overnight news. The US ups the ante.
This link is to a
video which discusses the current situation in Iran and the broader
implications for the US and the rest of the world. It is 49 minutes long but it is well worth
the watch.
https://www.powerlineblog.com/archives/2026/07/strait-talk.php
Iran tells Houthi’s
to close Red Sea chokepoint if US bombs its electric power infrastructure.
Fiscal
Policy
Spending remains out of control.
https://issuesinsights.com/2026/07/14/hey-republicans-spending-is-still-out-of-control/
Inflation
PPI inflation beyond energy.
More on the problem of PPI rising faster than
CPI.
https://www.marketplace.org/story/2026/07/13/rapidly-rising-producer-prices-could-hurt-the-economy
The impact of renewed fighting in the Middle East
on inflation.
https://www.capitalspectator.com/cooler-june-inflation-clashes-with-fresh-middle-east-risk/
AI
China
erases the US AI lead.
https://www.zerohedge.com/ai/china-erases-americas-ai-lead-goldman-says-age-scaling-over
Summary:
Markets are sharply lower overnight as the hardware trade moves into
liquidation. Leverage is accelerating the sell off, with the previously
favored and most-crowded pockets leading the move down. But, the big news
overnight is Kimi K3, a massive new model by Beijing-based
Moonshot AI - a release reminiscent of last year’s "DeepSeek
moment".The model's release was timed interestingly to coincide with
President Xi Jinping's appearance at China’s premier AI summit, underscoring
how rapidly the nation’s AI developers are closing the gap with US rivals.Moonshot
claims the model is competitive with, and on several public coding and agentic
benchmarks ahead of, leading Western models.
The
Financial System
Private
credit. The new junk bond market.
https://www.zerohedge.com/economics/private-credit-new-junk-bond-market
The need for reforms in the private credit
rating system.
https://giftarticle.ft.com/giftarticle/actions/redeem/3fac21c5-e33b-4342-82b8-1d2736707bc8
Investing
Has the bar been
raised too high?
https://www.zerohedge.com/the-market-ear/has-bar-been-raised-too-high
Summary: Wall
Street has spent months ratcheting earnings expectations ever higher. Now the
bill is arriving. Netflix is down roughly 10% after disappointing guidance, IBM
suffered its worst one-day collapse in decades after pre-announcing a miss, and
Alcoa also failed to impress. The problem isn't earnings. It's that
expectations have perhaps become almost impossible to beat. The key risk for
the overall market this earnings season is that AI capex disappoints.JPM: "US
capex may be a catalyst for global MOMO but might not be easy to impress
investors… 2027 buyside bars compiled by JPM Schilsky are quite elevated:
$325-350bn for Google (vs street $250bn), $300bn for Amazon (vs street $230bn),
and $200-225bn for Meta (vs street $170bn)."
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