Oil prices retreat and chip stocks rally, as market normalize to lates flare up

After rising sharply on Wednesday, oil prices are now retreating as the market normalizes to the latest flare up of tensions in the Middle East. Brent crude is down more than 0.5% on Thursday, and European stock markets are mostly higher, although the FTSE 100 is a laggard. US futures prices are pointing to a stronger open, and bond yields are falling around Europe.

Peace deal remains fragile

After spooking markets yesterday by saying the ceasefire with Iran is over, President Trump has now claimed that Iran wants to make a deal, although this has not been confirmed by Tehran. Overnight there were more attacks, with the US striking Iran, and Iranian forces using missiles against Bahrain and Kuwait. Interestingly, although Iran has claimed to have targeted Qatari sites, Nat gas prices are mostly stable this morning. Added to this, Qatar announced that it had spoken to the Iranian regime and urged both sides to find a diplomatic solution to their problems. Thus, for now, it seems like the situation may not escalate from here, although Iran has not confirmed that it wants a deal, and there could be symbolic attacks from Iran on the final day of Khamenei’s funeral.  

Although the events of recent days are another sign that the path to a long-term peace will have many twists and turns, the market seems well placed to absorb the current tensions. Brent crude is now trading around $77 per barrel, it had been trading around $76 per barrel earlier on Thursday, but reports that Iran has called the US strikes ‘pathetic’ have halted the oil price decline. Even so, bond yields are down sharply, the UK 2-year yield has given back half of Wednesday’s gains, and is down 6bps so far this morning.

Chip stocks benefit from spike in tensions

Amidst the angst about the Iran war, US tech and chip stocks rallied on Wednesday, which also helped to boost the market mood. SanDisk was higher by 6.7%, CoreWeave by 7.75% and Broadcom rose by nearly 5%. As yields and the oil price rose on Wednesday, there was a rotation out of tech stocks and back into chip stocks. Ahead on Thursday, Nasdaq futures are pointing to a 0.8% gain later today, outperforming the Dow Jones, which fell sharply on Wednesday and was down more than 1% as the tech sector continued its recovery.

FTSE 100 struggles from weight of Astra Zeneca

Tech was the second-best performing index in the US on Wednesday behind energy stocks, and this pattern could extend into Thursday. This is bad news for the FTSE 100, which is bucking the recovery trend in Europe and is instead down 0.5%. However, this is linked to Astra Zeneca, which is lower by more than 8% today, after one its nerve disease drugs failed to meet the target in its late-stage trial to treat a heart condition.

This is bad news for the FTSE 100, as AZ accounts for approx. 8% of the total weight of the FTSE 100, so it is hard to see the FTSE staging a recovery any time soon.

Fed rate hike bets moderate slightly

The FOMC minutes suggest that there are two camps developing at the FOMC. Those that are worried about upside risks to inflation, and those who are concerned about the outlook for employment. This should placate the market, as it suggests that the Fed is in balance as the two sides tussle. The prospect of a rate hike at this month’s Fed meeting has fallen to 27% in the aftermath of the FOMC minutes, which is also boosting risk sentiment as we move through the week.

The market view

Ahead today, we could see a continued rally in chip stocks. SanDisk and Nvidia are pointing to further gains today, while the hyperscalers like Microsoft and Alphabet are declining in the pre-market, suggesting that the rotation within the AI trade continues.

From an economic standpoint, initial jobless claims are worth watching later today as the focus remains on the strength of the US labour market. The dollar is broadly lower today as the oil price comes under pressure and yields fall. The weaker dollar impulse could continue if the initial jobless claims data support signs of a softer labour market.