Gave Peace a Chance? Future of Warfare, Huge Macro Day, Big Beautiful Blowup?
As the Israel-Iran conflict continues, let's review how markets are reacting. Meanwhile, OpenAI, Anthropic, Palantir and Amazon could define how wars are fought in the future.
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Financial markets were more than ready to give peace a chance on Monday. Unfortunately, from the looks of things, as I work my way through the "zero-dark" hours out on Long Island, NY, it appears that for the key combatants engaged in this latest round of military action, their fight goes on.
On Monday morning, I told readers that markets were acting as if the war might already be winding down. Foreign equities were higher, U.S. equity index futures were higher, crude oil had backed off. Demand sagged for safe-haven assets. Something was "up."
It was not long before the Wall Street Journal had reported that after cancelling talks with the U.S. on a potential nuclear deal on Sunday, that the regime in Tehran had signaled through intermediaries that Iran was open to a diplomatic end to these hostilities. On the surface, it made sense. Though Israel had sustained a number of civilian casualties, it had already become clear that Iran's military was no match for their opponent. The Israeli Air Force had achieved air superiority across Iran in near totality, including over Iran's capital city. Iran's military leadership had been eliminated and according to the IDF, more than one-third of Iran's ability to launch ballistic missiles had been taken off the board.
President Trump, speaking from the G7 meetings in Calgary, Alberta (Canada) had said that he was in favor of the two sides coming to a deal and that third parties had reached out to him on behalf of Iran. Saudi Arabia had supposedly lobbied the U.S. president as well, to pressure Israel to slow down their campaign. Israeli officials claimed that President Trump had not told them to stop. In addition, senior Iranian officials have expressed a mistrust of the U.S. president and rejected U.S. claims that there was no involvement in the attack on their nation.
Reality Strikes
President Trump left the G7 summit early in order to get back to Washington to try to deal with the war between Israel and Iran. In a comment that clearly disappointed financial markets and all of those hoping for peace, after French President Emmanuel Macron had mentioned that President Trump might be working on a truce, the U.S. president was quoted by Bloomberg News as saying "Wrong! He has no idea why I am now on my way to Washington, but it certainly has nothing to do with a Cease Fire. Much bigger than that. Stay Tuned."
As Iran has not indicated that they are more willing to compromise before this war started and Israel expressed caution in believing anything put out publicly by the Iranian government, the U.S. has moved more naval assets into the region. Overnight, the U.S. Dollar Index and U.S. Treasury debt securities have rallied off of their lows as investors once again show some interest in perceived safe-haven assets. Crude oil has traded higher overnight as well, as European equities moved lower alongside U.S. equity index futures.
Monday's Markets
As the yield for the U.S. 10-Year Note gave back four basis points on Monday, stocks were hot. The Nasdaq Composite gained 1.52% on the day as the S&P 500 rallied 0.94%. The Philadelphia Semiconductor Index took back 3.03%, which is more than was lost on Friday, as Advanced Micro Devices AMD and ON Semiconductor ON soared 8.81% and 5.61%, respectively.
The Dow Transports gained 1.47% and the small-to midcap indexes all rallied between 0.96% and 1.12%. Eight of the 11 S&P sector SPDR ETFs ended the regular session in the green, led by the "growthy" funds as Communication Services XLC and Technology XLK gained 1.72% and 1.62%, in that order. Defensive sector funds took four of the bottom five slots on the daily performance tables as the Utilities XLU and Health Care XLV led to the downside.
Breadth was wildly optimistic on Monday. Winners beat losers by a roughly 9 to 5 margin at both the NYSE and the Nasdaq. Advancing volume took a commanding 82.2% share of Nasdaq-listed trade and a 68.9% share of composite NYSE-listed activity.
What stops Monday from being a new "day one" or anything like that was the lack of confirming trading volume. While aggregate trade was up 6.9% across Nasdaq listings from Friday, aggregate trade was down 2.8% across NYSE listings and lower across the membership of the S&P 500 as well.
Monday was nice, but not enough professional capital was convinced that peace was at hand.
In Other News...
Senate Republicans have now put together their version of the "Big, Beautiful Bill" and will try to pass this bill next week, so as to get it back to the House of Representatives and off to the president's desk by the July 4th holiday. Republicans hold a 53-47 majority in the Senate, but there are a number of key differences, which will almost certainly run into trouble along that path.
The core part of the bill that extends the 2017 tax cuts was more or less left unchanged from the version that barely passed the House last month. Without that extension, those tax cuts would expire at year's end and undoubtedly damage the economy. That's a positive. However, this bill creates a longer phase-out period for clean energy tax credits and cuts more deeply into Medicare, while also imposing (as the House version did) work requirements on able-bodied recipients.
This last one may be what blows this bill up when it gets back to the House. The House version increased the SALT (State & Local Real Estate Tax) deduction from $10,000, which does not cover all that much of what many homeowners pay in high-tax states, to $40,000. The Senate version leaves that deduction where it was, at $10,000. Increasing the SALT deduction was one way of getting Republican representatives from blue states on board with the bill that passed the House. As Senators are chosen in state-wide elections, there are no Republican senators from blue states. This will be a point of contention.
The Future of Warfare
OpenAI was awarded a $200 million contract to provide the Department of Defense with the tools of artificial intelligence. This is a one-year deal and it is expected that OpenAI will collaborate with start-up Andruil to deploy advanced AI systems for national security focused missions. Andruil received a $100 million defense contract back in December.
That came after Anthropic, which is a competitor to OpenAI, had announced that it was working with Palantir Technologies PLTR and Amazon AMZN to supply AI models to the U.S. defense and intelligence agencies. Readers may have noticed that Palantir was still up 2.9% on Monday after being up 1.6% on Friday.
While most defense contractors rallied on reflex Friday, with peace seemingly at hand on Monday, Lockheed Martin LMT, Northrop Grumman NOC, L3 Harris LHX, General Dynamics GD, Kratos Defense & Security KTOS and AeroVironment AVAV all closed in the red. RTX, the old Raytheon Technologies RTX, which is a name that I have been championing for you, was the only traditional large defense name that closed on the upside on Monday. Remember, RTX is more about missiles and missile defense than tanks, fighter jets and ships.
Artificial intelligence and missiles. That's apparently the future of warfare. Drones too, but not the large kind that mimic fighter or bomber aircraft. More the smaller kind that can act as a swarm.
Huge Macro Day Ahead...
May Retail Sales and May Industrial Production along with April Business Inventories may be what matters to the markets today as the FOMC heads into their two-day policy meeting. The Atlanta Fed is expected to revise their Q2 GDPNow model later this morning after these numbers hit the tape.
Economics (All Times Eastern)
08:30 - Retail Sales (May): Expecting -0.5% m/m, Last 0.1% m/m.
08:30 - Core Retail Sales (May): Expecting 0.2% m/m, Last 0.1% m/m.
08:30 - Export Prices (May): Expecting -0.1% m/m, Last 0.1% m/m.
08:30 - Import Prices (May): Expecting -0.2% m/m, Last 0.1% m/m.
08:55 - Redbook (Weekly): Last 4.7% y/y.
09:15 - Industrial Production (May): Expecting 0.1% m/m, Last 0.0% m/m.
09:15 - Capacity Utilization (May): Expecting 77.7%, Last 77.7%.
10:00 - Business Inventories (Apr): Expecting 0.1% m/m, Last 0.1% m/m.
10:00 - NAHB Housing Market Index (Jun): Expecting 36, Last 34.
16:30 - API Oil Inventories (Weekly): Last -370K.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: JBL (2.32)
After the Close: LZB (.93)
At the time of publication, Guilfoyle was long AMD, PLTR, NOC, LHX and RTX equity.
