Proceed With Caution

I still had my screens up. I guess it was a little after 8 p.m. in New York, I wasn't really looking at the clock. Suddenly, I noticed the profit/loss of my most active, net long equity account lurch lower. About four minutes later I started seeing reports on X (Twitter) declaring that Israel had launched an attack on Iran. 

Maybe 25-minutes later than that, the legacy cable TV news networks finally woke up. As the media woke up, so did crude oil and gold, despite the fact that the U.S. Dollar Index had hit its lowest levels since March of 2022 on Thursday. U.S. equity index futures took a tumble on the news, soon to be followed to varying degrees by Asian and then European equities.

Early Friday, or late Thursday on the east coast of North America, Israel's armed forces launched a series of airstrikes at dozens of targets inside Iran that included nuclear enrichment facilities as well as key individuals such as nuclear scientists and military leaders. Israeli Defense Forces have dubbed the mission "Operation Rising Lion." Operation Rising Lion has been described by Israel's Prime Minister Benjamin Netanyahu as not a symbolic strike, but an attempt to weaken the ruling regime in Iran and degrade that nation's offensive nuclear capabilities or what he described as the Iranian threat to Israel's "very survival." In an address to his nation, Netanyahu said, “This operation will continue for as many days as it takes to remove this threat.”

U.S. Secretary of State Marco Rubio made an announcement that there was no U.S. involvement in, or U.S. assistance provided to the Israeli mission. We do know that Pres. Trump had been briefed prior to the mission's launch. Rubio's statement claimed, "Israel advised us that they believe this action was necessary for its self-defense." Netanyahu had apparently first brought up the possibility of such an attack this past Monday. This is why the U.S. started moving some diplomats and military dependents out of the region this week. This is also why British security agencies warned commercial maritime vessels that the region could become dangerous and that military action could be imminent.

It is known that at least three Iranian generals have been killed including Major General Mohammad Bagheri, who was the commander in chief of Iran's armed forces and Major General Hossein Salami, who had been the commander of Iran's Islamic Revolutionary Guard Corps. Salami was a well-known and outspoken opponent of both Israel and the United States. Iran has been reported to have launched at least 100 military drones at Israel through the night in response, many of which have been intercepted or shot down by the Israeli and Jordanian armed forces.

Markets: Be Careful Out There

While a negative reaction in markets for risk assets and a run into safe haven assets have both been quite visible overnight, those risk assets are off of their lows and those safe-haven assets are off of their highs. Buy the dip in equities? In measured steps as trades meant to work for the short-term outside of core portfolio holdings? Sure. As a way to add onto those core holdings, for investors, at discounted prices? I'd be careful with that.

I mean these discounted prices may be good for making those additions, but the risk is now elevated. While it seems, as I write through the zero-dark hours, that perhaps the situation has settled down a bit, we do not know that. Situations can always deteriorate and with equity valuations as expensive as they are, equities can go a lot lower than this.

I am not telling anyone to sell their holdings, and I am not expecting a serious deterioration in conditions that will further impact U.S. stocks. That said, nor would I be surprised if something far more awful than what we have seen so far, still happened. While the U.S. is not involved at this time, if Iran has been seriously harmed, it stands to reason that they might try to draw the U.S. into the conflict to unite the region against the perception of an Israel united with the U.S. This is a time, in my opinion, for investor caution, not aggression.

What's Hot?

Obviously, energy and defense stocks are having a solid overnight session. Exxon Mobil XOM and Chevron CVX are up 3% and 2.5% respectively.

Among the large defense/aerospace contractors, I see RTX RTX up 5.1%, followed by L3Harris LHX, and Lockheed Martin LMT, both of whom are up more than 4% and Northrop Grumman NOC and General Dynamics GD. Those are up more than 3% overnight. Among drone or unmanned aircraft stocks, Kratos Defense KTOS is trading 5.1% higher, while AeroVironment AVAV is up 4.2%.

Away from aerospace and defense, look for Consumer Staples XLP and other defensive (not defense) sectors to do well, while growth and cyclicals lag. Interestingly, I do not see big data / artificial intelligence software platform stocks with defense / security applications such as Palantir Technologies PLTR trading higher today. That could be due to the stock's recent run, which has been very strong, but I do know that the Israeli Defense Forces are a client of the firm. 

Traders may want to keep an eye on Elbit Systems ESLT, an Israeli-based defense contractor specializing in unmanned aircraft and unmanned surface vessels as well as intelligence and cyber systems. That stock is up 3% overnight.

Note to Readers...

I had planned to write up an in-depth opinion piece on the still tame inflationary data seen for May in the U.S. this week and the weaker U.S. Dollar and the implications for monetary policy at next week's Federal Open Market Committee meeting and beyond this morning. For obvious reasons, I think we hold that piece off until Monday or beyond that, given the geopolitical realities that have developed overnight. Have a good day today, gang.

Economics

All times Eastern

10:00 - U of M Consumer Sentiment (Jun-adv): Expecting 53.0, Last 52.2.

10:00 - U of M One-Year Inflation Expectations (Jun-adv): Last 6.6%.

10:00 - U of M Five-Year Inflation Expectations (Jun-adv): Last 4.2%.

1:00 p.m. - Baker Hughes Total Rig Count (Weekly): Last 559.

1:00 - Baker Hughes Oil Rig Count (Weekly): Last 442.

The Fed 

All times Eastern

Fed Blackout Period.

Today's Earnings Highlights 

Consensus EPS expectations

No significant quarterly earnings scheduled.

At the time of publication, Guilfoyle was long RTX, LHX, NOC, PLTR equity.