War Returns, Semis Snap Back, Fed Frets Over … AI Inflation?

U.S. forces, for a second straight day, carried out extensive strikes against Iranian military targets on Thursday. On Wednesday, U.S. air and naval forces hit 80 targets. On Thursday, they hit 90 targets. The object of these strikes is to degrade the Iranian military’s ability to attack civilian commercial vessels, which has been their hallmark, while those vessels traverse the Strait of Hormuz. Iran is claiming to have fired at U.S. military bases in Bahrain and Kuwait as well.

It is believed that targets on Kharg Island have been hit and damaged significantly. A rough 90% of Iranian exported oil leaves that country through Kharg Island. Damaging that facility seriously hampers any future recovery by the Iranian economy. Should the U.S. decide to take control of Kharg Island, the job would likely require extensive use of Marine Corps (always faithful) infantry units in addition to special operators.

That Wasn’t So Bad…

… was it? Sure, the Dow Jones industrial average moved lower on Wednesday. That said, the Dow 30 is the one large cap equity index that no professional sees as important. That index is only on your TV screen all day long because the financial media assumes that the public is unsophisticated and will never evolve. Portfolio managers watch the Nasdaq 100, S&P 500, and Nasdaq Composite to indicate market performance at a glance.

Then, if they have the time at the moment, how they are positioned impacts how many other more narrowly focused indices they keep on their screens. Personally, in addition to the above three headline level major indices, on an everyday basis, I watch the Philadelphia Semiconductor Index, Dow Jones U.S. Semiconductor Index, KBW Banks, Dow Transports, Russell 2000, S&P Small Cap 600 and S&P Mid-cap 400.

On a less than everyday basis, I’ll watch the industry specific indexes outside of the semis and the banks. The semis are probably the only industry that I watch all of the time and that’s because I haven’t been flat the semis as a group since I went pro in this game decades ago. The banks? They just matter. Period.

So, I Have to Laugh

At least a little when I hear some financial journalist report that stocks were weak, because the Dow Industrials were off 576 points or 1.09%. Understand that close to no capital at all tracks the Dow Industrials. No passive flows. No managers. That’s the index of a bygone era and that era ended in the 1990s.

The crash of 1987 damaged the Dow 30 in terms of prestige and the “dot com” bubble of the mid-to-late 1990s forced professional money to follow the major Nasdaq indexes far more closely than they ever had before. When I was a clerk (old school term for trader’s assistant), when one mentioned what the market did today, they mentioned how many points the Dow was up or down. Well before the turn of the century, when someone mentioned how many points the market was up or down, they usually cited the S&P 500 and professionals never looked back.

About Wednesday

Like I wrote above. Not so bad. Sure, the S&P 500 gave up 0.28% for the regular session, but the Nasdaq 100 and Nasdaq Composite closed up 0.27% and 0.2% respectively. All of these indexes bottomed before lunchtime in response to news that Pres. Trump had given up on Iran ever being able to abide by and respect the ceasefire agreement and permitted the U.S. military to try to shut down that nation’s persistent attacks on civilian cargo ships.

WTI Crude ran more than 5% higher, peaking at almost $76 per barrel, but that trade cooled as well. I now see the sweet stuff trading just above $73 per barrel. Treasury debt securities sold off in response to that news as well, but then bond traders, as did equity traders, bought the dip. The US Ten-Year Note paid almost 4.6% at one point on Wednesday. I now see that yield at less than 4.58%.

Looking at some of my other indexes mentioned earlier, the semis came back quite nicely as the Philadelphia Semis gained 2.23% and Dow Semis gained 2.86% led by SanDisk (SNDK) and Broadcom (AVGO). Yes, that was after I cut my SNDK long in half after my panic point was triggered. The banks were slapped around, though. So were small to mid-cap stocks, which negatively impacted breadth.

What Turned the Markets?

What came first, the chicken or the egg? It became quickly apparent that U.S. financial markets did not fear the resumption of hostilities in Persia the way I thought they would 24 hours ago. Of course, at that time, Asian, and European equities were being thrown in the trash bin along with U.S. equity index futures.

One distinct market positive was the quality of the U.S. Treasury Department’s auction of $39 billion worth of new Ten-Year Notes. A high yield of 4.58% was awarded, which stopped through the “when issued” which was trading at 4.586% at the time. Bid to cover landed at 2.593, up from the six-month average of 2.46.

Now, this is the interesting part. Direct bidders (domestic accounts) took down just a 10.73% share of this issuance. That’s the poorest domestic demand for this monthly series since April of 2025. Foreign demand, however, was off the charts. With the resumption of the conflict in the Middle East and Pres. Trump browbeating the deadbeats at the NATO summit, indirect bidders won an 81.5% share of the auction, which was their third largest slice (in aggregate) of this pie on record. Dealers only had to eat 7.8% of the auction, down from 9.5% in June and their lowest slice of the pie since January.

Breadth

OK, gang. This gets sloppy. Nine of the 11 S&P sector SPDR ETFs closed out the Wednesday session in the green. The winners were confined to energy (XLE), which was obvious and tech (XLK) thanks to the semis. The losers were led lower by the materials (XLB) and financials (XLF). Defensives outperformed cyclicals, which made sense. Growth, however, outperformed defensives. My portfolio eagerly welcomed that development, though I’m not sure it made sense.

Losers beat winners across the NYSE by a rough five-to-three margin and across the Nasdaq by about two to one. Advancing volume took a 42.5% share of composite Nasdaq-listed trade and just a 33% share of composite NYSE-listed activity. Do I recognize Wednesday as a “day one” bearish reversal of trend? No, I do not. Aggregate trading volume was up small on a day over day basis across both listings at the NYSE and the membership of the S&P 500. That said, trading volumes were 3.8% lower across Nasdaq-listings on Wednesday than they were on Tuesday.

The Fed Minutes

The Federal Reserve Bank released the minutes of the June 16-17 policy meeting on Wednesday afternoon. One thing was clear: While a number of Fed officials are concerned about the level of inflation, they, as a group, recognized that those inflationary pressures could fade quickly. There was no broadly stated intent to take action on short-term rates any time soon. There was some scattered support for a June rate hike, but that was not close to consensus.

Very interestingly, what discussion there was over the forces behind upward price pressure appeared not to be focused on energy prices, which spiked in response to the war in Iran. Instead, there seems to be concern that all of the capital spending to expand upon and develop the capabilities of artificial intelligence could force businesses to pass those costs on to customers.

This would be something that had been unexpected only recently as in the past, technological progress such as automation, the internet and machine learning had all served to place deflationary pressures upon prices. This would be a change from what we have seen in the past. Then again, the development of AI may serve to reduce payrolls and that in turn would reduce the abilities of the consumer to fully participate in the economy. That would not only be deflationary, but potentially recessionary. Food for thought.

Economics (All Times Eastern)

08:30 – Initial Jobless Claims (Weekly): Expecting 219K, Last 215K.
08:30 – Continuing Claims (Weekly): Last 1.814M.

10:00 – Existing Home Sales (June): Expecting 4.2M, Last 4.17M SAAR.

10:30 – Natural Gas Inventories (Weekly): Last +87B cf.

1:00 p.m. – Thirty-Year Bond Auction: $22B.

The Fed (All Times Eastern)

09:00 – Speaker: New York Fed Pres. John Williams.
1:30 p.m. – Speaker: Dallas Fed Pres. Lorie Logan.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: PEP (2.21)
After the Close: WDFC (1.57)

At the time of publication, Guilfoyle was long SNDK equity.