Having survived the weekend, investors, traders and speculators bid up stock prices Monday amid what could be described as either a relief rally or simply the resumption of the post-“Liberation Day” trend.
Technology stocks, communications services and financials led the way higher while utility stocks, health care and energy lagged on hope for a quick end to a conflict that, for now, is isolated to the Middle East and includes only Israel and Iran.
President Donald Trump is talking with other G-7 leaders in Calgary, Fed Chair Jerome Powell is preparing for an FOMC meeting, and the search for answers about known unknowns such as tariffs and interest rates continues.
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According to The Wall Street Journal, Iran is in a hurry to end hostilities and resume negotiations over its nuclear program and is “sending messages to Israel and the U.S. via Arab intermediaries.”
West Texas Intermediate crude oil shed 2.2% to $71.39 per barrel, Brent crude was down 1.8% to $72.92 and the Cboe Volatility Index (VIX) retreated to 19.21 from 20.82 Friday.
“Markets got a reminder that tariffs aren’t the only potential source of market volatility,” writes Chris Larkin, managing director of trading and investing at E*TRADE from Morgan Stanley.
“Right now, markets are signaling they expect the situation in the Middle East will remain contained,” Larkin adds, “but any surprises could have an oversized impact on sentiment.”
European theater
Nvidia (NVDA) bounced back from its 2.1% decline Friday to post a 1.9% gain Monday and rank among the top Dow Jones stocks.
It’s a pretty good sign the mode remains “risk on” if the AI stock performs like this and keeps company with financial stocks such as Goldman Sachs (GS, +2.3%), American Express (AXP, +2.3%) and JPMorgan Chase (JPM, +2.1%) among the day’s biggest gainers.
Nvidia CEO Jensen Huang toured Europe last week and received a warm welcome for the “sovereign AI” concept he discussed during the company’s May 28 earnings conference call.
Oppenheimer & Co. analyst Rick Schafer estimates the total addressable market for sovereign AI – countries building their own infrastructure to support the technology – at $1.5 trillion and Europe’s share at $120 billion.
“Nvidia remains best positioned in AI, benefiting from full stack hardware/software solutions and unique rack-scale,” Schafer writes.
The analyst reiterated his Outperform (or Buy) rating and his $175 12-month target price for the Mag 7 stock.
By the closing bell, the Dow Jones Industrial Average had added 0.8% to 42,515, the S&P 500 was up 0.9% at 6,033, and the Nasdaq Composite had risen 1.5% to 19,701.
Indian tragedy
Boeing (BA) was up as much as 1.8% Monday and closed higher by 0.7% in the aftermath of the crash of an Air India 787 Dreamliner. The large-cap stock had declined more than 6% since Thursday.
The 787 was powered by GE Aerospace (GE) engines. GE was down three cents Monday.
The cause of the problem has yet to be determined. The jet’s flight data recorder and cockpit voice recorder have been recovered.
The investigation of the cause of the crash continued as the Paris Airshow opened Monday. Boeing CEO Kelly Ortberg will no longer attend the show. GE Aerospace delayed an analyst event in Paris.
It’s all uncertainty these days
It’s a light earnings calendar and an abnormally short trading week, with markets closed in the U.S. Thursday to observe Juneteenth. But there is a Fed meeting on tap for Tuesday and Wednesday.
“We expect no change to the stance of policy at the June meeting,” writes UBS economist Jonathan Pingle in a preview of a Federal Open Market Committee gathering that includes a quarterly update of its Summary of Economic Projects.
“We expect little change to the post-meeting statement,” Pingle adds. “We expect Chair Powell to highlight the uncertainty in his press conference.” The economist expects “a relatively hawkish tone to the meeting.”
As of Monday, FedWatch is pricing a 99.8% probability the Fed holds the target range for the federal funds rate at 4.25% to 4.50%. The probability the Fed holds again in July has ticked up to 87.5% from 76.9% on Friday.
Traders have pared bets on a September cut, too. So the market is “pricing out” interest-rate cuts despite the outbreak of hostilities between Israel and Iran.
As we note on our live Fed blog, it’s unlikely the Fed would intervene preemptively to mitigate the potential impact of a regional war on financial markets.
And the variable to watch when it comes to the central bank and the Middle East is crude oil. An escalation of hostilities that constrains supply over a meaningful time frame and causes a sustained price spike could spark inflation.
So the Fed would likely hold off on trimming the target range for the fed funds rate. That’s what fed funds futures traders are factoring right now.
Geopolitics took a starring turn for a few days and could still turn ugly enough to push Powell and the Fed out of the spotlight.
It’s generally positive, though, that we’re back to tariffs and the trade war as the key uncertainties as opposed to a real hot war.