Capital Idea: Market wrap, 31 July

• Crude prices spike on continued US-Iran tensions

• Tech stocks slide amid ongoing AI capex concerns

• FOMC holds rates as September hike odds ease

The markets experienced big swings overnight as monetary policy, tech earnings, and geopolitical risk collided. Ultimately, it was quite a negative day for Wall Street. Geopolitical risk and concerns about the outlook for AI and US tech stocks outweighed the brief boost to the markets from a less-hawkish-than-expected Fed.

The major driver of downside in equities came as tensions between the US and Iran ratcheted up again. Following Iranian strikes on US military assets in Jordan, the US and Saudi Arabia launched strikes into Iraqi territory, with US President Donald Trump threatening that the US would be “hitting Iran hard” in retaliation. The peace process has taken another backward step as the situation between the two warring countries becomes seemingly more intractable. Crude prices surged as traders priced-back in a risk premium amid ongoing supply disruptions and heightened probabilities that energy infrastructure or other regional energy chokepoints—namely, around the Red Sea – could be strangled. The dynamic wasn’t helped by data showing another large drawdown in US crude inventories last week, offering another reminder of the tightening of global energy supply.

Meanwhile, tech stocks clearly remain out of favour, weighing heavily on Wall Street. The NASDAQ tumbled overnight, falling into a technical correction, as fears about diminishing return on investment on AI persist. Part of the sell-off during US trade was certainly due to positioning going into a big 24 hours of Magnificent Seven earnings, which included Meta and Microsoft after the closing bell. Those results proved to be a mixed bag. Meta shares dropped in after hours trade after delivering a tepid sales forecast. That was despite refraining from hiking AI capex as many had feared. Meanwhile, Microsoft shares lifted in post market trade after a solid revenue beat on better than expected Azure growth, underpinned by AI monetisation. That seemingly offset the impacts of an increase in CAPEX by the company. For now, NASDAQ futures are lower in response to the night’s earnings. Market participants will continue to weigh up their overall impact on the market, especially as focus shifts to Apple and Amazon earnings in the US session ahead.

The FOMC decision was approached with a high degree of intrigue and trepidation. But overall, the Fed did and said a whole lot of nothing. Interest rates were left on hold – an outcome that was far from a foregone conclusion, perhaps illustrated by the 9-3 vote split that coincidentally aligned well with the 28% implied probability of a hike going into the meeting. True to form, a still wet-behind-the-ears Chairperson Kevin Warsh said very little about the path forward for interest rates, other than reaffirming the central bank’s commitment to getting inflation back to its 2% target. Overall, evidence that Kevin Warsh isn’t that hawkish and clearly isn’t that dead-set on getting inflation back to 2% in a hurry lowered the probabilities of a hike in September. That weakened the US Dollar and briefly pushed Wall Street into positive territory, before geopolitical and earnings risks took hold of the market and sent it tumbling.

(Source: Trading View)

(Past performance is not a reliable indicator of future results)