Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Last week was a mixed week as markets digested the quarterly rebalancing crosscurrents. The main themes remained the same, though one of them was renamed. The rise in yields and oil prices continued to temper enthusiasm while the technology formerly known as AI (TFKAA) continued to buoy markets. Equity markets rallied on Friday, recouping a good portion of the week’s losses after a weaker than expected jobs report. Yields initially moved lower on release but ultimately ended the day modestly higher with a steepening of the curve throughout the week. The S&P 500 ended the week down 0.3% with Healthcare, Financials and Consumer related stocks the worst performing. Energy and Technology led to the upside. The equal-weight S&P 500 was down nearly 1%, falling for the seventh consecutive week. Small and midcap indices ended the week on either side of unchanged, outperforming on Friday after testing their respective 200d ma’s earlier in the week. (Russell 2k Chart Below).

We were expecting a little bit of a lull this week in between major catalysts with the labor market data behind us and inflation data and the “official” start of earnings season next week. This week’s Recap will be delivered with the same sadness as the Four Tops in their classic Same Old Song, since the Yankees are gone. On the bright side that means we’ll get some more sleep over the next month and the Knicks start their title defense in a couple of weeks.  The title of that song is apropos for the current market environment as the same triple play of themes are driving market activity: oil prices, rising yields and SI, and to be honest the playlist is getting old.

It was a choppy week for oil, yields and equity markets driven by some headline volatility. For oil and yields we’ll leave the details for what drove those markets below. There weren’t drastic changes to pricing for either asset class this week but suffice it to say that the elevated levels of both continue to weigh on overall sentiment.  

From an equity market perspective, we continued to see some impact from portfolio rebalancing. The week got off to a positive start with equities extending the gains from late last week as breadth improved. The S&P 500 hit a new all-time high on Tuesday but as yields and oil were testing recent highs again on Wednesday markets pulled back. Small caps began to underperform again retesting last week’s lows early in the session on Thursday. However, a social post Thursday afternoon President Trump posted that there would be no attack on Iran before mid-terms which helped oil and yields pullback and put a bid back in this area of the market.

Shortly, thereafter the FT ran a controversial story suggesting that according to sources that OpenAI, annualized revenues in financial documents were $20B below the $70B level the company had signaled to investors recently. Though there have been conflicting reports suggesting that these weren’t apples to apples comparisons as the higher number included revenue sharing agreements. Nonetheless, this sent the AI complex sharply lower yesterday though there has been a bounce back today.

For the week the S&P 500 ended up ~1% closing just over 7,800. The equal-weight version outperformed up ~1.5% breaking its 7-week losing streak. Small caps, which are more impacted by the high interest environment, underperformed closing slightly lower but off the worst levels for the week. 

Within the S&P 500 8 of 11 sectors ended the week up >1%. Info tech was down ~0.5% for the week given the outsized AI/SI exposure. Within tech, semiconductors including the analog chip stocks (not AI related) were under pressure. Memory stocks also fell >5% following Samsung earnings, which failed to live up to very high expectations, and concerns about new capacity coming online. Marvell Technologies was a standout with management raising its long-term revenue guidance highlighting strong demand for custom silicon and calling out optical as a new opportunity. Speaking off, Lumentum’s CEO highlighted that the company’s components were sold out through 2029. Software narrowed some of that performance gap with semis this week. Schneider Electric agreed to buy PTC for ~$22.5B. IT Services continued to rebound after last week’s Accenture results. 

Industrials were also modestly lower for the week. Machinery stocks were under pressure after the FTC and USDA are seeking public comments on ag equipment manufacturing and distribution markets. Airlines were also modestly lower. C.H. Robinson sold off ~10% after announcing a deal to buy RXO. Professional services stocks were the best performing within the group. Energy infrastructure companies ended the week higher despite selling off on the OpenAI news yesterday.

Communication services closed higher for the week but underperformed as telecommunication stocks sold off sharply today after SpaceX agreed to purchase up to $8B of low-band spectrum making it potentially a more viable competitor to the incumbents. The company was also in the news earlier this week looking to raise $40B in financing to buy Nvidia chips. We continue to see some pressure in the financing markets with so much supply coming. See chart of CDS levels for AI related stocks below. 

Utilities were up ~4% with IPP’s leading the way. Vistra got $4B in funding from the government to upgrade its nuclear fleet and expand capacity. Constellation Energy announced a 20yr energy supply agreement with Google, following a similar deal with Amazon recently. Both stocks were up >10% for the week.

Energy was up >4% heading into this afternoon but did pullback modestly after President Trump said following discussions with Vladmir Putin Russia agreed to immediately supply 300k tons of diesel to "America and Global Marketplace" with additional releases forthcoming. This had a limited impact on the commodities though refiners did reverse pretty significantly.

Consumer staples were up 4%. Lamb Weston and Constellation Brands were up >5% after earnings. Retailers were mostly higher while food stocks underperformed. Consumer discretionary was up a similar amount. The mega-cap components were both up >3%, accounting for a good portion of the gains. Casinos, homebuilders and restaurants underperformed.

It was a volatile week for healthcare which ended the week up ~3%. Vaccine developers were higher today after a report that the National Institutes of Health is working on an initiative to develop cancer vaccines. There was a mixed response to the CMS Star Ratings (Pos - HUM, UNH, CLOV Neg - ALHC, CVS). Genomics stocks, which have been AI beneficiaries have been rallying sharply but reversed this week. See the ARK Genomic Revolution ETF which was up >100% YTD earlier this week before pulling back.

It was a relatively light week for data. ISM Services came in at 54.9, a tick below estimates (55.0) and declined from last month (55.4) but still well within expansion (>50). Production continued to expand but the pace fell from last month. The pace of New Orders fell as well while Employment, Inventories and Prices rose. Tariffs and fuel costs were the most cited issues impacting respondents’ supply chains.

The employment picture remained the same. Weekly ADP jobs increased for the fourth consecutive week to 23.75k, while jobless claims continued along their trend. The Atlanta Fed GDPNow was revised a little lower this week, from 3.8% to 3.6%. The LMI Logistics Manager Index continued to move higher with the report continuing to highlight the increase in Transportation prices.

Fed governor Waller was among several Fed speakers this week. He toed the line between Hawks and Doves, noting additional rate hikes were likely needed to bring inflation down to target in a timelier manner, though the pace need not be overly urgent. The Fed Minutes were released but didn’t impact markets significantly. “Most” participants saw another hike in 2026 as likely appropriate. “Several” participants said the scale of the AI buildout continued to surprise. “Many” participants said financial conditions seem supportive of economic growth despite the rise in yields. 

Global yields were mixed, with US rates ending modestly lower. Treasury 10 and 30y stabilized after big gains the last two weeks, while 2y yields extended last week’s modest pullback.  This week’s 10y auction provided welcome relief, stopping-through by 1.7bp while the 30y auction tailed by a small 0.1bp. Yields may have reached a level that has become attractive for investors to allocate into, easing upside pressure, though its too early to call.

Market-implied odds for the Fed to stay put in October are ~80%, a little above last week. A December hike is ~70%, also slightly higher than last week’s level.

Looking globally, French yields pulled back, focused on the short-end, with the spread between France OATs and German Bunds stepping down from the peak after a substantial widening that was creating growing concern. 

The US Dollar Index rose this week, its fourth straight weekly gain. The index took out 102, reaching its highest since the tariffs last year.  The greenback was stronger against most major currencies, though it continued to weaken against the yuan and the Brazilian real saw sharp gains on the election news. 

Late in the trading day on Friday President Trump announced a deal with Russia wherein Russia will supply 300k tons of diesel immediately to the global market, with another 500k tons in November and 1M tons afterward. An additional 3M tons would be delivered “within a short period of time”.  All together it would equate to balancing the 1.6M barrel/day global diesel deficit for about three weeks, according to the WSJ. In exchange the US would temporarily waive sanctions. There’s a significant question of whether Russia actually has the capacity to do this, after the pounding that its infrastructure has taken from Ukraine’s strikes. It also elicits a lot of questions on the Russia-Ukraine war overall and the US’ position.  NY Harbor ULSD fell 4% on the day, but that basically just reversed Thursday’s gain.

Diesel has been a focal point beyond the oil complex as its price puts pressure across most of the economy. Crack spreads (difference between refined and crude) stood at over $100, and President Trump signed an EO earlier in the week to make red diesel more available to on-road vehicles.

For the week December Brent crude was up ~2% while Nov WTI rose 1%. Crude initially fell on the diesel news but quickly recovered most of the drop, with Dec Brent reaching its highest level this year. Before today, the biggest news in the oil patch were reports that the US military was preparing for a potential renewal of large scale strikes on Iran, with the surprise being it could happen before the mid-terms. However that was followed by President Trump saying any strikes would commence after the elections.

There were multiple reports highlighting that shipments through the SOH were back near pre-war levels. Saudi-backed forces launched major assaults on Houthi-held territory in Yemen. Before the Russian news, the IEA backed an accelerated release of oil stocks yet to be released (~100m barrels) from the March collective agreement, with priority for diesel inventory.

Precious metals were mixed. Gold and silver rose on the week, with a bounce on Friday. Platinum and palladium fell. Gold’s late week rally pushed it above $4200. Copper rose 2% and the October contract rose above its 50d ma. 

In crypto, Bitcoin and Ether were down this week, with Ether lagging, though the complex bounced on Friday. A mid-week swoon from liquidations caused most of the damage. New security concerns, including from quantum methods, weighed on the market overall. Tokenized Security Venues have begun to announce their plans to begin trading tokenized equities, in step with the recent SEC Innovation Exemption.

Agriculture was mostly lower. Corn and wheat got hit after the Friday WASDE report showed higher productivity. 

Global Equities -  Mostly higher. China closed most of week. Brazil outperformed

Europe - Major indices were mixed across the region. Sovereign politics and yields were a major story in France this week. France’s CAC was ~6% below its 200d ma at its lows but rallied on Friday. French yields pulled back, especially at the short-end, easing some of the growing concerns about their overall levels and widening spread versus German bunds. Central Bank chief Emmanuel Moulin had said the situation was “serious and worrying”. France’s finance minister said the government would circumvent a Parliament if proposed spending cuts are held up.

Germany’s DAX tested and held support at its 200d ma. The IMF / World Bank annual bank meetings will be held next week along with the EU leaders’ summit. Energy prices, Defense & Security and the Middle East will be key topics on the agenda. Meanwhile, 44 European industrial organizations signed a letter calling for greater trade defenses against China.

Japan’s Nikkei was up 1% but pulled back from its highs earlier in the week after trading back above 70k for the first time since early July. Yields backed off modestly across the curve. Big tech names were mixed, with SoftBank and Kioxia falling ~10% each while Advantest rose 10%. SoftBank was hit on the OpenAI ARR controversy, while also reportedly looking to raise up to $100B from Gulf investors to fund more AI investments, triggering another round of debate on the extraordinary amount of financing/debt issuance versus the extraordinary demand from the industry.

Mainland China was closed most of the week for Golden Week, returning on Thursday. Shanghai had a big reversal on Friday, with reports saying regulators “advised” funds to limit sell orders. There was also discussion of officials having sent out the “National Team” Bat Signal over the past few weeks to support equities. The Hang Seng was up 1% this week, including almost 2% on Friday.

South Korea's KOSPI fell 5% and was closed on Monday and Friday (as was Taiwan). Samsung  fell 5% and reported preliminary earnings. The company reported operating profits rose 9x from last year but that missed estimates, potentially providing a preview of the earnings season kicking off next week.

In Other / Emerging Markets, Brazil was a standout this week as the Bovespa rose 9%. Much of that was on Monday after Bolsonaro fared much better than expected in elections and is now favored to win a runoff later this month.

As we look forward to next week the key economic data will be the inflation data and retail sales on Wednesday and Thursday. The IMF World Bank Meetings begin on Monday with Fed Chair Warsh expected to speak at the end of the week. It is also the “official” start of earnings season with major banks starting to report on Tuesday so hopefully this can take some of the focus off the macro. Have a great weekend!

by Eric Criscuolo & Michael Reinking, CFA

Last week we discussed the main themes driving markets: the broadening of the Middle East conflict, rising yields and AI. The Iran conflict spread to Yemen as the Houthis took substantial territory and threatened to create another supply chokepoint in the Red Sea. Inflation reports remained elevated. Crude rose another 10%. Global yields jumped, taking the 10-year Treasury to 5.0%. These weren't exactly new catalysts but we did add one new brick to the wall of worry: the possibility that AI destroys the human race. 10% chance- at least- according to some. The S&P ended the week down almost 1% with small caps losing about twice that. Energy was the obvious leader and Tech outperformed due to semiconductor-related strength.

This week started on a strong note as Skynet didn't become self-aware. In another miracle, both the Giants and Jets won their opening day games for the first time since 2009.

Unfortunately, the expected meeting between Gulf states and Iran over the weekend was postponed and the Houthis continued to capture territory. That drove oil higher and kept the pressure on equities. Adding to that strain was the latest plot twist in the AI story. Anthropic’s CEO published an essay calling for the slowdown of AI model development, in order to keep the Skynet scenario from happening, basically. Other AI leaders voiced their support, but many others didn’t, including the President of the United States. Needless to say AI hardware and infrastructure names began the week by selling off (DRAM and ICE Semis down >5% on Monday). However, the countertrade to that was turbo-charged, as software stocks rose sharply (IGV +5%).

Oil continued to climb on news around Libyan production issues and strikes on Russian refineries. The S&P’s 50d moving average around 7615 failed to hold, and then the index fell below 7600, the bottom of the trading range it’s been in since early August. The TL;DR: The Middle East, yields and AI continue to be the major themes driving markets. And they probably will be for the foreseeable future.

This week's big market event would play directly into one of those themes: the Federal Reserve’s rate decision. Before getting into that, however, we'll briefly mention the news that Warren Buffett announced he’s stepping down as Chairman of Berkshire Hathaway, effective immediately. What an incredible run.

Back to the Fed. A 25bp rate hike was the overwhelming expectation and that is exactly what happened. The new Summary of Economic Projections (SEP), which were last updated three months ago, along with Fed chair Warsh’s Q&A session were the the main points of interest. We discuss more below, but the immediate results was yields ripping higher, especially on the front end. The 2y traded up 15bp from the day’s lows. The S&P fell to its 100d moving average ~7515 but support held and it recovered some of the loss into the close. The next day however the index jumped 1%, regaining the 50d and returned back into that 7600-7800 range we've been noting. Equities benefited as yields pulled back, erasing all of the 2y’s post-decision rip, and oil fell on some optimistic geopolitical news (also discussed below).

The Fed decision came right before a huge Quad Witching (welcome back single stock futures) on Friday, as well as index rebalances. It was the third-largest closing auction in NYSE history, at 3.5 billion shares, while notional was a record $244.9 billion. All of this created an enormous amount of market noise, making the overall moves a little harder to disentangle as mechanical flows from options and futures expirations, repositioning and treasury market gyrations flooded the market.

The late-week rally put the S&P 500 only slightly lower for the week. Mega caps limited overall weakness, however. The equal-weight is down over 1% and small caps closer to 2% while the NYSE 100 ended up ~1%. On Friday the S&P once again tested support at its 50d ma just above 7600 but bounced off it. The thematic and high beta baskets we track like quantum and space and rare earths (and quantum space data center mines on asteroids) were mixed but most came under pressure on Friday, coinciding with sharp rally in crypto. If crypto continues to wake up it's possible we see flows durably rotate from those groups into the crypto complex.  

Only 3 sectors were up up for the week:

Healthcare led. Life science tools were among the best performers on some positive updates at investor conferences and there was strength across the rest of the sector, including Med Devices, a YTD underperformer. On the other hand Services and managed care.

Communication Services was also near the top with the mega caps Alphabet and Meta +3%, but the rest was lower, including Netflix (-7%) which caught a downgrade to Underweight on Friday.

Tech was around flat but rallied into Friday's close and the big opex, driven by semis, to finish the week as third sector in the green. It was volatile as a lot of AI news crossed the tape- calls for the AI slowdown mixed with corporate updates highlighting unrelenting demand (Jensen said NVDA chip shipments would double next year).

On the downside, Utilities and Real Estate lagged as yields rose. Financials were lower, continuing the weakness from last week as the yield curve continued to flatten, combined with some negative updates at investor conferences. Bank of America offered soft sales and trading guidance and Goldman Sachs had similar commentary on FICC trading. Huntington cut its outlook on higher funding rates and NII pressure. On the other hand, commentary on overall economic and credit conditions remained positive if not robust. The sector is also digesting the failure of the crypto Clarity Act in Congress and the SEC and CFTC taking matters into their own hands by issuing pieces of a regulatory framework for tokenization and trading.  

Materials lagged with weakness in agriculture names and steel (earnings) / miners. Industrials were also weaker. JB Hunt noted pricing pressures which weighed on trucking and freight peers while talk of slowing down AI development earlier in the week hit other infrastructure names like electrical equipment and construction.              

Consumer Discretionary and Staples continue to diverge, and the most recent move tracks closely with oil's sharp move higher. This despite generally upbeat commentary about economic resiliency and consumer spending. The chart below is a look at the equal-weight Discretionary versus Staples ratio, mitigating the over-influence of the mega caps.

One of the market characteristics we've highlighted was the high dispersion of returns across individual stocks being offset by very low correlations, keeping overall index volatility muted. That dynamic has been changing from its extremes in the summer. Correlations have been rising but individual stock volatility has been falling, keeping index vol relatively stable. This week we saw correlations come back in but remain in an uptrend.

The focus this week was more about the Federal Reserve as opposed to the economic data. The data itself continued to paint a similar picture of a resilient economy, consumer and labor market while the housing data once again highlighted underlying weakness.

Retail Sales beat expectations, both headline and the control group that feeds into GDP.  Headline rose 1.2% in August, more than reversing a decline in July (which was at least partially due to calendar effects from Prime Day) and seeing its highest growth in 5 months. The control advanced 1.4%, the highest in 2 years. 12 of the 13 major retail categories increased. Among the largest gainers, gas stations (no surprise) grew 3.1%, nonstore (online) retailers +2.6% and miscellaneous stores +1.9%.

The labor market looks healthy. Initial claims fell back below 200k and continuing claims fell to 1.73ml from 1.78ml last week, hitting its lowest level since May of 2024. The weekly ADP Employment Change also jumped to 16.25k from 12.25k. 

The housing data continued to highlight weakness. The NAHB Housing Market Index fell to 32 from 35 last month driven by a decline in sales expectations. The percentage of builders cutting price and using incentives both increased. Building permits and housing starts came in a touch below estimates and last month’s readings. August pending homes sales bounced back modestly after big declines in June and July. NAR Chief Economist Dr. Lawrence Yun noted, “Nationally, contract signings today are running roughly 30% below where they were in the years leading up to the pandemic.”

This week we also got our first look at September data with the release of the regional surveys. Both Empire and Philly manufacturing showed some moderation of activity after the big jump in August but remained firmly in growth territory. New orders and employment trends moderated while prices increased.

The data largely supported the first rate hike by the Federal Reserve since July of 2023. The decision to raise rates was unanimous which the Committee said “will support a timelier return” of inflation to their stated 2% target. The Summary of Economic Projection had a dovish tilt. The Committee projected inflation to ease significantly next year, largely in line with the June SEP, but it was notable that the Committee does not see core returning to target until 2029, which stretches the meaning of “timely”.  The DOTS showed broad support for an additional hike this year but for rates to hold steady throughout 2027. Chair Warsh’s press conference was short, ending abruptly at the 30 minute mark, and a bit more hawkish. The Chair suggested that the rate hike comes at a time when the economy seems to be strengthening and reiterated, “I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the Committee. So, we removed a dose of accommodation.” This seems to suggest that the Committee is looking to unwind some if not all of the late 2024 cuts. 

For the week there was a flattening of the yield curve. The 2yr was up ~10bps to 4.75% which is 75bps above the current Fed Funds Target. The move in the long end was more moderate though markets are closely watching the 10yr which is sitting at the psychological 5% level. 

The USD moved higher throughout the week with much of strength coming against the Yen (more on that below).

Global Equities -  Most major indices ended modestly lower with geopolitics and rising oil/yields weighing on sentiment. 

Asia - a strong rally overnight recouped losses from earlier in the week.

Europe - Major indices tried to rally this week but today’s selloff wiped out those gains. The EuroStoxx index has closed lower in 5 of the last 6 weeks unwinding the August rally. Autos underperformed after Volkswagen cut guidance. Communication and retail stocks were some of the worst performing stocks while tech and pockets of healthcare outperformed. Overnight, ECB inflation expectations moved higher across all time horizons and Germany PPI came above estimates. This added to upward pressure on yields.

UK - The FTSE 100 ended the week around unchanged. In terms of economic data CPI was inline while PPI came in hot. This morning’s retail sales came in ahead of estimates. The Bank of England left rates unchanged in a 6-3 split vote. The central bank tweaked its QT program announcing slowing the pace from £70B to £46B announcing it would permanently hold long dated gilts on its books while bond with maturities ~2035 would be held to maturity and only passively runoff. 

The big event will be the Trump-Xi summit on Thursday. A dinner with AI leaders including Sam Altman and Jensen Huang will also be on the menu. Could turn into an Animal House-like food fight given all the "We need to all slow down!", "You can slow down if you want but I'm not!", "China wins if we slow down!" arguments that erupted this week. Speaking of arguments, the UN General Assembly meetings will also take place next week. The Fed media blackout ends, so we’ll start to hear from Fed officials about their thoughts on this week’s rate hike and overall views of monetary policy. The biggest data releases will be the global flash PMIs. On Tuesday we’ll officially say goodbye to Summer and usher in Fall as the autumnal equinox arrives for everyone in the Northern Hemisphere. Lastly, the NHL preseason begins as the sports calendar gets better and better this time of year. Enjoy your weekend.  

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