Rise and shine everyone
Markets were under pressure yesterday, but not everyone. The S&P closed down 0.3% and the Nasdaq down 1.0%, but 60% of S&P names still finished higher. Tech, and more specifically chips, is what took most of the hit.
Scott Bessent announced “Operation Economic Outcast”. More than 60 entities across digital assets, technology, gold, aviation, and shipping, have been sanctioned. There are also threats to name a major financial institution this week. This is a warning shot and the situation will escalate if a Chinese bank is named.
Credit concerns have come back to bite. Broadcom’s five-year CDS widened 28 bps this month, as the company moves toward backstopping a $60 billion AI chip financing package.
Here is what we are watching today:
Whether a financial institution is named in the economic sanctions package
Canada’s retaliation package against the 50% auto and steel tariffs
German Ifo, US Case-Shiller and consumer confidence, ahead of a very heavy back half of the week
Below, I set out where I stay long gold and the core PCE outcome that would change that, and why the Treasury’s TGA plan does nothing at all for the long end. In Market Prep, the NVDA buyside bar, the implied move, and where I would rather add risk this week than semis. Full breakdown, levels, and what we are trading below.
Morning Macro Briefing
So the sanctions were no surprise. We knew they were coming and they are just a broader set of measures of what was already there. What everyone’s watching is now which financial institutions get hit.
Banks that clear US dollar (which is most of the international banks) cannot deal with Iran because of the previous sanctions as it is. So what everyone’s watching are some of the Chinese banks that settle payments of crude in RMB. I doubt that this happens before September 24, because of President Xi’s visit to the US.
Clearly, Oil didn’t see these sanctions as much of a threat. We saw pull back in prices yesterday. We also got news that roughly 16million barrels clear Hormuz on Friday, so that was good news. On the downside, however, Fatih Birol, the IEA chief said there’s no second reserve release being discussed just yet.
The tariff wars continue. President Trump pledged another 50% on Canadian autos, parts, and steel effective January 1. PM Carney is supposed to come out with retaliatory tariffs on September 8. Mexico, on the other hand, is trying to take advantage of the situation by cutting the 50% steel and aluminum tariff.
Bloomberg had an interesting report about China. Apparently, there’s a 7.5% overcapacity tariff before the September 24 summit, restoring second-term duties to roughly 20%, the ceiling China already agreed to. But perhaps, the most interesting statistic on all this comes from Morgan Stanley: China’s AI chip self-sufficiency moving from 33% in 2024 to a projected 70% by 2030.
CNBC reported Bessent could tap the TGA’s roughly $950 billion balance to fund the doubled long-end buybacks starting September 9, and the 10-year drifted to 4.70%. ING’s Padhraic Garvey calls this a timing matter, since the delta is $16 billion a quarter against a $7 trillion bills program. Let’s see what Warsh says on Friday to see how rates respond.
Chart of the Day
Broadcom’s five-year CDS climbed 28 basis points in August and its 5.15% 2031 bonds widened about 14 basis points, both moving more than Oracle or SpaceX. The driver is the $60 billion AI chip financing package Broadcom may partially guarantee, on top of the $35 billion package it already backstopped alongside Apollo and Blackstone. JPM’s Tarek Hamid calls this phantom leverage, and that is the right label, because none of it appears on the balance sheet and all of it comes due at once if the capex cycle slows. AVGO reports September 2 and I am not adding ahead of it.
Calendars
Light in the US today, with Case-Shiller, CB consumer confidence expected at 91.2 against 90.8, new home sales, and Barkin speaking twice. German Ifo at 87.2 expected against 86.6 is the read that matters in Europe. Australian July CPI tonight is worth setting an alarm for, with headline expected at 3.2% against 3.8% and trimmed mean at 3.5%, after RBA minutes confirmed a hawkish hold.
Market Prep
Yesterday, we saw a momentum unwind in tech stocks. The pullback in oil helped the banks, retail and travel. Treasuries flattened, with 2s unchanged and 30s four bps lower.
JPM’s Market Intelligence desk is tactically bullish with lower conviction. Their monetization menu now spreads risk out of AI, memory, and semis toward Mag 7 and software, and out of AI-adjacent cyclicals toward financials, energy, and metals and miners. That is the broadening trade, and it lines up with what we already hold.
NVDA reports tomorrow after the close. JPM’s Harlan Sur looks for a beat and raise, roughly $94 to $95 billion for the quarter and $107 to $108 billion for the guide, both ahead of the buyside bar, on a strong GB300 rack ramp. Positioning has flipped to a score of 3 on JPM’s scale after material short covering, and the implied move is 4.6%.
That positioning is exactly what makes me cautious. The stock has sold off on earnings beats four quarters running, and investors are now talking up a $110 billion guide that Sur says wafer availability makes hard to deliver. I am not adding semis into this print. If you want AI exposure this week, MRVL on Thursday is the better risk, with a positioning score of 1, an 8.8% implied move, and a Google partnership worth an implied $20 billion a year against buyside expectations of only $12 billion in F27.
Today is retail and software, with DKS, INTU, ZM, ZS, HEI, SMTC, and WSM.
Three things to watch. Whether Bessent names the financial institution, because a large Chinese bank on that list reprices oil and gold immediately. Core PCE on Wednesday, where JPM Research expects a high print while the market still refuses to price out September, leaving gold and the front end exposed. And Warsh at Jackson Hole on Friday, where an unchanged approach sends bond yields and bond vol higher, and I would rather carry that risk through gold and financials than through duration.