Markets are on edge as tensions in the Middle East escalate. Oil prices have surged, Treasury yields are climbing, and investors are bracing for more volatility — all while navigating a busy earnings season with big questions around AI spending and consumer demand. Michael Reinking, market strategist at the New York Stock Exchange, joins us today. Mike, thanks so much for joining us. How are you pricing geopolitical risk right now and what would change your view in the next couple of weeks?
Thanks for having me. It has been a long week. We have seen a very significant repricing in oil markets throughout July — oil was up over 15% last week, up another 10% this week, nearly 40% for the month. Interestingly, equity markets held up fairly well throughout most of that. Part of that is positioning — institutional investors pulled a lot of money out of the market at the end of Q1 as geopolitical risk escalated, and then we saw a historic rally off those lows. There has been some reticence to reduce risk again. But what we saw yesterday was a confluence of events that finally cracked equity markets in the short term: real concern around the longevity of AI spending, interest rates pushing to fresh year-to-date highs, and oil breaking $100. The S&P 500 broke its 50-day moving average, and it feels like we are on shakier footing heading into the weekend.
What is the bond market telling you about the Fed's next move?
We are in the quiet period ahead of next week's rate decision. Markets have now started to price in about a 1-in-3 chance of a hike next week. We got a better-than-expected CPI report recently and markets had started to reprice lower, but the move higher in oil is letting inflation concerns creep back in. And there is a wild card — we have a new Fed chair. Kevin Warsh has been very steadfast about changing Fed communication and leading markets differently. In the past, when rate hike probabilities started shifting during the quiet period, you might see a leak to the Wall Street Journal over the weekend to guide expectations. I do not think we are going to get that under this leadership. So there is a genuine question mark heading into next week. I do not think they necessarily hike — but I can see a path where a surprise hike actually gets bond markets to rally by establishing credibility for the new chair. I still think it is unlikely, but I cannot rule it out.
Has the market's patience with AI spending shifted altogether or is it still a company-by-company situation?
In the moment, markets are clearly getting a little concerned about CapEx spending. Alphabet yesterday increased their CapEx budget by $15 billion, calling the midpoint $200 billion. To put that in perspective — that is larger than the market capitalisation of roughly 90% of companies in the S&P 500. That is a massive amount of spending. Markets are pushing back and want to see the return on investment. Alphabet can actually point to that — their cloud revenues were up over 80%, which was phenomenal. But what is interesting is that the impulse trade into semiconductors and memory stocks on hyperscaler CapEx announcements is starting to dampen. In Q2, whenever a hyperscaler announced increased AI spending, you would see an immediate spike into the chip stocks. Yesterday, those stocks held up okay but you did not see that sharp impulse higher. That is a sign the overarching sentiment around that spending is getting more cautious.
Bottom line for viewers — is this a moment to be on defence or a moment to look for opportunity?
I would sit back a little and look for opportunities as they present themselves. We have been in a consolidation phase and are now just starting to test and break some key technical levels. Volatility is picking up — first at the single stock level, now at the index level. Bond volatility and commodity volatility are also rising. When you get into these periods, systematic funds start reducing exposure, and positioning has gotten back to stretched levels. I would not be reducing exposure aggressively, but I would not be adding aggressively either. If the S&P 500 breaks yesterday's lows around 7,375, you could see a move toward the 7,200 level — around the 100-day moving average and the June lows. The 200-day moving average is around 7,000, which is also a 50% retracement of the rally from the March lows to the highs. Those are the two levels where, if I was looking to put more capital to work, I would start watching closely.
Michael, thanks so much for joining us. Always a pleasure to have you here.
Thanks for having me.
