Thoughts from Themes: Friday the 13th

Friday the 13th brought more than superstition last week: it marked a chilling turn in the Israel-Iran conflict. Israel launched coordinated strikes on Iranian nuclear and military targets, reportedly killing key commanders and scientists. Iran responded with a barrage of missile and drone attacks, fueling fears of a full-scale regional war. The geopolitical shockwaves rippled through global markets, sending oil and gold prices sharply higher and igniting a rally in defense stocks as investors braced for broader instability in the Middle East.

War: What is it Good For?

Brent crude surged over 10% to $75.15 per barrel, and U.S. oil rose 7.26% to $72.98, marking the largest single-day gains since March 2022. Fears of disruptions in the Strait of Hormuz, which handles 20% of global oil trade, drove the spike. Iran’s oil exports, primarily to China, are vulnerable, especially at Kharg Island. However, OPEC+ spare capacity of 5-6 million barrels per day could mitigate losses if Iranian supply is disrupted. Analysts estimate a $7.50 per barrel increase if Iran’s 3.4 million barrels per day are affected, with potential for $100 oil if the Strait is blocked.

Gold prices rose 1% to $3,426 per ounce, nearing April’s record of $3,500, as investors flocked to safe-haven assets. Silver saw a dramatic 44% single-day jump, reflecting heightened volatility. Gold’s 25% year-to-date gain underscores its appeal during uncertainty.

Defense stocks rallied, with Lockheed Martin up 3.7%, General Dynamics 1.1%, and BAE Systems nearly 3%. Rheinmetall and Northrop Grumman also gained 2-3%, reflecting expectations of increased military spending amid escalation.

Global stock markets initially fell, with the S&P 500 down 1.1%, Dow Jones 1.8%, and Nasdaq 1.3%. Asian and European markets dropped 0.8-1.3%. Airline stocks like Delta and United slid due to rising fuel costs and regional flight cancellations. The conflict, combined with U.S. tariff policies, raises stagflation risks, potentially adding 0.4% to consumer prices per 10% oil price hike. This could delay Federal Reserve rate cuts, impacting investor sentiment, even though inflation seems to be in check and employment is solid in the US.

US markets rebounded on Monday, investors should watch for further escalation, particularly attacks on energy infrastructure or the Strait of Hormuz, which could amplify oil price spikes. That said, Iran now seems to be more inclined to pursue resolution over further escalation, which would certainly ease investor sentiment and level out the price of oil. It will be interesting to see if rhetorical softening from Iran will lead to meaningful peace talks in formal negotiation. Defense stocks may still see sustained gains, while gold remains a hedge against inflation and uncertainty. Markets remain volatile, with OPEC’s response and U.S. involvement as key variables.

Macro Memo:

The Federal Open Market Committee (FOMC) is set to announce its interest rate decision on June 18, 2025. With inflation cooling to 2.3% in April, nearing the Fed’s 2% target, and employment remaining stable with low unemployment, expectations lean toward a cautious approach. The FOMC is likely to maintain the current federal funds rate at 4.25%-4.5%, as recent economic uncertainties, including potential tariff impacts, warrant a wait-and-see stance. While softer consumer price index (CPI) data and resilient job growth have raised the probability of a rate cut to around 60%, most economists predict no immediate action, with cuts more likely in September or later. Fed Chair Jerome Powell has emphasized patience, citing risks of both higher inflation and unemployment. The Fed’s dual mandate—price stability and maximum employment—remains balanced, reducing urgency for policy shifts. However, there is optimism that the Fed will cut rates in this mid-year meeting, especially with President Donald Trump continuing to pressure Powell to fall in line with central banks around that globe that have already lowered rates. One thing is for sure; the Fed is back in focus.

This Week’s Macroeconomic Events:

Monday June 16

8:30 AM Empire State manufacturing survey

Tuesday, June 17

8:30 AM US retail sales

8:30 AM Retail sales minus autos

8:30 AM Import price index

8:30 AM Import price index minus fuel

9:15 AM Industrial production

9:15 AM Capacity utilization

10:00 AM Business inventories

10:00 AM Home builder confidence index

Wednesday, June 18

8:30 AM Housing starts

8:30 AM Building permits

8:30 AM Initial jobless claims

2:00 PM FOMC interest-rate-decision

2:30 Fed Chair Powell press conference

Thursday, June 19

Juneteenth

Friday, June 20

8:30 AM Philadelphia Fed manufacturing survey

10:00 AM US leading economic indicators

Our Thoughts on Tesla’s Robotaxi Rollout:

The initial deployment of 10-20 Model Y vehicles will use Tesla’s Full Self-Driving (FSD) software, with human teleoperators monitoring remotely. Safety performance is critical, given public skepticism (60% view FSD as unsafe) and concerns from experts about Tesla’s autonomous tech readiness. Any incidents could delay expansion and erode trust. Elon Musk has claimed rapid scaling to other U.S. cities by year-end and millions of autonomous Teslas by mid-2026. However, the limited Austin pilot, geofenced to safe areas, and reliance on teleoperations suggest caution. Investors should watch for timelines and evidence of operational growth. Success could help with expansion through increased regulatory approvals and if Tesla can stay on track, the financial success could more than offset Tesla's softening EV sales.

Our Thoughts on US-China Trade Talks

The U.S.-China tariff negotiations have reached a fragile truce following talks in London last week. A framework agreement was announced, reducing U.S. tariffs on Chinese imports from 145% to 55% and Chinese tariffs on U.S. goods from 125% to 10%, effective for 90 days starting May 12, 2025. This deal, awaiting final approval from Presidents Trump and Xi, includes China easing restrictions on rare earth mineral exports and allowing Chinese students access to U.S. universities, while the U.S. will relax some export controls on technology like semiconductor software. However, tensions persist. China accused the U.S. of violating the earlier Geneva agreement by imposing export restrictions, while the U.S. claims China slow-walked rare earth export commitments. Negotiations aim to address long-standing issues like trade imbalances and intellectual property, but analysts doubt a durable resolution, citing Trump’s aggressive tactics and China’s strategic patience.

Investment Themes:

AMD recently unveiled its Instinct MI350 and MI400 series AI chips at the “Advancing AI” conference, intensifying competition with Nvidia in the AI and datacenter markets. The MI350X, set for release in 2025, boasts up to 35x better inference performance than the MI300 series, while the MI400 series, slated for 2026, powers the Helios server rack, a rack-scale system rivaling Nvidia’s Blackwell and Vera Rubin architectures. AMD’s chips emphasize cost efficiency, lower power consumption, and open standards, appealing to customers like OpenAI, which has adopted AMD’s chips for AI workloads. AMD’s acquisition of ZT Systems, Untether AI’s team, and others bolsters its end-to-end AI solutions, enhancing software (ROCm) and hardware capabilities. Despite Nvidia’s 90%+ market dominance and superior software ecosystem (CUDA), AMD’s annual chip release cadence and competitive pricing position it as a viable alternative, especially for inference tasks. With projected AI chip market growth to $500 billion by 2028, AMD’s $5 billion AI sales in 2024 and 60% growth forecast for 2025 signal its rising challenge to Nvidia, Intel, and others in powering AI-driven datacenter expansion.

Adobe reported its Q2 FY2025 earnings on June 12, 2025, with record revenue of $5.87 billion, up 11% year-over-year, surpassing estimates of $5.80 billion. Non-GAAP EPS was $5.06, beating forecasts of $4.97 by 2%. Digital Media revenue rose 11% to $4.35 billion, driven by Creative Cloud, while Digital Experience revenue grew 11% to $1.33 billion. AI-driven products like Firefly contributed over $125 million, with expectations to double by year-end. Adobe raised its full-year revenue guidance to $23.5–$23.6 billion and EPS to $20.50–$20.70.

Despite the beat, investor sentiment was mixed due to concerns over slow AI monetization and rising competition. Adobe’s stock fell 1.79% in pre-market trading and 7% in early trading on June 13, reflecting skepticism about AI revenue growth. However, some analysts, like Bernstein, raised price targets to $530, citing AI-driven potential and stable margins.

Disclosures:

All data sourced from Bloomberg as of June 15, 2025 unless otherwise cited.

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