The Strait of Hormuz remains closed, yet oil prices stay calm. Brent crude holds at $84.70, down just 0.3% on the day, despite Iran’s renewed blockade and U.S. airstrikes. Traders are betting on a short-lived disruption, but if tensions persist, gasoline and diesel prices could surge by next week, complicating the Fed’s inflation battle.
▸
PayPal soars 17% on a $53 billion takeover bid. Private equity firm Advent and Stripe are in talks to acquire PayPal, valuing it at $53 billion, a 27% premium over recent lows. This underscores private equity’s appetite for undervalued tech assets.
▸
BlackRock’s assets swell to $15 trillion, and Wall Street banks cash in. BlackRock’s earnings topped estimates, sending shares up 6.6% as assets under management surpassed $15 trillion. Meanwhile, JPMorgan, Goldman Sachs, and others report record trading revenue. A risk-on market is padding profits for financial firms.
The big story
Why oil is shrugging off the Strait of Hormuz crisis
For the third time this month, Iran has threatened to block the Strait of Hormuz, the world’s most vital oil shipping lane. The U.S. responded with airstrikes on Iranian ports, reinstated a naval blockade, and warned of further action. Yet oil markets barely flinched. Brent crude closed Wednesday at $84.70, down just 0.3%, and WTI crude sits at $79.59, virtually unchanged. Gasoline futures are flat. Even the VIX, Wall Street’s fear gauge, remains subdued at 15.89.
This isn’t indifference, it’s a calculated wager. The market is pricing in a brief disruption, not a prolonged crisis. Here’s the reasoning:
▸
The blockade isn’t new. The Strait has been effectively closed since mid-June, when Iran first halted tanker traffic. Shipping routes have already adjusted, and traders have factored in the slowdown. Only seven ships passed through on Wednesday, down from a pre-conflict average of 50-60 per day, but this is no longer a shock.
▸
Oil inventories are holding, for now. The U.S. Energy Information Administration reported a 1.7 million-barrel draw in crude stocks last week, but gasoline inventories also fell by 1.5 million barrels. Refinery utilization hit 96.2%, the highest in months, meaning refineries are operating at near-full capacity to meet demand. The system is stretched but still functioning.
▸
Workarounds exist. Saudi Arabia and the UAE can bypass the Strait via pipelines to the Red Sea, though capacity is limited to about 3.5-5.5 million barrels per day. The U.S. has also tapped strategic reserves in the past to stabilize prices, and traders expect it would do so again if needed.
▸
The Fed is the bigger focus. With the Producer Price Index (PPI) coming in softer than expected (up just 0.2% in June), traders are more concerned about whether the Federal Reserve will cut rates in September than about Middle East tensions. Lower rates could boost oil demand, so the market is looking past the immediate geopolitical risks.
The risk:. If the standoff drags on, the math shifts. Gasoline and diesel inventories are already tight. Refinery utilization can’t stay at 96% indefinitely. And if Iran follows through on threats to block other routes, like the Bab el-Mandeb Strait, which links the Red Sea to the Indian Ocean, the backup plans vanish. That’s when prices could spike, and the Fed’s inflation fight would get tougher.
For now, the market assumes a quick resolution. But if tensions persist, $5 gasoline could arrive by next week, and the Fed’s September rate cut might get pushed to 2027.
What's going on today
Markets brush off geopolitics, but earnings could change that
The Strait of Hormuz is closed again, Iran and the U.S. are exchanging airstrikes, and yet the VIX sits at 15.89, barely above its long-term average. Meanwhile, Wall Street is on track for its best year ever, BlackRock’s assets just hit $15 trillion, and PayPal is up 17% on a buyout offer.
Why the disconnect?. Traders are treating Middle East tensions as noise, not a systemic threat. The real drivers are earnings and M&A. UnitedHealth, GE, Netflix, and TSMC report today, and their results will determine whether the risk-on mood continues. If earnings disappoint, the market’s complacency about geopolitics could evaporate overnight.
Bonds show quiet caution.. The 10-year Treasury yield edged up to 4.58%, but the move was modest. The Fed’s patience is being tested: PPI was soft, but oil is up 11% over the past week. If gasoline prices jump next week, the Fed’s September rate cut could be delayed, and stocks would feel the pain.
Crypto stays calm.. Bitcoin is down 1% to $64,000, and Ethereum is off 1.7% to $1,880. The lack of volatility stands out. Geopolitical chaos usually sends Bitcoin higher as a “digital gold” hedge. This time? Silence. That suggests traders see the Middle East tensions as contained, or that crypto’s safe-haven appeal is fading.
The dollar weakens slightly (DXY at 100.54, down 0.4% this week), but not dramatically.. The British pound is the exception, up 0.8% today after UK GDP beat expectations (0.1% growth in May, better than the forecasted decline). That’s a rare bright spot in an otherwise slowing global economy.
Bottom line:. The market is ignoring the Middle East for now. But if oil spikes or earnings falter, that complacency will disappear fast.
The big picture
Oil’s uneasy calm
The Strait of Hormuz is closed, Iran is threatening to block more shipping lanes, and the U.S. is launching airstrikes, yet oil prices are barely moving. Brent crude sits at $84.70, down just 0.3% on the day, and WTI is flat at $79.59. This isn’t because the market is oblivious. Traders are betting on a short-term disruption, not a prolonged crisis.
But the bets could backfire. Gasoline inventories fell by 1.5 million barrels last week, and refinery utilization is at 96.2%, meaning refineries are running at near-maximum capacity to meet demand. If the blockade lasts more than a few days, gasoline and diesel prices will climb. The U.S. has alternatives (like Saudi pipelines to the Red Sea), but capacity is limited. If Iran blocks the Bab el-Mandeb Strait, which connects the Red Sea to the Indian Ocean, those alternatives disappear, and oil could jump to $100 quickly.
Bonds reflect subtle caution.. The 10-year Treasury yield ticked up to 4.58%, and the 2-year yield fell to 4.19%, flattening the yield curve slightly. That’s a sign traders are hedging: not panicking, but not ignoring risks either. The Fed’s patience is being tested. PPI was soft (up just 0.2% in June), but if gasoline spikes next week, inflation could tick up again, and the Fed’s September rate cut would be in doubt.
Stocks hold up, but the rotation is telling.. The S&P 500 is up 0.4% on the week, but the Nasdaq is down 0.3% as tech stocks face pressure. Semiconductors lead the decline: Micron fell 8%, Marvell dropped 7.3%, and Intel is down 4.4%. The AI trade is pausing. Meanwhile, financials are rallying: BlackRock surged 6.6% after its earnings beat, and Goldman Sachs is up 11.9% over the past week. The market is shifting from high-flying tech to cash-generating stocks, a classic late-cycle move.
The dollar is slightly weaker (DXY at 100.54, down 0.4% this week), but not collapsing.. The British pound is the outlier, up 0.8% today (GBP/USD at 1.35) after UK GDP beat expectations (0.1% growth in May, better than the forecasted decline). That’s a rare positive in a global economy that’s otherwise slowing. China’s GDP grew just 4.3% in Q2, the slowest pace since 2022, and the euro is flat despite a slight bounce today.
Crypto is quiet.. Bitcoin is down 1% to $64,000, and Ethereum is off 1.7% to $1,880. The lack of volatility is notable. Usually, geopolitical chaos sends Bitcoin higher as a “digital gold” hedge. This time? Nothing. That suggests traders see the Middle East tensions as contained, or that crypto’s safe-haven narrative is weakening.
What to watch next
▸
Oil inventories. If gasoline stocks fall again next week, prices at the pump will rise, and the Fed’s inflation fight gets harder.
▸
Earnings. UnitedHealth, GE, Netflix, and TSMC report today. If they disappoint, the market’s complacency about geopolitics could vanish.
▸
The Fed. PPI was soft, but oil is the wild card. If gasoline spikes, the Fed may delay rate cuts, and stocks would sell off.
Around the world
Middle East tensions rise, but markets stay calm (for now)
Iran and the U.S. are in another standoff. The U.S. reinstated a naval blockade on all Iranian ports on Tuesday, and Iran responded by threatening to shut down “all other export routes serving the United States and its allies.” The Strait of Hormuz, already closed since mid-June, saw just seven ships pass through on Wednesday, down from a pre-conflict average of 50-60 per day. Yet oil prices barely moved. Brent crude sits at $84.70, down just 0.3% on the day, and WTI is flat at $79.59.
The market’s calm is a gamble. Traders assume this is a short-term disruption, not a prolonged crisis. But if the blockade lasts more than a few days, gasoline and diesel prices will climb. The U.S. has alternatives (like Saudi pipelines to the Red Sea), but capacity is limited. If Iran blocks the Bab el-Mandeb Strait, which connects the Red Sea to the Indian Ocean, the alternatives disappear, and oil could hit $100 overnight.
Meanwhile, the U.S. is increasing military pressure. The Pentagon is considering ground troops and strikes on Iran’s nuclear-linked Pickaxe Mountain site, according to the Wall Street Journal. But the market isn’t pricing in a wider war. The VIX, Wall Street’s fear gauge, is at 15.89, barely above its long-term average. That could change quickly if Iran retaliates against U.S. assets or allies.
China’s economy slows, but stimulus is expected
China’s GDP grew just 4.3% in Q2, the slowest pace since 2022. The data was worse than expected, and the property crisis continues to weigh on growth. But here’s the twist: the market isn’t panicking. The yuan is flat (USD/CNY at 6.77), and Asian stocks are holding steady. Why? Because traders assume Beijing will step in with stimulus.
The People’s Bank of China has already cut interest rates twice this year, and more easing is likely. The bigger question is whether it will work. Chinese consumers remain cautious, and the property sector, which accounts for about 30% of GDP, is still struggling. If stimulus fails to revive growth, the slowdown could drag on global demand for commodities and luxury goods.
UK avoids recession, but the outlook remains weak
The UK economy grew 0.1% in May, beating forecasts of a 0.1% decline. That’s the good news. The bad news? The broader trend is still weak. Manufacturing jumped 2.3% year-over-year, but industrial production fell 0.5% month-over-month. The trade deficit narrowed, but only because imports fell faster than exports.
The Bank of England is in a bind. Inflation is still above target (3.2% in June), but growth is sluggish. If Middle East tensions push oil prices higher, the BOE may have to keep rates elevated, even as the economy struggles. The British pound is up 0.8% today (GBP/USD at 1.35), but that’s more about dollar weakness than UK strength.
Japan’s yen strengthens, but not for good reasons
The yen is up slightly (USD/JPY at 162.17), but it’s not because Japan’s economy is booming. It’s because the U.S. dollar is weakening on softer PPI data, and traders are betting the Bank of Japan will intervene to support the yen. Japan’s economy is still struggling with weak consumption and slow wage growth. If the BOJ does intervene, it could trigger a broader dollar sell-off, but that’s a short-term trade, not a sign of strength.
Companies making news
Earnings and deals take center stage, while tech stumbles
BlackRock surges after assets hit $15 trillion.. BlackRock’s shares jumped 6.6% after the asset manager reported a 20% rise in profits and assets under management soared past $15 trillion.
PayPal jumps 17% on a $53 billion buyout offer.. Private equity firm Advent and Stripe are in talks to acquire PayPal for $53 billion, a 27% premium to its recent lows.
Semiconductors lead the selloff.. Micron fell 8% and Marvell dropped 7.3% as the chip sector came under pressure.
UnitedHealth beats expectations, but healthcare stocks are mixed.. UnitedHealth’s earnings beat forecasts, and the company raised its full-year guidance. But healthcare stocks are split: Eli Lilly is up 0.4%, while Johnson & Johnson fell 2.7%.
TSMC’s record earnings fail to impress.. Taiwan Semiconductor Manufacturing Company reported record revenue and profits, driven by AI chip demand. But its stock fell 1.4% in after-hours trading.
Uber agrees to buy Delivery Hero for $14.8 billion.. Uber’s deal for Delivery Hero would create a global food delivery giant, but it’s not a sure thing. Regulators will scrutinize the merger, and Delivery Hero’s shareholders still need to approve it.
ABB buys Rotork for $5.6 billion.. The Swiss engineering giant is betting big on electrification and automation, two key trends in industrial tech.
Altice International faces debt default accusations.. Lenders holding about $9 billion in bonds claim Patrick Drahi’s telecom empire stripped away collateral through intercompany deals.
Conagra’s new CEO reviews every product.. John Brase, who took over the food giant in June, is evaluating Conagra’s entire portfolio to cut underperforming brands.
China restricts AI chatbot romances.. Beijing is limiting AI chatbots from offering companionship services, part of a broader push to boost birthrates.
From Washington
The Fed’s balancing act gets harder
The Federal Reserve is caught between two signals: soft inflation data and rising oil prices. On one hand, the Producer Price Index (PPI) came in softer than expected in June, rising just 0.2%, a sign that inflation pressures are easing. On the other hand, Brent crude is up 11% over the past week, and gasoline prices could spike if the Strait of Hormuz blockade drags on. That would push inflation higher just as the Fed is considering rate cuts.
Fed officials are divided. Some, like Governor Christopher Waller, suggest the central bank can afford to wait. Others, like Governor Michelle Bowman, warn that inflation progress has “stalled.” The minutes from the June FOMC meeting, released yesterday, showed that the Fed is monitoring geopolitical risks, including Middle East tensions and China’s slowdown, but isn’t ready to act yet.
The bond market is pricing in a 60% chance of a rate cut in September, down from 70% a week ago. If oil prices keep rising, that probability could drop further. The 10-year Treasury yield ticked up to 4.58%, and the 2-year yield fell to 4.19%, flattening the yield curve slightly. That’s a sign traders are hedging: not panicking, but not ignoring risks either.
Banks enjoy a record year, but risks lurk
JPMorgan, Goldman Sachs, and other big banks are reporting record trading revenue, thanks to a “risk-on” market where clients are actively trading stocks, bonds, and derivatives. But beneath the surface, there are warning signs. Credit card delinquencies are at 15-year highs, and commercial real estate loans are under stress.
The Fed is also tightening oversight. It recently proposed new rules to strengthen banks’ anti-money laundering programs, and it’s closely watching risks from private credit and leveraged loans. If the economy weakens, those risks could turn into losses, and test the banks’ resilience.
Housing policy becomes a political flashpoint
A new law restricting big investors from buying single-family homes is moving through Congress, but it’s facing pushback from both parties. Supporters argue that Wall Street’s purchases are pricing out first-time buyers. Opponents say the law could backfire by reducing the supply of rental housing, and making the housing shortage even worse.
The debate highlights a bigger issue: the U.S. doesn’t have enough homes. Builders are struggling with high costs for land, labor, and materials, and zoning laws in many cities make it hard to add supply. Until that changes, prices will keep rising, and so will the political pressure to “do something” about housing affordability.
Under the hood
Bonds signal caution, but not panic
The bond market is sending a subtle but important message: the risk premium for long-term growth is rising, but credit risk isn’t. Here’s the breakdown:
▸
The 10-year Treasury yield is at 4.58%, up slightly from yesterday. But the move isn’t about inflation fears, it’s about term premium, the extra yield investors demand to hold long-term bonds instead of short-term ones. The term premium has been rising because the market is pricing in slower growth over the next decade. That’s a quiet vote of no confidence in the economy’s long-term prospects.
▸
Credit spreads are tight. The option-adjusted spread (OAS) on investment-grade corporate bonds is just 0.79%, well below its long-term average. High-yield spreads are at 2.72%, also below average. That means investors aren’t worried about defaults, they’re worried about duration risk (the chance that rates stay higher for longer) and growth risk (the chance that the economy slows, hurting corporate profits).
▸
The yield curve is flattening. The gap between the 10-year yield (4.58%) and the 2-year yield (4.19%) is just 0.39 percentage points. That’s a sign the market expects the Fed to cut rates eventually, but not because inflation is vanquished. It’s because growth will slow, forcing the Fed’s hand.
▸
Mortgage rates are the canary in the coal mine. The 30-year fixed rate is at 6.49%, down slightly from last week but still near two-decade highs. If the Fed delays rate cuts, mortgages will stay expensive, and the housing market will stay sluggish. That’s a headwind for consumer spending, which drives 70% of GDP.
What would change this picture?
▸
A sustained oil spike (above $90 for Brent) would reignite inflation fears and send yields higher across the curve.
▸
A sharp slowdown in jobs (monthly payrolls below 100,000) would force the Fed to cut rates faster, steepening the curve.
▸
A credit event (like a major corporate default) would widen spreads and signal that the market’s complacency about defaults is misplaced.
For now, the bond market is in a holding pattern: betting on slower growth, but not a recession. That’s a fragile equilibrium, and it won’t take much to tip it.
Worth learning today: Interest: the price of time
Yesterday, we asked you to predict how the market would react to the Core PPI m/m report (forecast: 0.3%, prior: 0.4%). The actual number came in at 0.2%, below expectations. Here’s why it matters:
When PPI (which tracks prices at the factory gate) rises less than expected, it signals that inflation pressures are easing in the pipeline. That’s good news for the Fed, which is trying to bring inflation down to its 2% target. The softer PPI number helped push the 10-year Treasury yield down slightly (to 4.58%) and gave stocks a small boost. It also reduced the odds of a Fed rate hike this month to just 10%, down from 43% earlier in the week. Lower PPI → lower inflation fears → lower rates → happier markets.
What is interest, really?
You’ve heard the term a thousand times: interest rates, interest payments, APY. But what is interest, actually?
Interest is the price of time.. It’s what you pay when you borrow money, or what you earn when you lend it. Think of it like rent, but for cash instead of an apartment.
Here’s how it works in the real world:
▸
When you borrow: If you take out a $10,000 car loan at 5% interest, you’re not just paying back $10,000. You’re paying back $10,000 plus 5% of that amount every year until the loan is repaid. That 5% is the cost of getting to use the money now instead of saving up for years.
▸
When you save: If you put $1,000 in a high-yield savings account with a 4% APY (annual percentage yield), the bank pays you 4% interest. That’s their cost for getting to use your money to lend to others.
Why does interest exist?. Three reasons:
▸
Inflation. If a bank lends you $100 today, that $100 will buy less in a year due to inflation. Interest compensates for that loss in purchasing power.
▸
Risk. The borrower might not pay the money back. Interest is the lender’s insurance policy.
▸
Opportunity cost. If the bank lends you $100, it can’t lend that $100 to someone else. Interest is the price of that missed opportunity.
Simple vs. compound interest: the snowball effect
▸
Simple interest is calculated only on the original amount. If you borrow $100 at 5% simple interest, you owe $5 in interest every year, no matter how long you take to pay it back.
▸
Compound interest is calculated on the original amount plus any accumulated interest. If you borrow $100 at 5% compound interest, you owe $5 the first year, but the second year, you owe 5% on $105. Over time, this turns small amounts into big ones. This is why your 401(k) or credit card debt can grow so fast.
Why your savings account APY matters
That “APY” (annual percentage yield) on your savings account? It’s compound interest in action. If your bank offers 4% APY, your money grows not just by 4% of your original deposit, but by 4% of your growing balance. Over years, that difference adds up.
Quick check:. If you have $10,000 in a savings account at 4% APY, how much will you have after 10 years if the rate stays the same?
Compound interest: $10,000 × (1.04)^10 ≈ $14,802 (that extra $802 is the power of compounding!)
The bigger picture: interest as the economy’s thermostat
Interest rates don’t just affect your mortgage or savings account. They’re the most powerful tool the Federal Reserve uses to control the economy:
▸
When rates rise: Borrowing gets expensive. People and businesses spend less. The economy cools.
▸
When rates fall: Borrowing gets cheap. Spending and investing pick up. The economy heats up.
Right now, the Fed has rates at 5.25%-5.5%, the highest in 22 years, to fight inflation. That’s why mortgages are at 6.5%, credit card rates are near 20%, and your savings account finally pays more than 0.01%.
Tomorrow’s question:. The UK releases its GDP m/m report (forecast: 0.0%, prior: -0.1%). If the number surprises to the upside (say, +0.2%), which asset would likely react the most, which way, and through what mechanism? We’ll explain the answer in tomorrow’s edition.
Concept 6 of 83 in the Fair Value course.
What to watch this week
▸
Today (July 16):
▸
U.S. Retail Sales (June, 8:30 AM ET): — The key number to watch. If consumers are pulling back, the Fed may cut rates sooner.
▸
U.S. Jobless Claims (8:30 AM ET): — A jump in claims would signal a weakening labor market.
▸
Earnings: — UnitedHealth, GE, Netflix, TSMC.
▸
Friday (July 17):
▸
U.S. Housing Starts (June, 8:30 AM ET): — A read on the health of the housing market.
▸
U.S. Consumer Sentiment (10:00 AM ET): — If consumers are gloomy, spending could slow.
▸
Next week:
▸
Tuesday (July 21): — Tesla, AT&T, and Google earnings.
▸
Wednesday (July 22): — Boeing, IBM, and Lam Research earnings.
▸
Thursday (July 23): — Intel, American Airlines, and Lockheed Martin earnings.
Not financial advice.Data sources: Bloomberg, FactSet, U.S. Energy Information Administration, Federal Reserve, Bank of England, People’s Bank of China, Wall Street Journal. Disclaimer: This is not financial advice. Past performance is not indicative of future results. Do not buy or sell any security based on this information without consulting a licensed financial advisor.
