The US will blockade Iran and collect compensation fees; the Waller hearing strengthens interest rate hike expectations.
The United States will resume the maritime blockade against Iran starting Tuesday afternoon Eastern Time. Trump declared that a 20% compensation fee will be levied on all goods transported via the Strait of Hormuz. Hawkish remarks from a Federal Reserve governor have fueled expectations of an interest rate hike. Governor Waller will attend a congressional hearing on Tuesday and may face questions regarding the latest data and policy path.
Overnight Highlights
– The U.S. announced the resumption of a maritime blockade against Iran, escalating hostilities between the U.S. and Iran. Risk appetite in U.S. stocks was dampened, with tech stocks leading the decline. The Nasdaq underperformed the S&P 500 and the Dow. Inflation concerns pushed the 10-year Treasury yield to 4.62%, a new high since May 21. Eurozone bond yields also rose. Geopolitical tensions and hawkish comments from a Fed governor supported a slight strengthening of the U.S. dollar, while the Japanese yen, euro, and British pound generally declined. The blockade covers Iran's entire coastline and oil terminals, reigniting market concerns about energy transport through the Strait of Hormuz. Brent crude closed up over 9% to $83.30. Gold fell nearly 3% due to rising inflation expectations and increased likelihood of a prolonged high-interest-rate environment. Spot gold settled at $4000.65/oz, hitting its lowest level since July 1 during the session.
International News
– The U.S. military began a new round of strikes against Iran and will resume the maritime blockade starting at 4 p.m. Eastern Time on Tuesday. Trump stated that a 20% compensation fee will be levied on all goods transported via the Strait of Hormuz, meaning each supertanker transiting the strait would need to pay approximately $30 million.
– Federal Reserve Governor Waller will testify before the House Financial Services Committee on Tuesday morning regarding the semi-annual monetary policy report. In its pre-released report, the central bank reiterated its commitment to price stability. Traders estimate about a 50% probability of a Fed rate hike this month. Fed Governor Waller indicated that if the core inflation data released on Tuesday shows broad-based price pressures, policymakers may need to raise interest rates in the near term.
– The U.S. federal budget deficit expanded for the first time this fiscal year due to a surge in tariff refunds. The budget deficit for June alone reached $120 billion, a sharp reversal from the $27 billion surplus in June last year. On the spending side, total expenditures in June were $616 billion, a 23% year-on-year increase. Excluding timing differences in payments from last year, the deficit still widened by 79% compared to the same period last year.
– U.S. Energy Department data showed that U.S. Strategic Petroleum Reserve (SPR) crude oil inventories fell by about 3 million barrels last week to 316.5 million barrels, the lowest level since April 1983.
– Five major Wall Street banks, including JPMorgan Chase (JPM.US), will release earnings reports on Tuesday. Combined trading revenue for the second fiscal quarter is expected to be close to $39 billion. Trading revenue for most of these banks' equity trading desks is expected to be near record highs, just slightly below the peak set in the first quarter.
– SK Hynix (SKHY.US) ADRs plunged over 9%, nearing their issue price. SK Hynix's local Korean shares plummeted 15% that day, dragging the KOSPI down 9% and triggering a market-wide circuit breaker. The sell-off in the Korean stock market spilled over to U.S. stocks, with shares of U.S. memory and storage companies generally falling. Micron Technology (MU.US) and others fell over 6%. Analysts at KIS estimate that SK Hynix's latest quarterly operating profit may be 8% below market consensus, exacerbating market pessimism.
– SpaceX (SPCX.US) shares have been highly volatile one month after its IPO, currently trading 7% below their opening price on the first day and approaching the $135 IPO price. Despite passive fund inflows triggered by its recent inclusion in the Nasdaq 100 index last week, the stock remains under pressure. Meanwhile, the FAA announced the completion of its review of the Starship booster failure incident. SpaceX has been approved to proceed with its 13th Starship launch, with the launch window opening on Thursday.
– A Bank of America survey in early July showed that global portfolio managers' bearish sentiment towards the Japanese yen has risen to its highest level in about four years, as risks to Japan's fiscal and monetary policy outlook outweigh the possibility of government intervention in the currency market. Meanwhile, CFTC data shows that speculative leveraged funds held the largest net short position in the yen since 2007 by the end of June.
– As Ukraine attacks Russian oil infrastructure almost daily, Russian producers produced an average of 8.928 million barrels of crude oil per day in June, according to the OPEC monthly report. Russian crude oil production in June fell to its lowest level in at least two and a half years.
– The International Monetary Fund stated that sovereign debt conditions in European countries could deteriorate significantly if they fail to effectively control public finances. The report projects that by 2040, spending as a share of GDP in European countries will rise by nearly 5 percentage points on average, while economic growth remains moderate, and political space for tax increases or significant spending cuts is limited. This will push the public debt-to-GDP ratio to an average of 130%, nearly double the current level.
Greater China News
– Chinese Premier Li Qiang chaired an economic situation symposium, emphasizing stepped-up counter-cyclical adjustments to consolidate and expand the steady and positive economic trend. Attention is on Tuesday's release of June trade data, with expectations of a slight slowdown in import and export growth and an expansion of the trade surplus.
– China will release June trade data on Tuesday. The median estimate from a Reuters poll of 20 institutions shows China's June exports in U.S. dollar terms are expected to grow 18.2% year-on-year, slightly down but still strong, supported by robust AI-related demand. Imports are expected to grow 24% year-on-year, mainly dragged down by price factors. The trade surplus for the month is expected to widen to $120.6 billion.
– The People's Bank of China has increased its gold holdings for the 20th consecutive month, with the pace of accumulation significantly accelerating in the second quarter. Price volatility has not altered the direction of increasing allocation. Gold provides non-sovereign credit attributes and diversification functions for official reserves. China's gold share is about 8%, far below the global average of 27%. Foreign exchange reserves remain the foundation, and the future adjustment path may involve maintaining a stable total reserve while steadily increasing the gold share.
– The State Council of China stated that it has agreed in principle to the "15th Five-Year Plan for Expanding Consumption," outlining 28 key tasks and measures to boost consumption during the "15th Five-Year Plan" period, with the goal of reaching approximately 60 trillion yuan in total retail sales of consumer goods by 2030.
– The Chinese government is reportedly expanding its policy toolkit to better coordinate the strategic mineral supply chain. State-owned mining investment platforms established in recent years will provide multi-faceted support, including direct equity investments.
Commodity and Foreign Exchange Markets
– Escalating U.S.-Iran conflict and comments from Fed Governor Waller have strengthened market expectations for rate hikes, deepening the decline in spot gold prices, which are approaching $4000/oz.
– Trump's statement that the U.S. plans to impose a 20% fee on passage through the Strait of Hormuz pushed WTI crude above $75/barrel, with Brent crude nearing $80/barrel.
– The Bloomberg Dollar Index recorded its largest single-day gain in three weeks, rising back above the 101 level.
Earnings and Economic Data Focus
– U.S. June CPI MoM (Seasonally Adjusted) (Previous: 0.50%, Forecast: -0.10%)
– U.S. June NFIB Small Business Optimism Index (Previous: 95.3, Forecast: 95.8)
Source: Golden Horse Capital Management (Hong Kong) Limited
Author: Emily Zheng
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