WS #13971

The Strait of Hormuz closure remains the dominant market driver, with the US and Iran continuing to trade claims of control. Trump reiterated US 'total control' over the strait, calling the blockade a 'Wall of Steel,' while Iran's Persian Gulf Strait Authority (PGSA) categorically rejected US claims, stating the waterway remains blocked until Iran's conditions are met. This stalemate continues to underpin oil prices, with WTI holding near $83 and Brent near $88, despite IEA and OPEC cutting demand forecasts. The IEA warned that inventory buffers are rapidly depleting, adding to supply concerns. This is a stable, ongoing escalation with no new counter-signals, so the energy complex remains bid while airlines and shipping face headwinds. A notable development is the record trade in USO, the largest on record since 2008, indicating significant institutional positioning in oil. Additionally, there are reports of progress in negotiations between Iran and Oman over shipping lanes, and Pakistan has initiated efforts to bring the US and Iran back to the negotiating table, which could be early de-escalation signals, though Iran's official stance remains firm. The US budget deficit surged to $432.3 billion in July, the largest monthly deficit since March 2021, raising concerns over fiscal health and potentially pressuring long-term yields. This, combined with the benign CPI report, has reduced September rate hike odds to below 50%, supporting equities. The AI infrastructure rally continues to dominate, with CoreWeave and Super Micro surging on earnings, and Nebius jumping 34% on strong AI demand. However, Cisco's earnings beat was overshadowed by a drop in gross margins, sending its stock down after-hours, and Cerebras Systems tumbled 16% after hardware sales declined. These mixed signals suggest the AI trade is bifurcating between pure-play infrastructure winners and those with margin or hardware concerns. South Korean stocks entered a bull market, up 23% from July lows, led by Samsung and SK Hynix, as the AI trade roars back. This corroborates the global AI infrastructure demand narrative. The yen is approaching 160 per dollar, with Goldman noting Japan has 'plenty of capacity' for further intervention, which could be a source of volatility. Overall, the market is navigating a complex landscape of geopolitical risk, fiscal concerns, and a bifurcating AI trade.