WS #13972

The Strait of Hormuz closure remains the dominant market driver, with Iran's Persian Gulf Strait Authority (PGSA) firmly rejecting Trump's 'total control' claims, stating the waterway remains blocked until Iran's conditions are met. This is corroborated by multiple sources (CNBC, GDELT, ANI, France24) and is reinforced by Kpler data showing ship traffic near 3-month lows, about 90% below pre-war averages. However, oil prices are pulling back from recent highs—Brent down ~1.5% to $87.69, WTI down ~1.6% to $81.97—as OPEC and IEA both cut 2026 demand forecasts (OPEC to 580k bpd growth, IEA to 1.6M bpd contraction) and US crude inventories posted their largest weekly build since January 2023 (+17.4M barrels). This demand-side weakness is partially offsetting supply concerns, but the deadlock in US-Iran talks and continued attacks on shipping in Hormuz and Bab el-Mandeb keep a floor under prices. The energy complex remains bid (XOM, CVX, XLE) while airlines (DAL, UAL) and shipping (MATX, ZIM) face headwinds from elevated fuel costs and disrupted trade routes. The IEA also warned the global oil supply deficit is deepening to 1.27M bpd in 2026, with inventories below 7.9B barrels for the first time since April 2025, suggesting the market remains tight despite demand downgrades. 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, reflecting renewed confidence in the AI hardware cycle. Meanwhile, gold hit a two-month high above $4,400/oz as tame CPI data undermined rate hike expectations, and the US dollar weakened slightly. The July CPI report showed headline inflation at 3.4% YoY and core at 2.5%, both in line with expectations, reducing the probability of a September Fed hike to around 40% (down from 54% a week ago). This dovish repricing is supportive for equities and gold but poses risks if oil prices spike again on Hormuz disruptions. The market is also watching the July PPI report due later today, which could reinforce or reverse the disinflation narrative. In corporate news, Nvidia announced a partnership with six major asset managers to mobilize over $500 billion for AI infrastructure, a significant development that could support the AI trade but also raises concerns about circular financing and asset-backed securities risk. Apple is reportedly in talks to pay publishers hundreds of millions for content to improve Siri, a move that could enhance its AI capabilities but also signals rising content costs. The Los Angeles Lakers are being sold for a record $12.5 billion to a group led by Bob Iger and Josh Kushner, a notable transaction but with limited direct market impact. Overall, the market is navigating a complex landscape of geopolitical risk, inflation dynamics, and AI-driven earnings, with the energy complex and AI infrastructure as the primary drivers.