Oil and Iran
Crude oil is up 2.5% this morning as tension between the U.S. and Iran climbs. Iran's IRGC says it will start attacking U.S. bases. The Houthis are now involved with Saudi Arabia. The U.S. is cutting its footprint in the Middle East because of threats and attacks by Iranian forces, and is pulling some U.S. diplomats out of Saudi Arabia and nearby areas.
Iranian forces, the IRGC, and the Houthis appear to be lashing out. Some reports say they are running low on funds as a blockade starts to take hold and work, which may explain the sharper rhetoric. Tensions are rising, though negotiations are likely happening behind the scenes. The direction right now is escalation, not deescalation, but any headline could change that minute to minute.
The hope had been that nothing would happen. The president earlier said he had no interest in making big moves between the midterm elections. Now, in the middle of midterm elections, the situation is heating up and oil is the price being paid.
Bonds and Rates
As oil rises, the 10-year bond yield is falling, which is some relief. That split marks the difference from earlier trading days: crude up 2.5% while the 10-year yield now sits at 5.04%, down from a moment earlier. That means a strong rally in the 10-year note future and a sharp selloff in the yield, which pulls interest rates down.
Mortgage rates have already dropped from 7.5% to 7.4%. Near 5.03%, the 10-year is approaching lows seen over the past week. Breaking the 5% barrier would likely please the markets. Higher rates have been hurting the AI trade and the "NeoClouds," since AI depends on financing. Rates have now come off their 5.3% highs, a possible positive.
Meta Earnings
Meta (META) stock is down 2.3% after earnings, but the numbers were strong. Reported earnings per share came in at $3.83; without a legal charge it would have been $7.40. Revenue was $64.66 billion, up 26% year over year, beating consensus. GAAP operating income was $13 billion; without the legal charge it would have been $22.88 billion.
Free cash flow is the concern: negative $2.1 billion, driven by heavy capital spending. Capex was $34.9 billion, driven by AI infrastructure. A $9.9 billion charge was booked in Q3 tied to the August 2018 mental health settlement, so Meta (META) cleared that legal battle in this report.
Other news: the Meta (META) "Muse" agent has topped 10 million downloads and is number one in the app store, which Mark Zuckerberg called a big deal. Meta (META) raised the low end of its capex range to $135 billion, making the new range $135-145 billion, up from $130 billion, showing confidence.
Meta (META) is also issuing a new nonvoting stock class to fund the AI buildout. Much of this is a financial engineering move to keep Zuckerberg in California for the next 8 years; he had threatened to move out over a wealth tax. The structure raises money for capex while keeping his voting control of the stock and shielding him from the California wealth tax.
AI Demand
The AI trade still has weak spots, despite strong signals on NeoCloud demand from Jensen Huang (NVDA) in recent hours. Elon Musk also said yesterday that demand is so high he could use far more data center capacity. AI fears exist, but demand is clearly there on the other side of the story.
Jobless Claims and Outlook
Jobless claims came in at 194,000, which is 6,000 below the revised 200,000. Continuing claims were 1.728 million, slightly above last week's 1.710 million. Claims now sit below 200,000, a historically strong number, showing the labor market staying strong through the AI shift.
Overall, earnings have been good and there are still up arrows, but wild cards remain: geopolitics, France, and AI fears and jitters.
