Oil Back in Focus
Oil prices surged again. Brent crude rose a little more than 5% to above $105 a barrel. US West Texas Intermediate rose roughly 5% to about $93. Prices pulled back after comments from President Trump.
The jump came from renewed attacks on shipping, raising fresh worries about Middle East supply. Nine tankers were attacked in and around the Strait of Hormuz over the past week - the most in that time frame since the conflict began.
Hurricane Isaas added to supply concerns. It forced US producers to shut offshore output in the Gulf of Mexico, with more than 25% of US Gulf oil production offline.
Inflation Risk and the Bond-Equity Gap
The crude jump adds another inflation risk, especially with the 10-year Treasury yield just below 5.3%. That raises the stakes for the Fed and may add pressure on stocks and consumers.
Ray Dalio warned that stocks are losing the cushion that has protected them from rising bond yields, as the gap between expected equity returns and Treasury yields narrows. He says the bond bear market has further to run, as governments and companies compete for capital. Higher borrowing costs will eventually weigh on credit and spending. Thomas Urano gave a similar view on Trading 360.
Dalio urged investors to look past earnings and focus on free cash flow, which he expects to worsen as companies keep investing heavily. Strong earnings growth now lets stocks absorb higher rates, but that cushion is shrinking, leaving stocks more exposed if yields keep rising. Yields did come off a bit.
Chip Earnings: Samsung and TSMC
The tech trade looks more demanding now. Two solid reports were not enough for investors.
Samsung expects third-quarter profit to jump to a record $80 billion, helped by strong demand for memory. The 9-fold jump would be just above street estimates and marks the fourth straight quarter of record profit. Samsung shares fell, adding to a more than 25% slump from its record high in June. The reaction shows how hard this trade has become, even though the story stays intact and multi-year supply deals give Samsung much greater visibility. Samsung releases its full report on October 29.
TSMC (TSM), the world's biggest contract chip maker, posted monthly figures overnight: $512 billion in revenue in September, a 55% jump on the year but down 0.6% on the month. TSMC counts Nvidia (NVDA) and Apple (AAPL) as its biggest customers and benefits from growing demand for advanced chips. It reports third-quarter results next week. Taiwan shares traded lower despite the report, and the ADRs were down.
Tomorrow's Watch
Delta Airlines (DAL) reports before the bell. Wall Street expects adjusted earnings of about $1.93 per share on roughly $17.72 billion in revenue. The key question is whether strong travel demand, mainly premium and corporate travel, can offset sharply higher fuel costs and margin pressure. Delta could give an early read on consumer strength in travel and spending, corporate pricing power, and the hit from high oil prices on profits. Investors will watch whether the airline keeps its full-year EPS outlook. United (UAL), Southwest (LUV), and American (AAL) report in the 20s of October.
Also due are preliminary University of Michigan consumer sentiment results, showing how people feel about the economy. The ongoing view: watch what consumers do, not what they say.
