Morning in New York: Oil Risk Returns

A daily review and forecast of events in the U.S. stock market by Mikhail Denislamov, Deputy Director of Capital Markets Research at Freedom Broker.

The performance of stock indices during the upcoming session will be driven by a new spike in oil prices, which is heightening inflationary risks. Brent crude remains above $100 per barrel amid reports that the White House has asked the Pentagon for plans for new strikes against Iran, although a final decision has not yet been made. Pressure on the energy market is also being exacerbated by ongoing attacks on tankers in the Strait of Hormuz. A continuation of the oil rally could lead to a further rise in the already high yields on long-term Treasuries.

The investment community is also assessing the remarks made by Federal Reserve Board member Christopher Waller at the economic forum in Istanbul. He stated that additional rate hikes will likely be needed to bring inflation back to the 2% target, but that there is flexibility in the timing of these hikes and it is not necessary to tighten policy at consecutive meetings. In doing so, Waller left open the possibility of a pause in October. He cited the strengthening economy, the ongoing energy shock amid the conflict with Iran, and additional demand linked to the development of AI as reasons for further tightening. Our base-case scenario calls for one more 25-basis-point rate hike by the Fed in 2026.

Demand at the auction of $22 billion in 30-year Treasuries will serve as an additional guide for market participants. Weak auction results could push yields on 30-year Treasuries to a new multi-year high above 5.7% and limit the potential for valuation multiples to expand, particularly in the small-cap segment.

Before the market opens, PepsiCo (PEP), Helen of Troy (HELE), and Tilray Brands (TLRY) will release their earnings reports. At the close, there may be increased demand for Moderna (MRNA) shares from index funds due to its inclusion in the Nasdaq 100 starting tomorrow, although some of the buying may have already taken place in advance.

Futures on major U.S. indices are down 0.4–0.8%, with Nasdaq 100 contracts showing relative weakness. Traders are awaiting Waller’s remarks and the results of the 30-year Treasury auction, while also monitoring news from the Middle East. Given this, we expect moderate volatility and assess the risk balance as negative.

— Samsung Electronics shares fell by about 2.4% in Seoul, although the company’s third-quarter operating profit, according to preliminary estimates, reached a record 107.4 trillion won (about $80 billion) and exceeded market consensus estimates. At the same time, revenue, which totaled approximately 195 trillion won, fell short of the consensus estimate. The market’s reaction to the Korean company’s earnings report could affect the shares of Micron (MU), SanDisk (SNDK), Western Digital (WDC), and Seagate Technology (STX).

— Taiwan Semiconductor Manufacturing (TSM) reported a 54.6% year-over-year increase in revenue in September, reaching 511.9 billion New Taiwan dollars ($16.1 billion), down a modest 0.6% from August’s record high. In the third quarter, revenue set a new all-time high of $46.7 billion (+50% year-over-year). This exceeded the consensus estimate of $45.8 billion and the upper end of the company’s own forecast. Nevertheless, TSM shares are down by about 1%.

— Wolfspeed (WOLF) shares soared nearly 15% after receiving a conditional commitment from the Pentagon to provide a 30-year loan of up to $1.5 billion. The funds will be used to expand production of silicon carbide materials and power semiconductors, including for the defense industry. In return, the Pentagon will receive warrants to purchase up to 7.5% of the company’s equity, adjusted for dilution; therefore, for shareholders, the deal could result in a potential dilution of their stakes. The final agreements have not yet been signed.

— Levi Strauss & Co. (LEVI) shares are trading within a 1% range. The company’s revenue for the third fiscal quarter came in at $1.61 billion, slightly below consensus estimates, while direct sales in the U.S. declined by 1%. Adjusted EPS came in at $0.48, compared to the market consensus of $0.36; however, $0.11 of that amount came from one-time import duty refunds. The company raised its adjusted EPS guidance for fiscal year (FY) 2026 from $1.46–1.52 to $1.54–1.56 and announced plans for an accelerated $100 million share buyback.

— Applied Digital (APLD) shares are up nearly 4% following the release of its first-quarter report for fiscal year 2027. The company’s revenue increased by 322% year-over-year to $341.9 million, although more than half of that amount came from tenant fit-out services. The company commissioned an additional 75 MW of capacity at the Polaris Forge 1 site.

Trading on October 7 on U.S. stock exchanges ended in negative territory. The S&P 500 fell 0.22%, the Nasdaq 100 declined 0.21%, the Dow Jones lost 0.66%, and the Russell 2000 fell 1.31%. The decline was broad-based: the equally weighted RSP (-0.81%) underperformed the SPY (-0.24%) by 0.57 percentage points. The industrial sector (XLI: -2.18%) was among the underperformers: the decline affected equipment manufacturers, engineering firms, and airlines. Shares of Caterpillar (CAT: -5.7%) and Deere (DE: -3.8%) fell amid a joint inquiry by the Federal Trade Commission (FTC) and the U.S. Department of Agriculture into the production and distribution practices of agricultural equipment. The healthcare sector (XLV: +1.03%) emerged as a top performer thanks to demand for shares of pharmaceutical companies and health insurers.

At one point, the S&P 500 was down 0.7%, but by the close, the indices had managed to recoup some of their losses thanks to stabilization in the bond market. The minutes from the September FOMC meeting indicated a lack of progress in slowing inflation, and most committee members expect another rate hike before the end of the year. The market continues to estimate the probability of monetary tightening in October at approximately 20%. In the afternoon, stocks were supported by strong demand at the $39 billion 10-year Treasury auction and a 1.3% drop in WTI prices. The yield on 2-year Treasuries fell by 3 basis points to 4.77%, while the yield on 10-year Treasuries remained at 5.28%, while the yield on 30-year Treasuries rose by 1 basis point to 5.67%. As a result, the yield curve steepened.

The rise in long-term rates is accompanied by rising inflation expectations. According to a survey by the Federal Reserve Bank of New York, the median consumer inflation expectation for the coming year rose from 3.58% to 3.9%—the highest level since May 2023—with a consensus forecast of 3.64%. High interest rates continue to weigh on the housing market. According to weekly MBA statistics, the fixed rate on 30-year mortgages rose to 7.49%, a nearly three-year high, while the number of applications for such loans fell by 4.2%.

The megacaps traded mixed and did not drive the indices’ performance. Gains by Apple (AAPL: +0.9%) and Amazon (AMZN: +1.4%), as well as Micron (MU: +4.1%) offset the downward pressure from Nvidia (NVDA: -0.7%) and Meta Platforms (META: -2.4%). The five stocks with the largest positive contributions, including Eli Lilly (LLY) and Alphabet (GOOGL), contributed 25 basis points to SPY’s gain, while the five stocks with the largest negative impact contributed to a 20-basis-point decline in the benchmark. The technology sector (XLK: -0.3%) traded mixed: weakness among chipmakers and software developers, including CrowdStrike (CRWD: -4.8%), was partially offset by a rebound in memory chip manufacturers. The main feature of the session was selling pressure on smaller-cap companies amid high long-term interest rates, and the synchronized movement between SPY and RSP observed over the previous two trading days did not continue.

This article was AI-translated and verified by a human editor