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Testing support. Yesterday’s U.S. tech selloff has pushed the S&P 500 to an important technical crossroads, with investors watching key support levels to determine whether this is a healthy correction or the start of a deeper downturn. The decline was triggered by a fall in memory-chip stocks led by South Korea’s SK Hynix and Samsung, which raised concerns about the sustainability of the AI-driven rally that has powered markets this year. Valuations have become stretched after the S&P 500 gained more than 17% and the Nasdaq 100 over 30% since late March, with technical analysts now focused on support near 7,240, followed by 7,000 and 6,900 for the S&P 500, where dip buyers are expected to step back in. While many still view the pullback as a buying opportunity and note that trend-following funds remain net buyers, the market’s next move will depend on whether leadership broadens beyond a handful of AI-related tech stocks and whether key support levels can hold amid growing volatility and concerns about higher interest rates.
Despite easing geopolitical tensions, strong corporate earnings, and a resilient economy (in the U.S. that is) investors are positioning for a period of higher market volatility. Demand for protection through VIX call options has climbed to its highest level this year, reflecting concerns that elevated valuations, especially in AI and large-cap tech stocks, leave the market vulnerable to setbacks. The main risk appears to be the Fed, where Kevin Warsh’s hawkish stance on inflation has led investors to expect interest rate hikes as early as October, reducing hopes for lower borrowing costs. With the S&P 500 trading near record highs and earnings season still weeks away, traders are looking to upcoming inflation data for direction. With this in mind, many investors are shifting towards more defensive, favouring sectors like energy and industrials over pricier tech stocks, at least until there is more clarity on inflation and Fed policy.
U.S. business activity rose at its fastest pace in five months in June, driven by a strong rebound in manufacturing as factory output and new orders reached their highest levels in years. The S&P Global Composite PMI rose to 52.2, with manufacturing leading the gains while the services sector continued to grow modestly, helped in part by World Cup-related activity but still constrained by weak consumer confidence. Although supply chain delays and input costs remain elevated, businesses became more optimistic following signs of easing geopolitical tensions in the Middle East. The recent report also found that manufacturers continued to build inventories as a precaution against supply disruptions, while employment weakened across both manufacturing and services, suggesting companies remain cautious despite improving demand.
The next major test for the AI-driven stock rally may extend beyond corporate earnings and semiconductor demand, with strategists also looking at the strength of the U.S. dollar. The U.S. Dollar Index (DXY) has broken above 101, reaching a one-year high. While a stronger dollar often weighs on multinational earnings, commodities, and emerging markets, history shows it can also signal strong global demand for U.S. assets. During the late-1990s tech boom, both the dollar and U.S. stocks rose together as international capital flowed into U.S. tech companies. A similar dynamic could support today’s AI leaders if investors continue favouring U.S. markets. Still, there are risks that dollar strength happens while long-term Treasury yields remain above 5%, which could create a more restrictive environment for high-growth stocks.
Musical chairs. Britain’s political instability deepened earlier this week after Keir Starmer resigned as PM, less than two years after winning a landslide election, becoming the sixth UK leader to leave office in a decade. His departure reflects ongoing voter frustration over living standards, high government debt, weak economic growth, and immigration, problems that previous governments have struggled to solve ever since the 2008 financial crisis. Analysts argue that Brexit, the pandemic, the Ukraine war, and rising debt have further weighed on government spending and undermined public confidence, making long-term policymaking more difficult. Starmer’s expected successor, Andy Burnham, now faces the challenge of providing a credible economic vision and restoring political stability, with many noting that another failed PM stint could further erode confidence in the UK’s political system.
Il fait chaud! For those looking to travel to France for summer holidays be prepared for some hot weather. Summer may have just begun but France just registered its hottest day on record since measurements began in 1947, with the thermometer hitting 44.3C in Pissos (Landes). France is one of the top visited tourism economies in the world and some of its biggest attractions are dealing with operational logistics to deal with the heat. The Eiffel Tower closed early yesterday and today and last admission was at 12:15 pm, while the Louvre is requiring reservations and closing some galleries to protect artwork from the heat. Prime Minister Sébastien Lecornu is preparing to chair a crisis meeting with ministers to address the ferocious early summer heatwave that has left parts of western France suffering temperatures of above 40C. For anyone heading to France this summer, consider this your reminder that museum reservations may be as important as restaurant reservations. Pack plenty of water, comfy shoes, and a good hat. Paris fashion may have to take a temporary back seat to basic heat management.
Diversion: I wear my sunglasses…
