The stock market was hit by another June swoon today. Investors were unnerved by the outcome of last Wednesday’s FOMC meeting. The committee participants were more hawkish than expected, according to their Dot Plot. Fed Chair Kevin Warsh abstained from providing his dot, but he came across as very hawkish during his presser, repeatedly stressing the importance of the Fed achieving price stability. Also weighing on AI-related stocks is news that token prices are falling as competition heats up, and that a Chinese company introduced a new dirt-cheap open-source AI model.
(1) Crude oil. Meanwhile, the June swoon for oil prices continued today. Brent crude fell below $77 a barrel this evening (chart). The decline reflects an improving supply outlook following the US-Iran MOU, with tanker traffic resuming through the Strait of Hormuz and the lifting of the US blockade of Iran’s ports. The sharp reversal suggests the geopolitical risk premium in the crude oil market is rapidly unwinding and that the underlying trend is bearish, with crude prices falling from early 2022 until the latest war in the Middle East began.
Another factor explaining why oil prices never spiked as much as the closure of the Strait of Hormuz would historically have implied, and why they have since fallen so sharply, is the secular decline in Chinese crude oil demand. After three decades of near-uninterrupted growth, crude imports fell to just 4.6 million barrels per day in May, well below their 12-month average (chart). Chinese demand was already being weighed down by rapid EV adoption, a prolonged property downturn, slower economic growth, and elevated oil inventories before the Middle East conflict. According to JPMorgan, China accounts for 74% of the recent decline in global crude imports.
(2) Stock prices. Lower oil prices should boost US economic growth. That should be bullish for stocks. But the stock market has been weighed down by the Magnificent-7, which have been weighed down by mounting uncertainties about the AI trade (charts). The MAGS ETF is down 2.9% ytd, while the XMAG ETF is up 14.1%.
