Oil spiked, rates held, and tech surged
How did the Iran conflict affect the markets this week?
The week opened with the Iran conflict disrupting the stock market. Energy and technology stocks rose Monday, by Tuesday the U.S. was striking Iranian targets, and by Thursday, Iran was hitting American allies in the region. The price of crude oil pushed toward $90.
The impact was fast and global. On Tuesday, stocks fell as inflation worries and oil lifted bond yields around the world. On Wednesday, the 10-year Treasury yield (the interest rate on 10-year U.S. government bonds) touched 4.818%, its highest level since November 2023.
Euro area core inflation rose to 3.3% in August from 2.9%, with energy inflation accelerating to 14.3% from 10.3%, and a September rate increase from the European Central Bank (ECB) to 2.5% is now almost fully expected by the markets. Energy is the best-performing sector in the S&P 500 this year, up by 43%. One conflict is setting the policy path on two continents.
Why did the Bank of Canada hold its interest rate?
The Bank of Canada (BoC) held its rate at 2.25% Wednesday, for a seventh straight decision, and the reasoning is worth reading closely. Second-quarter gross domestic product grew by 3.3%, unemployment fell to 6.4%, and the BoC described a broad economic recovery. This strength removed the case for cutting rates, and contained core inflation removed the case for a rate hike.
The numbers behind this decision were the headline Consumer Price Index at close to 3% including gasoline, but only 2.2% excluding gasoline, with core measures close to 2% in July. Canada’s inflation is still driven by one category rather than being a more general problem, and that is the whole reason the BoC can sit still while the ECB raises rates and investors expect the U.S. Federal Reserve to increase rates.
The statement was honest about the condition attached. With the Strait of Hormuz still curtailed, the BoC warned that the longer high oil and high oil refinery profit margins persist, the greater the risk of inflation spreading into other goods and services, and that tariffs and counter-tariffs will raise business costs that could reach consumers. That condition got harder this week, not easier.
How did software company earnings perform?
Beneath the economic headlines, software company earnings were excellent. On Wednesday after the markets closed, Snowflake (a cloud data company) adjusted earnings of 62 cents against 45 expected, revenue up by 35% to $1.55 billion and product revenue up by 37%, a third consecutive quarter of acceleration. It raised its earnings and profit expectations for the full-year, and its stock jumped by more than 20%.
It had company. Dell (a computer hardware company) saw its stock rise by 15.8% on Wednesday, and GitLab (an AI software engineering company) saw an increase in its stock of 10%, with Palo Alto (a cybersecurity company) also delivering strong results. These followed solid reports from Salesforce (a cloud-based customer relationship management company) and Workday (a cloud software company).
The significance of this goes beyond the strong results. For much of the past year, the fear was that software would be disrupted by AI agents, and Snowflake lost more than half its market value between October and April on exactly that worry. This quarter argues the opposite; that the data layer (the software that manages data) is benefiting from AI workloads rather than being hurt by it. Accelerating growth for a third straight quarter is hard to explain any other way.
What market data is due next week?
Canadian retaliatory tariffs land September 8, then we’ll see U.S. Consumer Price Index data ahead of the September 15-16 U.S. Federal Reserve meeting. Fall is going to be interesting for sure.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
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