Last night, three scenarios rewrote the fate of the market

Source: Wall Street Intelligence Circle

On Monday, Trump rewrote oil prices, but failed to rewrite tech stocks; next, the only force capable of truly changing the market’s fate is the Federal Reserve.

First, the script for falling oil prices.

Last night saw a second wave of declines in oil prices, with the cumulative loss reaching 8% in a single day—all due to Trump’s statement: “Pausing strikes against Iran is to give negotiations one more chance.”

In an interview with Axios, Trump said: “We are in very in-depth negotiations with Iran. If talks fail, we will resume very tough military actions.” When asked how much longer he was willing to give diplomacy, Trump said: “Not very long. Either things move quickly, or they won’t happen at all.”

However, oil prices have not yet fallen back to early July levels. Prices need to drop to at least $70–75 for the market to start trading an easing of inflation again.

Second, the script of “falling oil prices did not save the market.”

A sharp decline in oil prices and a fall in interest rates should have provided the best environment for high-valuation tech stocks, but instead, the Nasdaq Index opened higher and reversed into a loss, the Philadelphia Semiconductor Index dropped more than 2%, Nvidia fell nearly 5%, and SK Hynix’s US shares broke below their IPO price.

Even if the Nasdaq rebounds on Tuesday, it’s important to watch if semiconductors also recover:

Nasdaq rises while semiconductors continue to fall: it means only the index’s heavyweight stocks are supporting the market;

If semiconductors continue to lead the decline: the correction in tech stocks is not over;

Only if both Nasdaq and semiconductors rise in sync, and Nvidia recovers at least half of Monday’s loss, will it mark an initial stop to the downtrend.

Third, the script for trading a “hawkish Federal Reserve.”

The US Dollar Index not only failed to drop below 101, but instead climbed above 101.50—a script of the dollar trading on “hawkish uncertainty” from the Federal Reserve in advance.

The market still assigns about a 30% probability to a rate hike this week; as long as the 10-year US Treasury yield remains above 4.60% and the dollar does not significantly fall below 101, investors will not fully interpret Monday’s oil price decline as a signal for monetary easing.

Today’s news shocked Wall Street. Citadel Securities released a report suggesting that the Fed may deliver a surprise rate hike (their base case has shifted to a 25 basis point hike this week), reinforcing its commitment to restoring price stability and officially ending the old era of reliance on forward guidance.

It’s not telling the market that the Federal Reserve will definitely hike rates, but it’s a reminder—not to take a Fed pause in July for granted.