Rising Interest Rates Pressuring Stock Market: Inflation and Oil Prices Are Key Causes

Most indices rose, but only the Nasdaq declined. In the morning, positive inflation indicators led to a rise, but soon a large volume of profit-taking emerged, causing stock prices to fall. Afterward, bargain buying entered the market, but overall stock prices did not rise significantly and remained stagnant.

Currently, interest rates are continuously trending upwards, consistently pressuring the stock market. This rise in interest rates acts as a primary cause, prompting sell-offs whenever stock prices attempt to climb. As a result, the market finds itself in a situation where it is difficult to maintain upward momentum.

Although the semiconductor sector is showing an upward trend, the main reason the overall market is not rising concurrently is due to interest rate issues. The fundamental source of these rising interest rates is analyzed to be oil prices. As oil prices continuously rise, they increase pressure for interest rate hikes, which ultimately curbs the stock market.

During the day, 8 out of 11 sectors rose, creating a bull market. Industrial, technology, and REIT sectors, in particular, recorded high growth rates. Conversely, big tech-centric sectors such as communication services and discretionary consumer goods showed a decline. This indicates that large tech stocks like Tesla underperformed, making it a contrasting day where other tech stocks showed strength.

The 30-year bond yield is continuously rising to 5.25%, making it difficult for the stock market to advance. With interest rates not coming down, stock prices face downward pressure even when they rise. The 10-year bond yield is in a similar situation. Concerns are being raised that if Japan, which holds a large amount of U.S. Treasury bonds, sells them, U.S. Treasury yields could rise further, negatively impacting the market.

The dollar rebounded slightly today, but an unusual phenomenon occurred where gold, which typically falls when the dollar strengthens, also rebounded simultaneously. This concurrent rise in the dollar and gold is analyzed to reflect the inherent anxiety in the current market. This reveals an uncertain sentiment among investors, as they simultaneously favor safe-haven assets but cannot lean towards one over the other.

Two main factors drove today's market rally: inflation indicators and the rise of tech stocks, particularly Coherent. Better-than-expected inflation data positively impacted the market, while the strength of specific tech stocks propelled overall market gains. These factors combined to shape the general market sentiment.

Looking at the details of the recent Consumer Price Index (CPI), fruits and vegetables rose by 5.1%, and meat by about 1.9%. However, the biggest driver of inflation was energy prices, which soared by an astonishing 14.7%. Gasoline prices, in particular, surged by 24.6%, critically influencing the overall rise in inflation. Rising oil prices also affected airfares, which recorded a 25.5% increase. Ultimately, if energy prices stabilize, inflation issues could largely ease, and if the Strait of Hormuz and Red Sea problems are resolved, pressure for interest rate hikes is expected to significantly diminish.

According to FedWatch, the probability of the benchmark interest rate being frozen at the September Federal Open Market Committee (FOMC) meeting has significantly increased. The probability of a freeze, which was 51.6% a day earlier, has now risen to 61.9%. This change suggests that market participants are more likely to expect a rate freeze rather than an increase at the September FOMC. Therefore, the outlook is that a rate freeze is highly probable in September.

Michael Burry, famous as the real-life protagonist of the movie 'The Big Short,' stated that the current market's calmness is unprecedented and warned about it. He pointed out that the unusual quietness of the market could conceal potential risks and advised investors to approach it cautiously.

Until recently, Treasury yields have remained relatively stable despite economic indicators that fell short of expectations. However, the July employment report released last Friday showed an unexpected decline in employment. Consequently, 10-year and 30-year Treasury yields temporarily fell but quickly rebounded. This immediate rebound is noted as a factor that amplifies market concerns.

Currently, inflation expectations are low, but real yields and term premiums are identified as issues. The term premium refers to the higher yield investors demand for holding long-term bonds, a phenomenon where more interest is required due to the risk of holding bonds for too long. This indicates that interest rates could continue to rise, acting as a factor threatening the stability of the bond market.

Over the past 10 years, the proportion of U.S. Treasury bonds held by foreigners decreased from 33% to 23%, a reduction of about 10 percentage points. This is mentioned alongside the fact that official government purchases of U.S. Treasury bonds are declining. As foreign investors reduce their holdings of U.S. Treasury bonds, a structure is formed where Treasury yields are bound to rise. This trend is expected to exert continuous pressure on the U.S. Treasury market.

Coherent, one of the main players in today's market, saw its stock price surge following its earnings announcement. The company is receiving positive reviews from both bulls and bears, thanks to an expanding customer base, positive pricing trends, increased order backlog, broader customer engagement, rising prices, and improved profitability. Bernstein, in particular, had previously maintained an 'underperform' rating due to concerns about past debt levels and financial health, but this time praised the company's performance, giving it a positive evaluation.

Coyo stated that customer interest in NVIDIA's A1 chip family, launched in 2020 with contracts extending to 2029, is high. This implies a commercial lifespan of 9 years for silicon depreciated over 5 years in the market. Prices for previous generation chips are maintained at or above last year's levels. A 'buy' rating and a target price of $250 were given for the stock. All these positive evaluations address the residual value problem that formed the basis of Neocloud's bearish argument. The estimated chip lifespan of approximately 9 years suggests progress in the right direction and acts as a positive signal for improved profitability.

Nevius is also raising expectations for Neocloud-related stocks through its own strong earnings announcement. Companies like Coyo and Nevius are responding positively to demand signals due to their earnings releases. Nevius, in particular, recorded Q2 revenue of $575 million, a 514% surge year-over-year, significantly exceeding expectations. While it reported a net loss of $190 million from continuing operations, adjusted earnings metrics surpassed forecasts. The CEO stated that demand for AI impact is growing exponentially, and the company is converting this into profitable, contract-based growth.

Nevius is piloting a new asset-light option that allows customers to deploy its AI cloud services in their own data centers. This option reduces the capital burden of adding capacity for customers while maintaining its owned and colocation portfolio. Most importantly, the continuous increase in orders is a positive sign. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) also significantly surpassed expectations, reaching $236 million, far exceeding FactSet's estimate of $169 million. This demonstrates Nevius's strong growth in the AI cloud market and its robust financial performance.

Despite an upward adjustment to Super Micro's stock price, a cautious stance is still maintained due to intense competition in the infrastructure market. Specifically, an ongoing investigation into products exported to China acts as an uncertainty. These factors provide reasons for investors to approach Super Micro carefully.

According to Super Micro's September quarter outlook, while margin improvements are expected to slow, strong revenue will somewhat offset this margin deceleration. In particular, large-scale data center construction plans are scheduled until 2027, projecting sustained revenue growth. This fosters expectations that the company can maintain solid performance through overall revenue growth despite margin pressures.

When considering data center investments, the most crucial factors are the depreciation rate, given that expensive GPUs become obsolete in just a few years, and the actual lifespan of the data center. These factors directly impact the return on investment, making them paramount considerations for investors. Additionally, the trend of overseas competitors, including those in China, securing additional computing capacity is a significant issue. Increased competition can affect market share and profitability, so a thorough analysis of this competitive environment is essential when deciding on data center investments. It is crucial to comprehensively consider not only technological advancements but also financial factors and the market competitive landscape.