Following a second consecutive day of US strikes on Iran, oil price gains were contained on Thursday, July 9, with equity markets rebounding from a brief bout of geopolitical risk aversion.

At the time of writing, Dow futures were down 0.13%, S&P 500 futures were up 0.15%, and Nasdaq futures were up 0.64%.

The European Stoxx 600 index recovered from its largest single-day sell-off since March. In London trading, disappointing trial results for an AstraZeneca heart disease drug dragged its shares down by 9.4%.

Shares of chipmakers in Asia, Europe, and the US advanced, following robust demand for an American Depositary Receipt offering from SK Hynix.

After several days of sharp volatility, signs of recovery appeared for chipmakers in after-hours trading. Micron Technology rose 3.4%, while Intel gained 3.6%.

Escalation in US-Iran Tensions Prompts Risk Reassessment

The renewed flare-up in tensions forced equity investors to reassess earlier optimistic assumptions that a final resolution to the US-Iran conflict might support risk assets.

On Wednesday, the S&P 500 and Dow Jones Industrial Average closed lower, while the Nasdaq Composite Index managed a slight gain.

The US military stated on Wednesday it had launched a new round of strikes against Iran to ensure the Strait of Hormuz remains open to shipping. Iran responded with attacks on Kuwait and Bahrain, deepening the confrontation and raising the risk of derailing already fragile ceasefire efforts.

This escalation came hours after US President Donald Trump stated he believed the temporary ceasefire agreement with Iran was "over."

Despite the escalation of violence in the Middle East threatening efforts for a lasting peace deal, market sentiment remained relatively calm.

Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, stated, "We have always believed the path to a lasting peace agreement could be bumpy, with periodic flare-ups in tensions potentially causing market volatility. However, we also believe both sides still have an incentive to keep the Strait of Hormuz open."

Oil Prices Retreat but Supply Risks Remain

Brent crude fell 0.5% to $77.60 per barrel. In the previous session, Brent had recorded its largest single-day gain since May.

Supply concerns were also influenced by factors in Russia, particularly for middle distillates. Facing domestic fuel shortages due to ongoing Ukrainian drone attacks on refinery infrastructure, Russia announced a ban on diesel exports until the end of July.

Analysts at ING stated, "The price action of the past few days clearly shows: the market had become too complacent about the risks around this agreement and too optimistic about a quick rebound in regional supply."

While the day's decline in crude prices helped stabilize sentiment, investors remained alert to the potential for new inflationary risks if Middle East energy transport routes face prolonged disruption.

Traders indicated that while the tensions reflect the fragility of the ceasefire relationship, neither government appears to want a full-scale return to war, and both sides are likely to eventually return to the negotiating table.

Geoff Yu, Senior Macro Strategist at BNY Mellon, said, "This is the new normal; it's an uneasy equilibrium, but an equilibrium nonetheless. You just have to factor in the volatility in your asset allocation."

Bonds Stabilize as Yields Pull Back

Global bonds edged higher as a two-day, oil-driven sell-off subsided. The yield on the US 2-year Treasury note fell 2 basis points to 4.20%.

August Hyldgaard, an analyst at Danske Bank, noted, "However, the market appears to have stabilized for now. Brent crude is hovering around $79 per barrel, and US yields and German Bund futures are trading sideways in Asian overnight trading."

As oil prices turned lower, yields on eurozone government bonds and UK gilts fell, reversing part of the previous session's significant gains.

The yield on the 10-year German Bund fell 1.8 basis points to 3.067%, while the 10-year UK gilt yield dropped 3.1 basis points to 4.935%.

Fed Minutes Reveal Divergence as Market Awaits Inflation Data

The US dollar was little changed. The latest Federal Reserve meeting minutes revealed policymakers were divided on the future path for interest rates.

The minutes from the Fed's June 17 meeting, released Wednesday, showed some committee members saw a case for raising rates. Traders will now await next week's US inflation data and testimony from Fed Chair Wash to lawmakers for further clues on the rate path.

Mohit Kumar, an economist at Jefferies, wrote in a note that the minutes were more balanced compared to the "hawkish interpretation" prompted by the June press conference, which had raised market expectations for rate hikes.

He noted that many Fed policymakers believe price pressures will ease over the medium term, allowing the policy rate to remain stable or be lowered gradually.

Kumar stated, "Our view remains that as long as oil prices do not spike significantly, we do not see the Fed hiking rates this year, and we still expect the next move to be a cut, likely next year."

Oil Prices Remain Key Variable for Fed Hawks

Haefele added, "While policymakers may maintain a hawkish stance for a while longer, their rhetoric should begin to soften once they are more confident that second-round inflationary effects are limited."

According to LSEG data, traders currently expect the Fed to implement at least one rate hike by the end of this year.

New York Fed President John Williams is also scheduled to participate in a moderated discussion later on Thursday.

Chris Turner, Head of FX Strategy at ING, wrote, "Our bias is that higher energy prices will provide ammunition for Fed hawks and support the dollar on dips, especially against low-yielding currencies."

Nearly 70% of Tech Stocks in Bear Market Territory, Testing AI Conviction

AI star stocks that led the market higher in recent months are now collectively stalling—69% of the components in the S&P 500 Information Technology sector have fallen more than 20% from their 52-week highs, entering bear market territory.

However, despite the significant sell-off, some analysts do not believe this necessarily signals a trend reversal. They view the pullback as a natural process of profit-taking following the previous sharp gains.

Some observers point out that over the past few quarters, tech stocks have often faced pressure in the month following earnings reports, only to rebound ahead of the next quarterly report.

Furthermore, Goldman Sachs stated in a report this week that the AI-driven tech upcycle is not yet showing signs of peaking. The report argues that supply for semiconductors and electronic components has not yet exceeded demand, and there are no signs of a slowdown in technological advancement. The Wall Street firm views the recent market correction as a healthy consolidation after rapid price appreciation, rather than a reversal of the tech stock trend.

Goldman Sachs believes this cycle has the potential to become one of the largest and longest tech upcycles in history.

Notable Stock Movements

AstraZeneca shares tumbled 8%, primarily due to its new heart drug Wainua failing to meet the pre-specified efficacy endpoint in a Phase III clinical trial.

PepsiCo reported mixed second-quarter results. Adjusted earnings per share were $2.20, below the LSEG consensus analyst estimate of $2.21; total revenue was $24.18 billion, exceeding the market expectation of $23.95 billion. The stock fell 1%.

Investment bank KeyBanc downgraded Salesforce from "Overweight" to "Sector Weight," sending its shares down 4%. The bank stated that industry checks, customer interviews, and the company's disclosed financial data made it difficult to find positive catalysts to support further share price appreciation.

Morgan Stanley downgraded Stellantis from "Overweight" to "Equal-weight," and shares of the Jeep parent company slid 2%. Analyst José Asumendi noted that Stellantis's transformation plan would take at least another 14 months to deliver performance benefits.

Denim apparel giant Levi Strauss lowered its third-quarter guidance, causing its stock to drop 4%. The company forecast Q3 EPS in the range of $0.34–$0.36, below the FactSet analyst consensus of $0.38; however, its Q2 revenue and net profit both exceeded market expectations.

Metal coatings solutions provider AZZ reported latest quarterly earnings per share of $1.85, beating the FactSet consensus of $1.69; revenue of $448.5 million also exceeded the expected $434.6 million, driving the stock up 6%.

AI computing infrastructure company Cerebras Systems announced a major European expansion plan, with shares rising nearly 7%. The company will commission its first European data center by year-end and plans to build new facilities across Europe by 2027, expanding total capacity to 2,000 megawatts.

Costco shares fell nearly 2% as its June comparable sales growth slowed: June comparable sales grew 8.8% year-over-year, compared to a 12.5% increase in May.