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“No one expects the rug to be yanked out from underneath them; life-changing events usually don’t announce themselves.” – Slash

Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.  

Equity futures have been getting progressively weaker as the morning goes on, and the major averages are now on pace for sizable declines. The Dow and S&P 500 are both indicated to open 0.6% lower while the Nasdaq stares at a loss of 0.80%. Treasury yields continue to march higher unabated, with the 10-year yield up more than 0.4% to 4.7%. The rise in yields has been driven by crude oil prices, which are up over 4% with WTI trading back above $90 per barrel. Gold is down more than 1.5%, and Bitcoin is 0.6% lower but still above $65K.

In Asia, South Korea regained most of the losses from late in Wednesday’s session overnight and finished the day up 4.4%. Other major benchmarks in the region were also mostly higher, as India was the main outlier, falling 0.5%. South Korea’s GDP for the second quarter came in stronger than expected, rising at a rate of 0.6% q/q compared to forecasts for an increase of 0.4%.

European stocks are lower across the board, taking their cue more directly from the rise in oil prices. The STOXX 600 is down 0.7% as Italy and France lead the declines with losses of over 1%. As expected, the ECB left rates unchanged, but President Lagarde’s comments will be scrutinized for signs of a potential hike in September.

It’s been a quiet week for data so far, but this morning jobless claims hit the tape at 8:30. Initial claims dropped to 187K, which was the lowest level since September 1969, and continuing claims also fell below 1.8 million for the first time since May. Besides these two reports, the KC Fed Manufacturing report will come out at 11 AM. While not an economic report, the latest sentiment survey from AAII showed a large drop in optimism as bullish sentiment dropped below 30% for the first time since September.

While shares of Alphabet (GOOGL) haven’t helped the overall tone in futures with its decline of over 4%, rising crude oil prices are also weighing heavily on pre-market sentiment. After falling below $70 per barrel in late June and earlier this month, as mentioned above, WTI crude oil prices are surging more than 4% this morning and trading back above $90 per barrel. While the decline earlier this summer provided some relief to markets, investors are going to have to rethink some of their assumptions regarding the economy and the Fed if $90 becomes the new normal.

Rising tensions in the Middle East have been the obvious driver of the latest leg higher in crude oil prices, so you would think that the defense stocks would also be getting a lift. That hasn’t been the case. In fact, the iShares US Aerospace & Defense ETF (ITA) is barely hanging on to its uptrend line from the April lows, and it remains well off its peak, which literally came on the first day that markets opened after the war started.

A look at the ETF’s 10 largest holdings and their performance this year also shows a weak picture for a sector that couldn’t ask for a better geopolitical environment. Of the ten stocks listed below, only three (HWM, GD, and GE) are outperforming the S&P 500 on a YTD basis while half of them are in the red. Even over the last week, as the conflict has escalated, most of the stocks listed are lower.

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