Red Lines
Volatility jumped as oil routes shut. US$49M poured into $XLE. Chips slid, software surged, and the trade narrative flipped.
We’re in uncharted territory as the conflict in the Middle East escalates. Red lines, meant to prevent all-out war, have been breached. The immediate shock: Iran’s closure of the Strait of Hormuz, a key shipping route handling roughly 20% of global LNG flows.
Energy markets reacted swiftly, and on Monday retail investors bought a record US$49M of the State Street Energy Select Sector SPDR ETF ($XLE). By Tuesday, $XLE’s gains faded as its biggest holdings Exxon Mobil ($XOM) and Chevron ($CVX) lost ground.
Traders saw plenty of red lines in the form of candlesticks on their screens. All three major U.S. indexes fell as the VIX spiked to its highest level since November.
Wall Street’s newest market darlings Sandisk ($SNDK) and Micron ($MU) led the losses after South Korea’s KOSPI index plunged 7%. As a top LNG importer, the country’s higher energy costs squeeze the chip fabs that make most of the world’s memory.
In a somewhat strange twist, previously unloved software stocks outperformed. Workday ($WDAY) rallied 7% as Adobe ($ADBE), ServiceNow ($NOW) and Intuit ($INTU) gained around 3% as money rotated out of airlines, energy and small caps.
In AI, Nvidia ($NVDA) trade was choppy. But the real focus was Nvidia’s US$4B investment in optical infrastructure – its venture arm is quickly becoming a signal for where the AI trade goes next. Lumentum ($LITE) and Coherent ($COHR) each secured US$2B and a direct partnership, sending both stocks up 10% Monday before they pared gains with the broader selloff.
Another big development was the outcome of Anthropic refusing to cross its red line with the Pentagon. The AI firm wouldn’t consent to its tech being used for mass surveillance or autonomous weapons.
OpenAI swooped in and signed the deal with the U.S. military instead, but amended it this week after calls to ‘delete ChatGPT’ gained momentum. OpenAI now says its AI system won’t ‘intentionally’ be used for domestic surveillance, which did little to quell the backlash.
And finally, investors grappled with some disappointing red line items on Berkshire Hathaway’s ($BRK.B) balance sheet. In Warren Buffett’s last quarter as CEO, Berkshire saw a 30% YoY decline in earnings and no major capital allocation despite a US$373.3B cash position.
As the market narrative becomes shaped by hedging geopolitical risk, the days ahead could be volatile. But even as red lines are tested, they can bring chances for strategic, long-term positioning.
This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. The author of this article and other employees of Stakeshop Pty Ltd may hold positions or have financial interests in the company (or companies) discussed above. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
Samy is a markets analyst at Stake, with seven years of experience in the world of investing, working across roles in private banking, venture capital and financial media. She has a Master’s degree in Finance and Data Analytics from The University of Sydney Business School.
