The Overnight Report: Oil Up, Chips Down

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The S&P500 faded over the day to close lower, losing initial gains, and ending in the red on a Monday for the first time since the war started.

Semiconductor chips stocks dragged the technology sector down.

WTI crude oil futures ended above US$100/bbl for the first time since July 20, 2022.

After another down session yesterday, and ahead of the March RBA minutes, as well as quarter end, ASX200 futures are pointing to a slightly positive start.

Good Morning,

The Australian market declined for a third straight session on Monday, with the ASX200 down -55points or -0.7% to 8,461.

Tech and financials were the most under pressure, with energy up 2.3%.

ASX200 futures indicate a slightly positive start to end the March quarter.

Overnight, Big Picture, J.L. Bernstein extract

Oil Breaks US$100 as War Expands: 

The Houthis fired missiles at Israel over the weekend and pledged to keep fighting.

That matters because Saudi Arabia has been routing oil through the Red Sea to bypass the closed Strait of Hormuz, and the Houthis can hit that route.

Societe Generale now sees Brent averaging US$125 in April with spikes toward US$150 if the Red Sea gets choked off. 

Powell Takes Rate Hikes Off the Table: 

The Fed Chair told a Harvard economics class that policy is in a “good place” and the central bank will look through the oil shock.

Before his speech, markets priced a better than 50% chance of a rate hike this year. After it, that fell to 5.5%.

The 10-year yield dropped almost 10 basis points on the session. 

Chip Stocks Keep Bleeding:

The semiconductor ETF is on pace for its worst month since December 2022.

Google’s TurboQuant algorithm spooked memory chip makers last week by showing AI models can run with less memory.

RBC pushed back and said pricing could stay strong through 2027.

The market is not buying that yet.

NAB Markets Today Research extract

Market fortunes continue to sway with the tête-à-tête over the Middle East conflict. Brent crude has retreated from an Asia-session high of US$117 to US$113.

Risk appetite has been fragile but, on balance, somewhat positive. European equities are up, but US equities continue to weaken toward close. 

The entrance of the Houthis into the Middle East conflict over the weekend cast a pall over early Monday trading. This was exaggerated by press articles and Trump social media posts implying a higher likelihood of ground operations in Iran to either seize uranium or oil infrastructure (and oil) on Kharg Island.

The Trump and White House version of the negotiations is that “great progress” is being made in “serious discussions” with a new regime in Iran — alongside renewed threats to “completely obliterate” energy infrastructure if the US’ 15-point peace plan is not advanced.

Iranian parliament Speaker Mohammad-Baher Ghalibaf has been nominated as the face of a new “more reasonable” regime that the US is negotiating with although, unsurprisingly, this has met with strenuous denials from Iranians.

At Harvard, Chair Powell reinforced a wait-and-see stance, saying policy is “in a good place” to assess the impact of the energy shock and that the Fed will look through supply-driven oil price moves for now. 

He emphasised inflation expectations remain well anchored beyond the short term, keeping the bar high for any near-term policy response.

Germany’s March inflation uptick was energy-led, with flash HICP at 2.8% y/y and CPI at 2.7% y/y, while core inflation stayed at 2.5% and food eased further.

Meanwhile the European Commission survey showed a sharp drop in confidence and a rise in inflation expectations in March, underscoring concern about the growth hit from higher energy prices. For now, the hard data point to headline-driven upside risks for tonight’s euro-area CPI.

In rates markets the rebalance between inflation, rate hikes and growth has continued, meaning further declines in yields. The 10Y UST yield is down -9bp, back below 4.35%, slightly outperforming most peers on the session. (10Y Gilt yield -4bp, Bund -6bp).

Front ends have been slightly better bid and most curves steepened a little. The downward trend in yields was in motion before Powell spoke, but his comments did help cement the move. Fed pricing for 2026 has shifted from 6bp of hikes to -3bp of cuts.

Currency markets were dominated by broad USD strength and yen volatility after Japanese officials escalated intervention warnings. Strong rhetoric from Tokyo helped turn the yen around, with USDJPY retreating from above 160 to below 159.5, even as the dollar continued to firm against most other majors.

The AUDUSD slipped below 0.685.

European stocks rose, with the Stoxx Europe600 up 0.9%, supported by falling bond yields, while the FTSE100 jumped 1.6% and the DAX gained 0.9% despite firmer German inflation.

By contrast, US equities faded, with the S&P500 reversing early gains to end modestly lower and the Nasdaq underperforming, as elevated oil prices and the Iran conflict continued to cloud the rates outlook.

In credit markets the US cash bond index was 0.4bp tighter, led by 1bp tightening in communications and tech bonds. 

Domestically, the RBA minutes from the February meeting are the main event. The cash rate was increased by 25bp to 4.10% in a close 5-4 decision. The Board judged the labour market had tightened a little recently. Private sector credit is out alongside the minutes.

Internationally, March readings for preliminary Eurozone and Tokyo March CPIs will be keenly watched as one of the first hard data reads that capture the conflict in Iran. 

China’s official manufacturing PMI is expected to slip back into expansionary territory.

Franklin Templeton Institute, Chris Galipeau extract

We are constructive on US equites and have established a target range of 7,000 to 7,400 for the S&P500 Index, based on expected earnings-per-share growth of 8% to 13% year-over-year (based on our Global Investment Management Strategy.

We don’t expect this geopolitical event to impact our outlook unless oil trades north of US$100 for months. We expect high levels of volatility to persist in the near term.

Multiples are compressing. At the start of 2026, the price-earnings (P/E) ratio for the S&P500 Index was 22.5 on 2026 earnings. As of the close on March 26, 2026, the P/E multiple on this year’s earnings for the S&P500 was 20.07.

The multiple on 2027 earnings was 17.38. The valuation has become more reasonable. Remember, when multiples come down, all else equal, so does the risk involved in owning stocks.

What I find more interesting is this: Earnings estimates have been rising across the board. With the exception of the Russel2000 Growth Index, every other US index has seen earnings estimates rise relative to the start of the year.

This is also true outside of the United States, with the exception of Europe; estimates are up for emerging markets and Japan. 

Right now, this tape feels like death by a thousand paper cuts. We are held hostage to the situation in the Middle East and expect to be in this pattern until an off ramp comes into view.

Still, the broadening theme we have been advocating since January of 2025 continues. Consider this YTD performance: Through the market close on March 26, the Russell2000 Value Index was up 4.81%, the S&P MidCap400 Growth Index was up 3.64%, the S&P MidCap400 Index was up 2.11%, the Russell1000 Value Index was up 1.44%, the S&P MidCap400 Value Index was up 0.49%, the Russell2000 Index was up 0.74%, and the S&P Equal Weight500 was up 0.18% (the Equal Weight Index is a measure for the average stock, which means the average stock is up).

That’s the good news. On the downside, the Magnificent Seven basket (the stocks of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) was down -13.29%, the Russell1000 Growth Index was down -10.64%, the S&P500 Index was down -5.12%, and the Russell1000 Index was down -4.95%.

This market performance is bearable if you are diversified, but painful if you are not diversified. This dispersion is great for active stock pickers, in my view.

As for YTD performance through March 26 outside of the United States, the MSCI Latin America Index was up 11.90%, the MSCI Emerging Markets Index was up 3.50%, and the MSCI Japan Index was up 4.55%. The MSCI Europe Index was down -3.06%, and the MSCI India Index was the laggard, down -13.45%. All of the international return data is in US-dollar terms.

Supported by forward earnings growth, we remain bullish on US small cap stocks as well as EM equities. Consider using this recent period of price weakness if planning to increase exposure.

Let’s talk about where we are right now and how to deal with volatility. I think it’s time for discipline over emotion. It’s time to have a plan. I am keeping watch on the S&P Volatility Index (VIX). If the VIX closes above 30 on a weekly basis, I think it’s probably an attractive time to dollar-cost average into equities. This is step one. 

Since 1990, when the VIX closed at 30 or higher on a weekly basis, forward returns for the S&P500 were positive. The median three-month forward return was 6.85% and the hit rate for positive returns was 80.28%. The median six-month forward return was 15.15%, and the hit rate was with a hit rate of 80.28%. The median one-year forward return was 23.46% with a hit rate of 88.57%. Discipline over emotion.

Similarly, if things get out of hand, and the VIX closes over 50 on a weekly basis, I think it’s time to get more aggressive if you have cash to put to work.

This is step two: Rather than dollar-cost averaging, my approach is to buy quality stocks on price weakness, even baskets like the Magnificent Seven. In the periods since 1990 when the weekly VIX closed above 50, the median forward one-year return was 24.06%, with a 100% hit rate.

Again, I emphasize discipline over emotion. Markets bottom on bad news, after all. Remember April 2025?

The “Rule of 16” is a handy tool to help gauge the magnitude of potential S&P500 price movements when the VIX is elevated. The calculation is: (VIX Index level/16) = likely daily price movement in percentage terms. For a VIX reading of 32 this gauge would project a 2% daily movement in the S&P 500 Index (32/16 = 2%).

Here is the bottom line: Our Institute believes it’s best to have a diversified equity playbook including large-, mid-, and small-cap exposure in the United States with a balance of growth and value.

The same can be said for ex-US equity exposure; we favor positions in emerging markets and developed international markets. To act on the broadening theme, consider reducing concentration and diversifying portfolio exposure.

The VIX index parameters described above can be helpful for deciding further action.

Corporate news in Australia

-Navigator Global investments ((NGI)) invests $145m to acquire a 4.5% stake in Canadian AI firm Georgian

-Made Group auction narrows to Temasek, Danone, and a Chinese consortium

-Raphael Geminder nears full ownership of Pact Group to 96% after buying shares from Jeremy Raper

-Rio Tinto ((RIO)) taps Morgan Stanley for Pilbara power sale

-Advanced Innergy ((AIH)) targets Matrix Composites & Engineering ((MCE)) with 40c cash bid

-Dateline Resources ((DTR)) seeks funding to develop ex-Barrick mine

-IP Group and Clean Energy Finance Corporation launch $50m Climate Catalyst Fund

-David Jones nears $150m refinancing to stabilise finances amid retail pressure

-DroneShield ((DRO)) opens EU headquarters in Amsterdam 

-Kapstream Capital launches $200m ASX “sleep-at-night” trust

On the calendar today:

-NZ March ANZ business confidence

-AU Feb Private Credit

-AU RBA Mar Meeting Minutes

-JP Feb Unemployment

-CH March PMI

-EZ March CPI

-UK 4Q GDP

-US Feb Jolts

-CROMWELL PROPERTY GROUP ((CMW)) ex-div 0.75c

-CYGNUS METALS LIMITED ((CY5)) earnings report

-GENUSPLUS GROUP LIMITED ((GNP)) ex-div 2.00c (100%)

-MAAS GROUP HOLDINGS LIMITED ((MGH)) ex-div 3.50c (100%)

-NEW HOPE CORPORATION LIMITED ((NHC)) ex-div 10c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author’s and not by association FNArena’s – see disclaimer on the website)

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