CNBC Daily Open: Rising geopolitical risk

This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

Nasdaq’s worst session
The Nasdaq Composite suffered its worst session since December 2022, plunging nearly 3%, as semiconductors came under pressure amid reports of tougher trade restrictions. The S&P 500 also retreated as the rotation out of technology stocks continued. Meta Platforms tumbled 5.7%, while Big Tech peers Netflix and Microsoft dropped more than 1% and Apple slid 2.5%. Bucking the trend, the Dow Jones Industrial Average closed above 41,000 for the first time. The small-cap focused Russell 2000 slipped 1%, ending its five-day win streak. The yield on the 10-year Treasury was little changed, while U.S. oil prices rose 2.6%.

Chip tensions
Global chip stocks tumbled amid potentially tighter restrictions on U.S. exports to China and escalating geopolitical tensions. U.S.-listed shares of ASML and Taiwan Semiconductor Manufacturing Co plunged 12% and 8%, respectively. The declines followed a Bloomberg report that the Biden administration is weighing tougher restrictions on companies exporting technology to China. Nvidia shares slumped more than 6%, while Arm Holdings, Lam Research, Applied Materials and Advanced Micro Devices slid about 10% each. Qualcomm slid almost 9%. The VanEck Semiconductor ETF dropped more than 7%, its biggest daily loss since 2022.

Getting closer
Federal Reserve Governor Christopher Waller suggested that interest rate cuts could come soon, barring major surprises in inflation and employment data. “I believe current data are consistent with achieving a soft landing… while I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted,” Waller said. His comments align with those of other policymakers, indicating a rate cut is unlikely at the upcoming Federal Open Market Committee meeting, but more probable in September.

United soars
United Airlines‘ second-quarter profits soared more than 20%, driven by strong international travel demand. However, the carrier’s third-quarter earnings forecast fell short of expectations, now projecting $2.75 to $3.25 per share compared with the expected $3.44. Despite an industry-wide struggle with overcapacity pressuring airfares, United and Delta Air Lines have thrived by increasing international flights and premium offerings.

Eli Lilly slides
Roche‘s stock surged after positive trial data for its new obesity drug, sending shares of rivals Eli Lilly, Novo Nordisk and Zealand Pharma tumbling. The Swiss pharmaceutical giant announced promising early-stage data for its second obesity drug candidate, intensifying competition in the weight loss market. Roche shares jumped 5.8%, while Novo Nordisk and Eli Lilly dropped 3.8%, and Zealand Pharma plunged 8.4%.

[PRO] Double-digit correction
Sam Stovall from CFRA Research believes a market correction is likely despite a recent rotation from tech stocks to small caps. Small-cap stocks have rallied due to positive economic data, while mega-cap tech stocks like Nvidia have declined. This rotation may not be enough to prevent a double-digit correction in the S&P 500, Stovall argued.

A Bank of America survey of global fund managers — conducted July 5-11 before an attempt on Donald Trump’s life — revealed that “geopolitical conflict” had overtaken “higher inflation” as the primary risk for investment.

The survey was conducted against a backdrop of multiple global tensions: France’s hung parliament, pressure on President Joe Biden to step down as the Democratic presidential candidate, Russia’s ongoing war on Ukraine, Israel’s war in Gaza and the fraught relationship between China and Taiwan.

Trump’s interview with Bloomberg and his choice of VP, JD Vance, have further heightened geopolitical concerns. Taiwan “did take about 100% of our chip business. I think, Taiwan should pay us for defense,” Trump said. Casting doubt on U.S. commitments to Taipei was enough to send the Taiwan Weighted Index and Taiwan Semiconductor Manufacturing Co tumbling on Wednesday.

A Trump victory could be bad for global inflation, CNBC’s Karen Gilchrist writes, as his “America-first” policy could trigger tariffs of “more than 60%” on Chinese imports and 10% on all U.S. imports. Trump’s 2018 trade war with China cost Americans $195 billion and resulted in the loss of 245,000 jobs.

“Donald is a dealmaker. The president is a dealmaker, he wants to make a deal with China, you know he wants to make a deal.” Howard Lutnik, CEO of Cantor Fitzgerald, told CNBC’s “Squawk on the Street.” “But he called out China the last time, I think there is a deal out there he’s thinking about and he’s working on. But he’s going to start tough and then he’s going to make a deal. He cares about business in America, I know he cares about business in America.”

Vance has strongly opposed aid for Ukraine. “God help Ukraine” was the reaction of Timothy Ash, emerging markets strategist at BlueBay Asset Management, as CNBC’s Holly Ellyatt writes. Vance has also identified China as the “biggest threat” to the United States.

Adding to the tension, the Biden administration is considering more restrictions on companies exporting critical chipmaking equipment to China. This news caused shares of ASML, Nvidia, and TSMC to fall sharply.

These converging factors have heightened market risk, triggering a nearly 3% slide in the Nasdaq as investors shift toward other sectors. Bank of America cautions that retail investors in AI stocks could face losses reminiscent of past bubbles, while CFRA Research’s chief investment strategist, Sam Stovall, warns that even the rotation trade may not shield the S&P 500 from a double-digit correction.

— CNBC’s Jeff Cox, Pia Singh, Alex Harring, Leslie Josephs, Sarah Min, Samantha Subin, Arjun Kharpal and Rebecca Picciotto contributed to this report.