Written by Earnings reports in focus
While it has been a solid start to the Q2 earnings season, the first big test comes today as Alphabet and Tesla publish their earnings reports after US markets close, followed by Intel tomorrow. Despite lingering concerns about valuations, the profitability of the AI investment already announced, and the threat from Chinese-based AI models, analysts remain exceptionally upbeat about the technology sector’s earnings.
This also means that the bar for disappointment is quite low, as weaker earnings or any signs of weakness in the outlook and/or AI investment could prompt a significant drop in risk appetite and a subsequent correction in US stock indices, which remain extremely fragile.
The oil price rise clouds the economic outlook
Part of the reason for the current muted movements is the developments in the Middle East. Military operations from the US and Iranian forces have continued for the 11th day as the mediators’ task of finding common ground between the two sides and agreeing on a short-term ceasefire appears to be exceptionally difficult. Apparently, the initial proposal by regional mediators for a 10-day ceasefire has been rejected by US President Trump, although talks continue.
Unsurprisingly, oil prices are edging higher, attempting to overcome the busy $84.45-$85.93 resistance range, which also includes the 50-day simple moving average (SMA). A continuation of the current exponential rise could mean a climb towards $90 by the end of the week. With the ECB meeting being held tomorrow (Thursday), the current oil rally is expected to set the discussion alight, with a decent degree of disappointment on the cards if President Lagarde et al do not adopt a more hawkish stance.
Dollar muted movements persist
Middle East hostilities have not had the early March effect on the dollar, partly due to the blackout period limiting monetary policy commentary from Fed members, when euro/dollar dropped from 1.1812 to 1.1415 in two weeks, but they have managed to stop euro/dollar from climbing back inside the one-year-long 1.1476-1.1829 range. The short-term downtrend from mid-April remains firmly in place, with a fresh low below the June 24 trough of 1.1324 targeted by dollar bulls.
After hovering for a number of sessions above 162, dollar/yen has climbed above 163, a fresh 40-year high level, with higher US Treasury yields and rising oil prices being the main culprits for the latest move. There has been a verbal reaction from Finance Minister Katayama, but investors are past the point of reacting to commentary. With no intervention in sight, the burden falls on next week’s BoJ meeting to rescue the yen, but BoJ’s hands are tied by PM Takaichi.
More importantly, since PM Burnham’s arrival at 10 Downing Street, the pound has been on a firm downward trend against both the euro and the dollar. The move has intensified today as the June CPI report failed to produce a significant downside surprise. Headline CPI decelerated to 2.6% annual growth, but the core indicator remained stable at 2.6% YoY, defying expectations for a small drop, thus complicating the BoE outlook.
Euro/pound is testing the resistance at 0.8538, with a move above this level potentially opening the door to a return to the 0.8600 region, especially if tomorrow’s ECB meeting proves hawkish and Friday’s eurozone PMI surveys produce an upside surprise.
Gold and bitcoin rallies pause
Finally, despite the mixed dollar and equity market performance, both gold and bitcoin have been on the move. Gold has climbed to a two-week high, once again building bullish momentum after bouncing off the $4,000 level, partly helped by numerous bullish calls from major investment banks and persistent Chinese buying. Meanwhile, bitcoin reached a fresh one-month high, rising 15% from the early July trough. However, both assets are showing signs of weakness at the start of the European session, a move that could be interpreted as profit-taking and positioning ahead of tonight’s earnings reports.
By XM.com
