Stocks await key earnings, oil rise puts July Fed hike on table

• Trump threatens tit-for-tat strikes, Iran threatens regional energy facilities
• BoJ is said to be open to faster rate hike pace as yen adds risks
• Google burned through nearly $6 bn in cash last quarter as AI capex surged
• Tesla profits plunge as EV discounts weigh, capex more than doubled

Forex

USD dipped marginally as markets proved choppy through further geopolitical escalation, higher energy prices, and ahead of Big Tech earnings. US data and Fedspeak again took the backseat to the Middle East conflict given the lack of data and the Fed being on blackout. Oil prices pushed higher on continued strikes between the US and Iran, and more threats from both sides on hitting key infrastructure. That caused Treasury yields to rise, with now around a one in three chance of July Fed hike from a one in four chance on Tuesday.

EUR traded above 1.14 as further higher oil prices saw investors price a more aggressive tightening response from the ECB than the Federal Reserve. Focus now turns to today’s ECB meeting with a hawkish hold widely expected. See below for more details.   

GBP consolidated its recent fall with cable trading around the 50-day at 1.3368 and staying below the 200-day SMA at 1.3396. CPI offered little in terms of any major surprises with headline offering a marginal miss and core offering a marginal surprise. Lower food and services inflation is probably good news for MPC hawks. PM Burnham’s fiscal plans are still being formed and previous pronouncements are being walked back as the government seeks to maintain confidence in its commitment to fiscal responsibility.

JPY closed marginally lower with the major right near recent highs around 163.23. The official response to the yen’s weakness is intensifying, with MoF officials warning of ‘bold action’ and BoJ officials offering unexpectedly hawkish commentary to media. Both efforts are suggestive of desperation as the currency falls to fresh multi-decade lows at levels last seen in 1986. There is a lack of any major technical levels to the upside.

US stocks: The S&P 500 lost 0.14% to close at 7,499, the Nasdaq closed down 0.54% at 28,998 and the Dow Jones settled lower by 0.01% at 52,224. Sectors were split with Utilities, Materials and Energy outperforming while Communication Servies and Consumer Discretionary lagged. Indices traded sideways as investors awaited results from Alphabet, Tesla, IBM and Texas Instruments. The former saw revenues and cloud revenues beat while search revenue grew in line with expectations. The stock was down modestly after hours. Tesla traded 2.5% lower after the market close as Q2 earnings fell short of estimates as discounts on EV models weighed Capex more than doubled on the pivot to robots and semiconductors. IBM lowered its growth outlook as sales of data centre mainframes sunk 42%. The stock was 2% down after hours.

Stocks

Asian Stocks: Futures are mixed. APAC stocks were mostly green after the positive handover Stateside. The ASX 200 was modestly higher with strength in commodities offset by defensive weakness. The Nikkei 225 moved higher on the open after the cabinet approval of its first comprehensive economic and fiscal policy guidelines, targeting JPY370 trillion in combined public and private investment by 2040.  The Shanghai Comp and the Hang Seng were mixed with Hong Kong underperforming.  

Gold moved higher for a second straight day as prices got closer to the falling downward trendline from the late January top at $5,598. Bulls need to get above this and the 50-day SMA at $4,277 to beat the downtrend.

Day Ahead – ECB Meeting

The ECB looks set to keep rates unchanged at its meeting, with the latest data giving policymakers little reason to move just yet. Inflation has eased, energy prices have come down from recent extremes, and growth data is showing signs the slowdown may be starting to stabilise, which all supports a wait-and-see approach.

The June inflation print was softer, with headline inflation falling to 2.8% from 3.2%, while services inflation also cooled to 3.2% from 3.5%. Crucially, there is still no clear sign of second-round effects feeding through into broader prices which is key for rate setters on the Governing Council. That gives the ECB room to pause, especially after June PMIs improved and suggested the eurozone economy may be finding a floor.

That said, July PMIs, due on Friday could be clouded by renewed US-Iran tensions and a bounce in energy prices, which is exactly the kind of uncertainty that keeps the hawks on the Governing Council potentially in the ascendancy. That means President Lagarde is expected to stick to her usual data-dependent and “meeting-by-meeting” message with a hawkish tilt, while avoiding any firm commitment on the next move.

Chart of the Day – EUR/USD consolidates above 1.14

There’s around a 10% chance of rate hike at today’s ECB, with markets still pricing in around 45bps of tighter policy by December. That points to this meeting being one about signals, tone of language and the ECB keeping the door open for September action. If Lagarde and the Governing Council sounds cautious on growth and comfortable with current inflation trends, that would support risk sentiment and cap the euro. The flip side sees them sounding more concerned about energy-driven inflation risks, which could boost EUR/USD. Current price action in the major remains limited with continued consolidation within a relatively tight 1.1380/1.1480 congestion range that has extended since late June. The 50-day SMA sits at 1.1509 with the June low at 1.1324.