Rising Oil Prices and Treasury Yields Threaten Stock and AI Rally
Market Overview and Key Influences
A look at the day ahead in European and global markets from Wayne Cole.
Geopolitical Tensions and Oil Prices
As Spain was hoisting the World Cup, the U.S. military was starting its ninth straight day of attacks on Iran, which in turn was striking targets across the region. Just a handful of ships transited the Strait of Hormuz on Sunday and one was reported to be on fire.
Brent duly climbed above $90 a barrel for the first time since early June and Treasury bond futures slipped as investors narrowed the odds on a Federal Reserve rate hike, with a September move implied at around 65%.
Impact of Rising Treasury Yields on Equities
Historical Context and Current Concerns
The rise in 30-year Treasury yields above 5.0% carries a warning for equity valuations. Just a glance at a chart shows yields have spent little time above that barrier in the past two decades, and when they do stocks tend to have a bad time.
Earnings Season and Tech Sector Performance
That raises the stakes for earnings season with Alphabet, Intel and Tesla among a host of companies reporting this week.
Expectations for tech profits are sky high and results have to be truly exceptional not to get punished. Taiwanese chip maker TSMC last week handily beat guidance, yet its shares still slid 7%.
Asian Markets Reaction
South Korea's chip-heavy market has sunk by a quarter in the past month as retail investors got squeezed out of highly leveraged positions. The index was down another 3.0% on Monday, though that was better than many had feared.
Japan's Nikkei was on holiday but futures were actually trading higher, holding out hope for some stabilisation. Futures for the Nasdaq and S&P 500 were a shade firmer, again a solid performance given the flow of negative news.
Central Bank Policy and Currency Markets
European Central Bank Meeting
The latest spike in oil will be a headache for the European Central Bank which meets on Thursday and is considered likely to hold rates at 2.25% following June's hike.
Attention will be on policymakers' guidance with markets almost fully priced for a rise at its September meeting and rates of 2.75% early next year.
UK Political Developments and Sterling
Sterling held at $1.3447 as bond markets waited for Britain's incoming Prime Minister Andy Burnham to name a new treasurer. Shabana Mahmood seems to be the market's favourite candidate, ahead of Ed Miliband.
Key Data and Events to Watch
Key developments that could influence markets on Monday:
- Canada CPI for June, U.S. leading index for June
(Editing by Jacqueline Wong)
