London Capital Group: Earnings to drive US equity markets as Fed members enter pre-FOMC quiet period. Oil up on Iran tensions

July 22, 2019

Oil gained at the start of the week, as tensions in the Straits of Hormuz intensified after Iran seized a British oil tanker. The UK attempted to ease tensions through diplomatic talks.

WTI crude rose 0.84% a barrel, Brent crude advanced 1.31% to $63.50 a barrel.

Stocks in Japan opened on a negative note as PM Shinzo Abe’s LDP and its ally Komeito fell short of a super majority at the upper house elections on Sunday. Yen slid against the US dollar. The USDJPY is testing the 108 hurdle.

Hong Kong and Chinese mainland stocks also kicked off the week in the red. Hang Seng fell 0.77% as Shanghai’s Composite eased 0.62% amid another weekend of violent protests in Hong Kong. On the other hand, it is reported that some Chinese companies have offered to buy US farm products, amid Donald Trump’s complaints last week, to contribute in easing the trade tensions between the US and China.

Meanwhile, US and Chinese officials talked on the phone last week, but we have little detail on whether and when a face to face meeting will take place for a further progress.

Company results will drive US equity markets this week

US equity futures treaded water in Asia, after the major US indices reversed gains on Friday and closed the session on a negative note. The sudden slide in US equity markets happened as investors sharply trimmed their dovish Federal Reserve (Fed) expectations before the closing bell. The probability of a 50-basis-point rate cut fell from 40% to below 20%, the US 10-year yield advanced to 2.06%. The VIX index, which tracks the volatility of S&P500 futures, rose to a three-week high.

Higher price volatility is usually an indicator of stress in the market. The sharp correction in Fed expectations hint that investors now question whether they have gone ahead of themselves regarding the ‘preventive’ easing measures that the Fed is preparing to take. Indeed, a 50-basis-point cut may be too dramatic and little justified due to still-solid US economic data. The rising doubt among investors could enhance two-sided volatility in US-denominated assets, as Fed members enter the pre-meeting quiet period from now to the July 30-31st FOMC meeting and they won’t be able to guide the market before the next policy decision. Hence the attention will mostly be on the IMF’s world economic outlook update due Tuesday, the US 2Q advance GDP data due Friday and the company results due throughout the week.

Nearly a third of the S&P500 companies will report earnings this week. Coca Cola and Snap on Tuesday, GlaxoSmithKline, Facebook, Boeing and Ford on Wednesday, Unilever, Alphabet and Amazon on Thursday, McDonald’s and Twitter on Friday will be among the closely monitored companies this week.

Finally, on Friday, the US second quarter GDP growth may be revised to 1.8% from 3.1% printed earlier. Negative news could spur the expectations of a 50-basis-point cut again.

US dollar flat, EURUSD testing the 1.12 support ahead of ECB meeting

The US dollar index consolidates near its 100-day moving average (97.20). The majority of G10 currencies are little changed against the greenback.

The EURUSD is testing the 1.12 support, as the European Central Bank (ECB) doves have the upper hand ahead of Thursday’s monetary policy meeting. The ECB is expected to maintain the interest rates unchanged at this meeting, however President Mario Draghi will likely deliver a dovish accompanying statement as the global uncertainties due to trade tensions weigh on European economic outlook. Due Wednesday, Markit’s PMI data could confirm the contraction in Eurozone’s manufacturing activity in July. The odds for a 10-basis-point rate cut advanced to 90% for the ECB’s October meeting, and to 95% for December meeting.

The 1.12 level is where the euro-bulls and bears will be fighting this week. Decent put option expiries and stops could enhance the euro sell-off below the 1.12 mark.

UK will announce the next Prime Minister on July 23rd

In the UK, the Conservatives’ leadership race will finally end with the announcement of the new Tory leader and the Prime Minister on July 23rd. The appointment of the new Prime Minister could temporarily ease the selling pressure on the pound, as the worst-case no-deal Brexit scenario is already widely factored in. But on the other hand, there are rumours that Boris Johnson could call for a general election if he becomes the UK’s next Prime Minister. According to Ladbrokes, the probability of a new general election stands at 47%. If this happens, then the political uncertainties may not let the pound breath for long. And a weaker pound would be a further headache as the UK tries to make its way out of the European Union. Johnson said that a trade deal could break the Brexit deadlock, meanwhile some European leaders warned Johnson that he could force a no-deal Brexit if he comes with unrealistic demands on Ireland.

The pound-dollar fluctuated around the 1.25 mark in Asia.

The FTSE could test the 7480p support at the open. Energy and mining stocks should provide some support to the FTSE. But a slide below the 7480p could encourage a deeper downside correction toward the 50-day moving average (7384p).

Opening calls

FTSE is expected to open flat at 7508                                                   

DAX is expected to open 15 points lower at 12245