Equity markets across Europe and the US began the week on a positive footage, except for oil stocks. Energy companies were hit by a 5% dive in oil prices due to Israel’s targeted attack on Iranian military facilities. The barrel of US crude is trading below the $68pb this morning. A major part of the geopolitically-backed long positions around the $70pb level are likely cleared at yesterday’s selloff. But trend and momentum indicators remain comfortably negative, the RSI indicator suggests that oil is not yet in the oversold territory and that there is room for further selloff in the short run – with shorts targeting the $65pb September support. Once the actual selloff loses stream, we will certainly see some minor upside correction and consolidation, yet the medium to long term dynamics remain tilted to the downside, as well, as the Chinese growth struggle is not over, bad news keep coming in from Germany – where the country’s iconic carmaker VW announced at least three factory closures and a 10% salary decrease for tens of thousands of its employees, prospects for global oil demand have been deteriorating, OPEC countries show willingness to relax their production restrictions and the non-OPEC countries produce an ample amount of oil – led by the US – to a world that’s trying to transition from fossil fuel to alternative sources of energy. That doesn’t mean that oil prices will be immediately minced. But the downside pressures will likely be felt until global growth and demand prospects improve.
And indeed, oil giants like Exxon, Chevron, BP, Shell and TotalEnergies are expected to announce a combined 12% decline from the Q2 when they release their earnings throughout this week.
But besides oil, the S&P500 stocks eked out a meagre 0.27% gain yesterday, while bonds fell amid weak demand for 2 and 5-year bonds at yesterday’s auction. The US 2-year yield – which best captures the Federal Reserve’s (Fed) policy plans – pushed higher above the 4% level, while the US 10-year yield – which is a reflection of long-term growth, inflation and debt dynamics – advanced to 4.30%. The US dollar consolidated at the highest levels since summer, as the election jitters kept investors flocking into the safety of the US dollar and gold. The precious metal hovers near its ATH levels despite rising US yields and should remain bid until next week’s US election.
In the FX, the EURUSD regained the 1.08 handle but without much conviction from the euro bulls as the VW troubles remind investors about the difficulties that the European economies are going through at the moment. The morose European outlook supports the dovish European Central Bank (ECB) expectations, hence price rallies are interesting opportunities to strengthen bearish euro positions. Across the Channel, Cable is offered near the 100-DMA, while the yen is slightly better bid this morning and the USDJPY is back below the 153, but the political jitters, there, probably call for an extended Bank of Japan (BoJ) support to the economy. The BoJ will announce its latest verdict on Thursday.
But before that, investors’ attention will shift to the US jobs data starting from today with the JOLTS data due today, ADP tomorrow, weekly jobless claims on Thursday and the official NFP, wages and unemployment rate due Friday. The Fed doves have certainly scaled back their too dovish expectations over the past few weeks, but there is no doubt that the Fed will announce another 25bp cut when it meets next week. The probability given to that scenario is close to 97%. Unless we see another month of blowout jobs report – which will be hard due to the strike at Boeing and hurricanes – the Fed should go ahead with another rate cut. A softer-than-expected set of jobs data will have the potential to convince those who were betting that the Fed should take a pause in the December meeting, and maybe fuel the 50bp cut expectations for next week’s FOMC and weigh on the dollar. But the dollar weakness will likely remain limited into next week’s election.
On the earnings front, Alphabet is the first Magnificent 7 company to go to the earnings confessional this week. Together, the US Big Tech companies are expected to announce around 18% growth in profit and – hopefully for Nvidia – massive increase to their AI spending. Nvidia will not be reporting its results for another month, but AMD results are also due today. Roundhill’s Magnificent 7 ETF is back to flirting with ATH levels after the summer fatigue, but the Big Tech companies must deliver meaningfully better-than-expected results and brighter-than-expected forecasts to justify a further extension of the AI rally at a time investors are getting increasingly worried about the huge amounts spent on AI. Any misstep could cost the US indices their latest rally, as the rest of the S&P500 stocks are expected to announce flat profit growth in Q3. According to the latest data, 75% of the S&P500 companies that reported so far reported better-than-expected results – the smallest beat since the 4th quarter of 2022 for profit expectations that have already, meaningfully weakened since summer.
