Asian shares saw an uptick on Monday, setting the stage for a week filled with earnings reports and key central bank meetings that may hint at potential easing measures from the United States and the United Kingdom, while Japan might consider increasing borrowing costs to move towards economic “normality.”
Oil prices edged higher due to concerns over a potential escalation in the Middle East following a rocket attack in the Israeli-occupied Golan Heights, which both Israel and the United States attributed to the Lebanese armed group Hezbollah.
This week will also feature the release of the US jobs report for July, significant surveys on US and global manufacturing, and key Eurozone economic indicators including GDP and inflation data.
Additionally, the US Treasury is set to announce its bond issuance plans for the quarter, and China’s politburo meeting may unveil further stimulus measures following last week’s unexpected rate cuts.
Following a favorable June inflation report, market participants are betting that the Federal Reserve will signal the possibility of a rate cut in September at its policy meeting on Wednesday. Futures markets are fully pricing in a quarter-point reduction, with a 12% chance of a 50-basis-point cut, and 68 basis points of easing expected by the end of the year.
Goldman Sachs analysts noted, “The FOMC is set to hold steady but is likely to revise its statement to hint that a cut at the following meeting in September has become more likely. We now see the risks to the Fed path as tilted slightly to the downside of our baseline of quarterly rate cuts, though not quite as much as market pricing implies.”
The Bank of Japan also meets on Wednesday, with markets implying a 70% probability of a 10-basis-point rate hike to 0.2%, and some chance of a 15-basis-point increase.
There is less certainty regarding the Bank of England’s actions at its Thursday meeting, with futures indicating a 51% probability of a rate cut to 5%.
Earnings Test
The anticipation of higher borrowing costs in Japan negatively impacted the Nikkei, which fell 6% last week as the yen appreciated. However, early Monday saw a 2.4% rebound in the index, following a strong close on Wall Street.
MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.9% after a 2% decline last week. Chinese blue-chip stocks fell 0.9%, showing little response to recent rate cuts.
EUROSTOXX 50 futures rose 0.5% and FTSE futures increased by 0.4%. In the US, S&P 500 futures added 0.4%, while Nasdaq futures climbed 0.7%.
Approximately 40% of the S&P 500 by market value is set to report earnings this week, including major tech companies such as Microsoft, Apple, Amazon.com, and Meta Platforms. With high expectations, any sign of disappointment could challenge the lofty valuations of these mega-cap stocks.
“With some sizeable moves implied by the options market for the individual names on the day of reporting, movement at a stock level could resonate across other plays within their sector and potentially promote volatility,” said Chris Weston, head of research at broker Pepperstone. “Company earnings don’t come much bigger than Microsoft, where the options market implies a move (higher or lower) of 4.7% – the after-market session on Tuesday could get lively.”
In currency markets, the Japanese yen continued its recent rally, with the dollar slipping to 153.40 yen, approaching last week’s low of 151.93. The euro remained steady at $1.0858, having found support around $1.0825 last week.
In commodity markets, gold rose 0.4% to $2,394 an ounce, buoyed by expectations of a dovish stance from the Fed. Oil prices moved higher on concerns over the Middle East situation, though worries about Chinese demand persisted.
Brent crude increased by 31 cents to $81.44 a barrel, while US crude rose by 22 cents to $77.38 per barrel.
