Earnings could determine market direction, Bank rally continues

A swathe of earnings due out today could play a critical role in setting the tone on whether or not this rally is able to continue its recent push higher, or take a step back. Recent better-than-expected earnings from big banks provided significant support after weak price performance; will disappointing earnings from tech stocks crimp their recent rally? Nasdaq was flat, while the KBW Bank’ index was up 3% today and 6% over a week. After the close the market will get a look at earnings from key tech stocks Tesla, Netflix, and IBM.

Bottom-line: Risk-hold.

TODAY’S MAJOR NEWS

Global economic troubles shared

We've seen how connected the global economy is, with recent struggles in China's economic recovery weighing on sentiment across the globe. Wall Street is now focusing less on recession risks, as US growth continues to be robust, and more on those factors that could create stronger demand and/or supply threats, increasing inflation risks, with the Russian/Ukraine war again a factor.

Poor European inflation data, including four of the world's ten largest economies, is sharpening the focus on inflation, suggesting that European interest rates will stay higher for longer. Even with recent optimism as the US and UK inflationary picture improves, it's important to keep in mind that the battle is far from over, and that there are things happening elsewhere in the world that will eventually have an impact in the US, especially as the commodity sector rebounds, potentially bringing back nagging inflationary pressures.

Bad news on Euro inflation

The European inflation picture wasn't rosy. Two of the main drivers of June’s sticky core inflation were prices increases in the service sector only partially offset by falling energy costs, a similar story to that seen in the US.

• Eurozone CPI readings this morning showed headline inflation match expectations by falling to 5.5% in June, down from the 6.1% in May – but reaching the lowest level since January 2022
• Core inflation readings were less optimistic, rising to 5.5% in June after falling to 5.3% in May, and remaining near the 5.7% peak set in March

Good news on UK inflation

The UK, the world's sixth-largest economy, has had one of the biggest struggles combatting inflation, and while today's better-than-expected data could be the first step in the right direction, further progress is needed before the hawkish the Bank of England cuts interest rates.

• The UK’s June CPI dropping to a 7.9% year-on-year rise, less than the 8.2% forecast, considerably higher than many of the world's top economies, and way above their 2.0% target rate
• Much of this decline was due to falling energy costs, but UK core inflation eased from its 31-year high set in May of 7.1% down to 6.9%

China lightens tech sector regulation to boost growth

China knows that it must stimulate domestic demand to offset lost export business to Europe and the US, and it’s now finally figured out that regulation is stifling growth in its tech sector, another critical component of its economy. As such, it’s lightening up on regulations that are hoped to strengthen its private tech economy, which when you include all the various support sectors, could support domestic consumption.

More than 240 million jobs are generated by online service operators: social media and video gaming, e-commerce and food delivery, truck drivers, ride-hailing drivers, and delivery riders. This group of workers accounted for more than 25% of the working-age population. Less regulation creates more jobs that in turn stimulates greater consumption.

On the other hand, China took a step backwards by prioritizing support for State Owned Enterprises, using national security to justify the move. It indicated that it wants the SOE’s to lead China forward, which puts it in direct conflict with needing support from the critical foreign investment needed from investors in the West, while increasing the distrust that the West has in China’s economy and in its intentions.

Ending Ukraine/Russia grain deal lifts corn and wheat prices

Ukraine’s attack on the Kerch bridge that connects Crimea to Russia, a critical supply link for Russia to support its war efforts, focused attention on the collapse of the grain deal. The end of the grain deal initially had little impact, as Russia and Brazil are dumping a lot of cheap wheat and corn on world markets currently, and Ukraine announced that it would implement Plan B to maintain the initiative without Russia’s support.

The view that ending the grain deal had little impact on prices changed quite literally overnight. Russia launched a second major missile attack on grain and oil facilities at ports near Odessa overnight, supplemented with drone attacks. The significance of last night’s attack was not lost on markets, leading to higher soft commodity prices, and a revision of the sanguine view that the war doesn’t matter to prices.

TODAY’S MAJOR MARKETS

Equity markets

• Markets were flat morning trade, with the S&P 500 and Russell 2000 up by 0.2% and 0.3% respectively, while Nasdaq edged down 0.1%
• The KBW Bank Index was up for a second day, by 3.0%, further reversing a now 12% decline in the year-to-date
• Global markets were up more strongly, with the FTSE 100 up by 1.8% on better than expected inflation data, the Nikkei 225 was up 1.2%, and the DAX was flat
• The VIX, Wall Street’s fear index, was pretty much unchanged at 13.6

Currencies and Bonds

• The dollar index was up 0.4% against a basket of currencies to 100.3
• Yen/dollar cross rates were up 0.5%, while Sterling/dollar and Euro/dollar were off 0.8% and 0.2% respectively
• Bonds edged lower, with yields on 2- and 10-year Treasuries at 4.75% and 3.75% respectively

Commodities

• Crude oil prices fell 0.6% to $75.3 per barrel
• Silver led the precious metals, up 0.4% to $25.4 per ounce, while gold was unchanged at $1,980 per ounce
• Corn and wheat were boosted by Russia’s attacks in Odessa, demonstrating that it may not make it easy for Ukraine to continue grain shipments

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com