Key Takeaways
- Rising tensions in the Middle East continue to pose risks to global energy supplies.
- Markets will closely scrutinise central banks’ meetings this week, particularly in the US.
- Technology earnings will be in focus as investors assess whether AI-related spending can continue to justify the hype.
The coming week may turn out to be a tipping point for markets over the summer, as investors assess key developments in monetary policy, corporate earnings and geopolitics.
Monetary policy will be a major focus, with the Federal Reserve, Bank of England and Bank of Japan all scheduled to meet. The Fed’s meeting is likely to attract most scrutiny, as Chair Kevin Warsh’s scraping of forward guidance has increased uncertainty about the direction of US monetary policy.
Markets are currently pricing in around a 30% probability that the Fed will raise rates this week, but fully pricing in additional tightening by September. The pressure on policymakers has increased as US inflation remains significantly above target, while the economy and the labour market remain resilient.
However, policymakers may be willing to look through the recent spike in oil prices, until the inflationary implications become clearer. Nevertheless, the broader direction of travel is evident: the Fed is adopting a more hawkish stance under Warsh’s leadership.
In contrast, the Bank of England and the Bank of Japan are expected to hold rates at their respective meetings. While our view of the outlook for interest rates remains broadly unchanged, with oil prices rising above $100 a barrel for the first time since May last week and the re-escalation of tensions in the Middle East, market expectations for global interest rates have risen.
Following the recent escalation in tensions between the US and Iran, and efforts by the US to curb Iran’s control of shipping via the Strait of Hormuz, we have seen an encouraging pause in hostilities and talks between Oman and Iran to establish a framework to control the Strait. However, these talks may simply be a distraction, and in the meantime shipping activity is already significantly dwindling again.
We continue to monitor developments carefully, including in the Red Sea, where attacks on commercial shipping continue to further disrupt energy supplies. Although oil prices have eased somewhat following recent positive diplomatic headlines, supply-side risks have grown since the beginning of the conflict. Earlier in the year, relatively comfortable inventory levels helped absorb disruptions, but those inventories have since been drawn down significantly, reducing the buffer available to offset any future supply shocks.
This week will also be a key one for corporate earnings, particularly for the technology sector. While the earnings season has generally been solid so far, questions remain about the sustainability of AI-related investment spending. As companies increasingly turn to borrowing rather than cashflow to fund capital expenditure, there is growing scrutiny among both equity and debt investors about the expected return on investment from these substantial commitments, and company management teams are therefore having to be careful in their messaging about capex increases when issuing guidance. The earnings releases delivered over the coming days could therefore set the tone for market sentiment and equity market leadership over the coming weeks.
We are now in the middle of summer, which is traditionally a relatively quiet period in terms of market activity and trading volumes. However, this can exacerbate volatility should negative headlines resume. Given the combination of monetary policy uncertainty, geopolitical risks and earnings sensitivity, the potential for heightened market volatility remains a key risk for investors.
This week’s upcoming central bank meetings and corporate earnings releases will hopefully provide greater clarity on the likely direction of financial markets and monetary policy over the months ahead.
