Earnings and Iran dominate sentiment

Despite better than expected results from Microsoft on Thursday evening Wall Street finished Friday and the week in the red. The S&P 500 has retreated from 3000 mark made few days ago, closing the week at 2975. Geopolitical concerns may dominate equity markets in the coming days, as the diplomatic row with Iran deepens. The seizing of a British tanker in the Gulf by Iranian forces sent oil prices higher. Geopolitical tensions tend not to impact market sentiment too much, however as we have commented on before a spike in oil prices have the potential to impact global economies, and not in a good way.

New York Fed president John Williams reinforced the markets expectation this week that the Fed will cut interest rates by at least 25 basis points at their up coming meeting. Ahead of the ECB meeting this week, expectations are also rising that the ECB could send interest rates further into negative territory in the coming months. The recent US economic data has started to beat analyst forecasts, being reflected in the Citi economic surprise index, this has not dented the capital markets belief the Fed will move. The Vix index rose on the week as fund managers appear to feel a greater need to protect their portfolios from a correction.

Looking to the week ahead the UK will have a new prime minister, the likelihood is Boris Johnson. Several members of Theresa Mays cabinet, most notably the Chancellor are walking the plank before being pushed. Sterling finished the week just above 1.25 to the US dollar. Our view remains that sterling has the potential to rally once Boris is confirmed and negotiations restart with new teams on both sides.

Earnings season continues this week with many large cap stocks reporting including Coca Cola, Amazon, Facebook, Intel and Alphabet. More than a quarter of the companies in the S&P 500 report in the coming week. We also get the announcement of 2nd quarter growth for the US economy released this week. Growth is expected year on year at 1.8%, this is a fall of 3.1% in the first quarter.

It is quite probable equity markets will again start the week on the back foot. A lack of clarity on trade negotiations, increased tensions in the Gulf and equity markets already discounting interest rate cuts. Earnings may be the swing factor as the week continues.