Week ahead: Politics in focus as volatility set to make a return

Just when you thought the US Presidential election campaign could not get any more dramatic, there is an assassination attempt at a Donald Trump rally in Pennsylvania. Former President Trump emerged unscathed from the shooting, and he is set to attend the Republican Convention later today, where he is expected to formally be crowned the Republican nominee. In the aftermath of the assassination attempt, US PredictIt Presidential poll, increased the chance of Trump winning the election in November to 66%, with Joe Biden’s chances languishing at 23%.

No major market reaction to US election shooting

The latest twist in the Presidential election had a bigger political impact than it did financial impact. There was a mild rush to safe havens, however, gold is now in retreat, US 10-year Treasury yields fell a mere 3 basis points and the dollar is also giving back earlier gains as we start the European trading session. Bitcoin is worth watching, as it seems to have had the biggest reaction to Trump’s shooting. Immediately after the news late Saturday/ early Sunday, the cryptocurrency jumped above $60,000. It extended that gain on Monday and is now hovering just below $63,000. It is hard to know exactly why Bitcoin has reacted in this way: does a Trump victory increase the attractiveness of alternative assets? Does political discord and chaos boost crypto? Does the increased chances of a Trump win lead to fears about the future independence of the Federal Reserve, which also feeds into demand for crypto assets? This is a theme worth watching if President Trump can maintain this lead in the polls.

Earnings in focus as 40 blue chip US companies report results

Stocks index futures are higher on Monday morning, and the e-mini-S&P 500 future is within touching distance of the all-time high reached last Wednesday. This is a big week for earnings releases in the US. 40 companies are reporting earnings in the S&P 500 this week, including Blackrock, Goldman Sachs, and Bank of America. On Thursday, Netflix will release its earnings. While it is not part of the Magnificent 7, it is seen as a bell weather for the tech sector. Its share price has stalled in the past month, but it’s still higher by 34% YTD, beating rivals Disney and Comcast. Its earnings report will give us an update about whether Netflix can still grow its subscriber base even though the positive headwinds from its crackdown on sharing passwords has faded. Added to this, investors want to see how Netflix can monetize its ad-based subscription service and if that is helping the bottom line. The focus will also be on global subscriber growth and if that can make up for some of the slowdown from domestic subscriber growth. The focus will also be on profitability, which has been strong in recent quarters. If Netflix falters, then its share price may take a hit, due to its strong performance so far this year.

Labour government sets out its growth plan

In the UK, the King’s Speech on 17th July is a key event to watch in the UK. It is expected to introduce up to 35 new bills that will showcase the new Labour government’s plans to prioritize growth. These include a bill to strengthen the UK’s fiscal rules and give more power to the Office for Budget Responsibility to scrutinize future Budgets, plans for the National Wealth Fund, and a road map to get the UK to net zero by 2030. So far, the government’s focus to boost economic growth has been announcements about housebuilding targets, 1.5 million new homes in 5 years, and an overhaul of the planning system. However, housebuilding alone will not revitalize the UK economy. Part of this is because the target seems unachievable based on a shortage of labour to build these homes, thus an investment in skills will be necessary before this could happen.

Even though there are some doubts creeping in about the government’s plans to boost growth, the UK homebuilder index have had a strong run in the past month, rising more than 3%. The FTSE 250, which is a domestically focused index, has risen to its highest level since March 2022, and is outpacing the blue-chip FTSE 100. We will be watching closely this week to see if this theme can continue.

Will mid-caps continue to outperform?

One of the key themes for markets as we move through the summer months is a broader market rally than just the Magnificent 7. In the last week, the Russel 2000 has outpaced the S&P 500 due to a number of factors. There are rising expectations of a Fed rate cut, the market is now pricing in the chance of a September rate cut at more than 90%. Added to this, companies excluding tech are expected to report earnings growth of 5.4% for Q2, which, if true, would be the fastest pace of growth for 6 quarters. In contrast, the market thinks that Magnificent 7 could be at peak earnings growth, and earnings may slow going forward. Looking ahead, if we get a decent set of earnings data this week, it could also boost the mid-cap indices, and help this theme continue.

UK CPI set to dip below BoE target rate

Key economic data to watch this week includes UK CPI and PPI on Wednesday. The market is expecting the disinflation trend to continue. Headline inflation could fall below 2% to 1.9%, core price growth may slow to 3.4% from 3.5%, and service price growth is expected to decline slightly to 5.6% from 5.7%. While headline inflation may well tip below the 2% target rate, core price growth, especially service prices, are expected to remain sticky. Service price growth may also receive a boost from the ‘Taylor Swift’ effect, after the US super star played 10 nights across stadiums around the UK. She played to nearly 1 million people, who filled hotel rooms and ate and drank at restaurants and bars in the run up to her concerts. Swift is coming back to the UK in August, so there may be more upward pressure on service prices in the summer months.

This is why we do not think that this inflation report will boost expectations of a rate cut from the BOE next month. The market had reduced expectations of a BOE rate cut in recent weeks to just over 50%. Ironically, a weaker headline inflation reading for June may also boost the pound as it would further increase the real interest rate in the UK, the Bank rate adjusted for inflation, which is already the highest in the G7. This has helped power the pound, which is the top performer in the G10 FX space so far this year.

Will UK Retail Sales surprise on the upside?

Elsewhere, retail sales are also worth watching in the UK and the US this week. Retail sales in the UK are expected to decline by 0.6% in June, core sales are also expected to decline by 0.5%, which could be a sign that high interest rates and a softening in the labour market are starting to impact the UK consumer. However, higher than expected GDP in May and signs that the economy is picking up, means that an upside surprise may not be unexpected. Either way, this report could impact the FTSE 250, which has had a strong run so far this summer.

Will the ECB signal a September rate cut is likely?

In the US, retail sales were also expected to decline last month. However, core retail sales are expected to rise by 0.3%, which could be a sign that there is still life in the US consumer, which is good news for the small and mid-cap US stock market indices. However, the recent uptick in US unemployment may have a dampening effect on retail sales in the US, which may boost Fed rate cut expectations for the rest of this year. In the Eurozone, the ECB will announce their latest decision on interest rates on Thursday. The market does not expect any change in rates at this meeting, however, the ECB may signal that further rate cuts are coming down the line. The market is expecting a rate cut in September, the probability is currently more than 80%. There is also a 70% chance of a third rate cut this year in December. A dovish ECB may stall the euro’s gains, however at the start of this week, momentum is on the upside for EUR/USD, and this pair has broken back above $1.09.