By Wayne Cole
SYDNEY, July 20 (Reuters) – Shares slipped with bonds on Monday as the escalating conflict in the Gulf lifted oil prices and fanned fears of inflation, while a packed week of major tech earnings will further test investor faith in the artificial intelligence trade.
Brent crude climbed above $90 a barrel for the first time in more than a month as the U.S. military started a ninth straight day of attacks against Iran, which in turn struck targets across the region. Just a handful of ships transited the Strait of Hormuz on Sunday and Tehran claimed to have hit two.
“The longer the strait remains closed and the war escalates, the greater the risk that oil prices will have to rise to around $150/barrel to bring demand down to match the hit to supply,” said Shane Oliver, head of investment strategy at fund manager AMP. “This is not our base case but it’s a high risk again.”
Brent added 2.4% to $90.18 a barrel, while U.S. crude rose 2.1% to $84.18.
The jump in fuel costs has revived worries about inflation even as U.S. consumer price data surprised on the downside last week, leading futures markets to price in 29 basis points of Federal Reserve rate hikes by year-end.
“Our forecast is for a more gradual turn toward a Fed hike in 2027, but the balance of risks is shifting in the direction of an earlier hike than expected,” said Bruce Kasman, chief economist at JPMorgan, noting a recent hawkish tilt in Fed policy rhetoric.
Futures imply a 60% chance of a rate rise as early as September, pushing yields on 30-year Treasuries back above the psychological 5.0% barrier. This is a level that tends to attract funds away from equities and toward fixed income, while lifting the valuation bar for future corporate earnings.
The shift has come just as investors question sky-high valuations for chip and AI stocks, which have seen the Philadelphia Semiconductor Index shed 10% last week to leave it 20% down from June’s record high.
SKY HIGH EARNINGS EXPECTATIONS
Markets took an added blow on Friday when Chinese AI firm Moonshot said it had a new open-weight model, Kimi K3, that it says delivers performance approaching U.S. giant Anthropic’s frontier Fable model.
All of which raises the stakes for this week’s rush of profit results, which include Alphabet, Intel and Tesla.
BofA analyst Savita Subramanian remains upbeat on the earnings outlook, tipping a 5% beat versus consensus, or 28% growth. Tech is expected to drive over half of growth, with semiconductors expected to rise around 130% year-on-year.
Such forecasts helped S&P 500 futures hold steady, while Nasdaq futures edged up 0.2. In Europe, EUROSTOXX 50 futures were little changed, while DAX futures and FTSE futures eased 0.1%.
Japan’s Nikkei was closed for a holiday, having shed 6.4% last week in a tech-led rout. MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.3%, while Chinese blue chips rose 1.4%.
South Korea’s chip-heavy market lost a further 4.1%, after diving almost 9% last week in wild trade as retail investors were squeezed out of leveraged positions.
The latest spike in oil will be a headache for the European Central Bank which meets on Thursday and is considered likely to hold rates at 2.25% following June’s hike.
Attention will be on policy makers’ guidance with markets almost fully priced for a rise at its September meeting and rates of 2.75% early next year.
The euro was flat at $1.1442, having spent more than a week trading between $1.1377 and $1.1482. The dollar was steady at 162.36 yen, just below the recent 40-year peak of 162.84 as Japanese authorities flag the threat of intervention should the yen weaken quickly.
Sterling held firm at $1.3462 as bond markets waited for Britain’s incoming Prime Minister Andy Burnham to name a new treasurer.
In commodity markets, the rise in yields pressured non-interest-paying gold which fell 0.1% to $4,013 an ounce. [GOL/]
(Reporting by Wayne Cole; Editing by Jacqueline Wong and Thomas Derpinghaus)
