A big week ahead

Crude oil kicked off the week with a more than 4% slump after Israel attacked the Iranian military facilities over the weekend. Investors breathed a sigh of relief as the attack was more retrained than expected and Israel targeted the military facilities – and not the country’s nuclear or oil infrastructure.

The cherry on top, Iran didn’t vow to respond, in a clear sign of de-escalation – or at least not a re-escalation – of the tensions in the region. As such, the geopolitical tensions that were keeping the oil bulls on alert near the $70 per barrel level has gone up in smoke. The US crude slipped immediately below the $70pb and traded as low as $68pb. Brent crude fell below $73pb. Trend and momentum indicators are negative and the RSI indicator hints that oil is far from oversold market conditions at the current levels. Hence, the medium-term outlook is bearish and oil bears will certainly make another attempt on the $65pb level in US crude and challenge the $70pb support in Brent crude.

Not helping: the Chinese industrial profits fell 3.5% from January to September versus a meagre 0.5% printed a month earlier. Petroleum, other fuels and ferrous metal smelting turned from profits to losses. The big stimulus measures came only by the end of this period, therefore we can’t jump to the conclusion that they haven’t been efficient. But the measures that the country had announced earlier in the year had no material impact and that growth in China is still being challenged. The CSI 300 is slightly lower this morning, and the Chinese news are probably not helping to cheer up the oil bulls, either.

In Japan, the market mood is not mixed. The country’s long-ruling coalition lost its majority at the weekend election, rising the political and economic uncertainty in the country and making the Bank of Japan’s (BoJ) rate normalization path blurrier. The USDJPY spiked past the 153.50 helping the Nikkei index shrug off the moodiness of political uncertainty. The BoJ will announce its latest policy decision on Thursday. The bank is expected to stay seated on its hands but the officials will probably warn the yen shorts that they could intervene to stop the bleeding in the yen. Yet, an intervention will unlikely hit the ground before the USDJPY approaches the critical 160 level. Hence, the yen has room to further weaken, especially if the BoJ softens its tone to counter political uncertainty.

A crowded earnings calendar

In Europe, energy and mining-heavy FTSE futures are slightly in the negative at the time of writing, but the US counterparts are in the positive after having posted a mixed week during which the S&P500 eased 1%. But the selloff mostly hit the value names – because their earnings were less enchanting that the Big Tech’s. McDonald’s E.Coli outbreak didn’t help. The Big Tech on the other hand continued to do well with Tesla jumping more than 20% after announcing better-than-expected earnings and another 3% on Friday. As a result, the Dow Jones fell nearly 2.70% last week, while Nasdaq 100 tested the ATH levels for the first time since July.

This week, 5 of the Magnificent 7 companies are due to report their earnings and they are expected to report earnings growth of around 20%. Big oil companies are also report this week, but they are expected to announce a collective 12% decline in their profits.

Busy economic agenda

This week, the US will report the latest job figures, the GDP update and the core PCE index and the Eurozone countries will reveal October preliminary inflation figures and the Q3 GDP update. In the US, Q3 GDP is expected to remain steady around 3%, with easing inflation and potentially softer job numbers. Meanwhile, Eurozone growth might show a slight uptick in Q3, with core inflation edging down in October, while headline inflation is expected to have ticked back up to 1.9%. Zooming into Federal Reserve (Fed), figures more or less in line with expectations should keep the expectation of a 25bp cut from the Fed in November in check, but improved European data could scale back the dovish European Central Bank (ECB) bets, tame the possibility of accelerated rate cuts in the Eurozone. The EURUSD kicks off the week below the 1.08 mark, and having stepped into oversold market conditions. Hence, any positive news from the euro area could help the EURUSD post a minor recovery at the current levels. Still, the medium-term outlook for the EURUSD remains bearish on the clear divergence between a resilient US economy and sluggish European economies. Price rallies should see resistance near 1.0870, that matches the minor 23.6% Fibonacci retracement on September – October selloff and 1.0935, the major 38.2% Fibonacci resistance to the actual bearish trend.

Across the Channel, the Brits are preparing for the October Budget reveal. There will certainly be tax increases for big companies and wealthy individuals on the menu. Lately, the British 10-year gilt yield has been pushing higher – along with the other Western economies’ yields. If there is no major surprise, or an overreaction to the Budget announcement, the market’s attention should remain on the Bank of England’s (BoE) policy easing plans, which became sensibly more pronounced over the past few weeks due to Chief Bailey’s unusually confident and dovish remarks. As such, Cable could see a relief rebound on a potentially smooth budget announcement but sterling offers will likely remain strong near the 1.30 level against the US dollar, unless, of course, the US dollar eases unexpectedly due to soft economic data at their home.