Key facts
- Asian share markets opened cautiously on Monday due to the upcoming earnings season.
- Oil prices were choppy, with Brent futures slipping 1.1% and US crude futures losing 1.2%.
- S&P 500 earnings are projected to increase by over 30% in the third quarter, largely driven by the tech sector.
- Rising energy costs are expected to push US CPI up by 0.6% to 3.7% annually.
- Markets are pricing in an 85% chance of a Federal Reserve rate hike in December.
- The dollar index held near 17-month highs, while the euro remained defensive.
Asian share markets began Monday's session with caution as investors braced for the upcoming earnings season, which could challenge the high valuations of technology stocks. Oil prices experienced volatility following strikes on shipping and airports in the Gulf region.
There was confusion surrounding President Donald Trump's announcement of an energy ceasefire between Ukraine and Russia, as neither side had confirmed the proposal. Trump's suggestion for Russia to increase diesel exports also faced criticism from senators.
Brent crude futures initially rose but later slipped 1.1% to $103.50 a barrel, moving away from a recent peak of $109.97. US crude futures declined 1.2% to $90.73 a barrel.
In equity markets, South Korean stocks fell 1.1%, while MSCI's broadest index of Asia-Pacific shares excluding Japan showed little change. S&P 500 futures were up 0.2%, Nasdaq futures gained 0.5%, and European futures also pointed to a firmer open.
Trading volumes were thin with Japanese markets closed for a holiday and the US observing a partial holiday ahead of the earnings season, which kicks off with major US banks on Tuesday. S&P 500 earnings are anticipated to have grown by over 30% in the third quarter, according to LSEG IBES, with most of this growth attributed to the technology sector.
Economist My Bui from AMP observed that all S&P 500 gains since mid-September have been concentrated in tech, while investors are demanding higher yields to finance significant borrowing for artificial intelligence initiatives. The US investment-grade credit default swap index has risen to its highest level since the Iran war began, suggesting investors are questioning the ability of AI revenues to keep pace with increasing borrowing costs. This, combined with wider high-yield spreads, is expected to raise refinancing costs for corporate debt maturing in the coming years.
Fresh challenges for the market this week include US data on consumer and producer prices, as well as retail sales. Rising energy costs are forecast to lift the Consumer Price Index (CPI) by 0.6% to an annual rate of 3.7%, while the core CPI is expected to be cooler at 0.2% and 2.5% respectively. Bruce Kasman, head of global economics at JPMorgan, noted that oil prices remain higher than anticipated due to soaring shipping costs. He indicated that the inflation signals point to a sharp rebound in headline inflation, which will impact purchasing power, and a firming in core inflation that will keep central banks focused on near-term interest rate hikes.
Market expectations suggest an 18% probability of a Federal Reserve rate increase this month, but an 85% chance of a hike in December. Investors are also anticipating rate increases in the EU, Japan, and the UK before the end of the year.
In currency markets, the euro remained under pressure, trading at $1.1201 after five consecutive weeks of declines amid concerns over European government deficits. The dollar index held near 17-month highs at 102.25 but has stalled against the yen at 158.15, with the threat of Japanese intervention deterring speculators. Gold prices rose 0.3% to $4,206 an ounce, having seen a bounce of over 1% last week.