Market snapshot: prepare for a pivotal week

A testing start to the week is already on the cards following an escalation of military strikes between the US and Iran over the weekend, reigniting inflationary concerns and edging investors towards haven assets such as the dollar.

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The week had ended well in the US, with the AI trade refusing to succumb to growing questions over the return on capital required after massive investment. NVIDIA Corp (NASDAQ:NVDA) shares rose by around 4% and Meta Platforms Inc Class A (NASDAQ:META) by 6%, with the latter seeing the benefit of a report suggesting it would be improving its AI cost structure.

The focus and enthusiasm was deepened by the Nasdaq debut of South Korean chipmaker SK Hynix Inc ADR (NASDAQ:SKHY), whose price spiked by around 13% following the offer of its ADRs at $149. SK Hynix shares have rocketed by more than 520% over the last year on the group’s domestic Kospi index as the apparently insatiable demand for memory has taken hold.

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Such unbridled enthusiasm will face an early test this week, however, as the resumption of hostilities in the Middle East could overshadow opening trading. Further tit-for-tat exchanges intensified over the weekend, with varying views on traffic passing through the Strait of Hormuz. While the US President maintained that the waterway was still open, the voluntary reporting scheme UKMTO reported that traffic had already slowed to 10 vessels by Friday and that none could be tracked at all early this morning. As a result, crude oil jumped by around 4% to $79 per barrel, as compared to $72 pre-conflict but far short of the $120 level hit in March.

The news will complicate the release tomorrow of the Federal Reserve’s preferred measure of inflation, the Consumer Price Index, for June which has been overtaken by events. Even if a cooling of the headline 4.2% rate is seen, subsequent flare-ups around the Gulf region will need to be factored into the current level and therefore the Fed’s decision on whether to tighten monetary policy. Even the bulls who are largely to be found in the equity market will be hard pushed to call peak inflation, while the bears who mainly reside in the bond market are still pencilling in at least one interest rate hike this year.

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Geopolitical tensions aside, the week heralds the beginning of the second-quarter reporting season in earnest. On Tuesday alone, Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), The Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) will be releasing earnings, amid a slew of numbers during the week including the likes of Morgan Stanley (NYSE:MS) and Netflix Inc (NASDAQ:NFLX).

Expectations for the season are stratospheric, with estimates of an average 23% spike in year-on-year profits and follow an extremely strong set of results during the first quarter. Big tech will once more be at the vanguard of heightened forecasts, with capital spending, cash flow generation and profits top of the investor agenda.

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The main indices go into this pivotal week with strong momentum, even though there will undoubtedly be challenges over the coming days. In the meantime, the Dow Jones has risen by 9.5% in the year to date, with gains of 10.7% for the S&P500 and 13.1% for the Nasdaq leading the way.

With Asian markets largely lower overnight following the renewed tensions, the FTSE100 made some laboured progress at the open. Gains were largely attributable to index heavyweights Shell (LSE:SHEL) and BP (LSE:BP.) which followed the oil price higher, while Computacenter continued its recent progress after strong results last week, bolstered by a broker upgrade.

Some notable buying interest in the likes of Persimmon (LSE:PSN) and Barratt Redrow (LSE:BTRW) offered further support, with the latter due to release a full-year trading statement on Wednesday.

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However, the headwinds came from the usual suspects, with declines in mining stocks and International Consolidated Airlines Group SA (LSE:IAG) in focus. With Dow futures pointing to opening declines being most strongly felt by the Nasdaq, Polar Capital Technology Ord (LSE:PCT) and Scottish Mortgage Ord (LSE:SMT) also came under pressure.

Even so, the overall gains add to the performance of the FTSE100 so far this year, where progress of 6% has largely been achieved by the ability of the index to dodge most of the tech bullets as they arrive and fall back on its defensive nature.