Lower Trade Ahead of Big Tech Earnings

MACRO FRAME

The military exchanges between the US and Iran re-inflate the geopolitical risk premium in energy and add a hawkish skew to the macro backdrop.

STOCK INDEX FUTURES

Equity index futures are lower ahead of the bell; attention is firmly on Q2 results from Alphabet and Tesla after the bell, the first of the “Magnificent 7” to report in this earnings window. Investors will be scrutinizing results for evidence that multibillion‑dollar AI investments are starting to pay off. If big tech signals it is slowing the pace of AI spending, another leg of selling could hit the semiconductor sector, given that these companies’ free cash flow has been funneled into chipmakers but returns are not yet clearly visible. Alphabet is under particular scrutiny after delays to a key AI model have intensified concerns about execution, increasing the stakes for tonight’s print. Despite volatility and geopolitics, earnings growth should remain the main driver of equity performance. Threats to shipping from Yemen’s Iran‑backed Houthis and a widening US–Iran conflict are disrupting two major energy chokepoints, keeping the Middle East firmly on the market’s radar. Brent crude has climbed back toward six‑week highs near 90 dollars per barrel, reinforcing an inflationary outlook for central banks.

CURRENCIES

US DOLLAR: The USD index held steady overnight near 101.12. With Brent trading above $90, global inflationary worries have remerged, alongside increased expectations for Fed policy tightening. The divergence between US and European yields continues to play a dominant role in price direction for the dollar and euro alike. While European Central Bank tightening expectations are greater than those of the Fed, safe‑haven support from US strikes on Iran and renewed threats to shipping are likely to offer the dollar an edge. Meanwhile, a strong Q2 earnings season will help offer some support.

Watch point: June’s inflation data is bearish for the dollar, though the report’s impact may be partially overshadowed by the current geopolitical backdrop and the rise in oil prices.

EURO: The euro rose 0.11% to $1.1411. Focus is on the ECB’s meeting on Thursday, where the bank is expected to maintain a hold on rates after hiking last month. Still, tightening expectations remain against the current geopolitical backdrop: traders are placing a 77% chance of a hike at the September meeting and see a total of 65 bps of tightening by September of next year. For the euro, direction will ultimately hinge on the divergence between ECB and Fed tightening expectations. Persistent inflationary concerns arising from escalating tensions in the Middle East have reinforced expectations that inflationary pressures in the euro area may remain elevated.

Watch point: With the MOU seemingly done with, policy expectations are biased upwards though performance of EUR remains dependent on US inflation data and domestic growth factors.

BRITISH POUND: Sterling is a tad weaker at $1.3361, as UK inflation for June came in softer than expected, helped by a brief de‑escalation in the Iran war that pushed fuel prices lower. Markets had largely anticipated a downside surprise, so rate expectations are little changed with one 25bp hike fully priced by December. Meanwhile, the current US-Ira backdrop reinforces an inflationary outlook for global central banks.

New Chancellor John Healey has welcomed the data while rolling out modest cost‑of‑living measures, including lower energy taxes and bus‑fare caps, which investors view as small enough not to threaten fiscal discipline. The bigger swing factor is oil: Brent has jumped more than 4% to near six‑week highs as Middle East shipping risks intensify. With a fragile geopolitical backdrop, the pound remains vulnerable to a pullback toward $1.32.

Watch point: While recent strength has come off the back of better-than-expected data and easing political risks, expect macro factors to pressure the pound with fundamentals favoring a stronger dollar. We look for GBP/USD to weaken in Q4 2026.

JAPANESE YEN: The yen is little changed at 163.08 yen per dollar, near a 40-year low. Bloomberg reported that BOJ officials are open to raising rates at a faster pace has prompted traders to reassess the path of Japanese policy, adding some support to the yen at the margin. Without a material shift in BOJ policy, FX intervention would act as a quick fix, not a cure, with the broader trajectory dictated by rates and global risk sentiment. Meanwhile, markets remain uneasy about political influence: Prime Minister Takaichi’s government has retained language in its economic blueprint urging the BOJ to align with government policy, fueling worries that Tokyo might pressure the bank to slow further hikes. BOJ policy expectations have edged up modestly, pricing about 26 bps of tightening by year-end, from an earlier 21 bps.

Watch point: With the yen sustaining a break above the 160 level, intervention from the government appears to be the greatest near-term risk against further depreciation.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.6988. Australian 10-year yields have gained against US Treasuries, now 34bps higher, up from a 26bp advantage last week. Q2 inflation data next week is expected to see the core measure rise around 0.9%, taking the annual pace up to 3.7%, from 3.5%. That is likely to keep the risk of a rate hike before year-end alive. The latest jump in oil prices has already seen traders add to expectations of one more hike to the cash rate to around 80%, though much depends on the geopolitical backdrop in the Gulf. With markets awaiting further data on the economy, the Aussie is likely to remain subject to geopolitical developments, mainly regarding moves in oil.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields edged higher in a flattening move, with the 10-year yield rising to a two-month high at 4.64%. Both the US and Iran signaled that a resumption of peace talks is unlikely in the near-term. The rise in oil prices has renewed inflationary pressures ahead of next week’s Fed meeting. Policymakers are in their pre-meeting blackout period. The Fed is expected to leave the fed funds rate unchanged. However, markets continue to price in the possibility of policy tightening later this year, with traders assigning roughly a 61% probability of a rate hike at the September meeting.

Inflation expectations have steadily eased this month even as oil prices remained elevated, with one-year inflation swaps falling below the Fed’s 2% target for the first time since October 2024, though this is in-part thanks to the market’s perception that the Fed will be raising rates later this year. A stable labor market has also supported the view that policymakers are expected to focus on taming inflation. A Reuters poll showed that economists are expecting the Fed to keep rates on hold for the remainder of the year, while a majority of those who answered a separate question about the chance of a rate hike this year now described the likelihood as “high”, a reversal from last month when most saw it as “low.”

Watch point: Mainly, the renewed fighting and prospect that some inflation remain sticky reinforce a hawkish backdrop for the Fed despite a drop in the headline reading.

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