The Week Ahead

Key takeaways

• Oil markets calm after renewed flare up in Middle East tensions
• The AI trade stabilizes
• Tech sell off not driven by fundamentals
• Capacity constraints bite
• FTSE 100 flight risk
• NFP preview
• European inflation set to moderate as oil price falls
• The UK: what are Andy Burnham’s plans for the economy?

The Week Ahead: What next for tech, payrolls, and Andy Burnham’s economic agenda The start of a new week brings the end of Q2, and we are officially in the middle of the year. As we move into Q3, the focus is already turning to shifting geopolitics, a strong US economy, the potential for fresh Federal Reserve rate hikes, and a selloff in tech stocks, that is particularly acute in Asia.

Oil markets calm after renewed flare up in Middle East tensions

At the start of trading, the focus is on a flare up in tensions between Iran and the US. Both exchanged fire near the Strait of Hormuz over the weekend, however, so far this has not led to a rebound in the oil price, and Brent crude oil is up only 0.5% on Monday, after both sides agreed to halt attacks. Brent and WTI remain below pre-war levels, and they both fell more than 10% last week. This shifted the dial for global rate hike expectations, especially in the UK. The question is whether investors will look through the period of renewed tension? If yes, then the Brent crude oil price could fall back towards $70 per barrel.

The AI trade stabilizes

At the start of this week, European stocks are mostly quiet, and US futures are pointing to a stronger open later today. After a sharp sell off last week, stocks in Asia have stabilized, although the South Korean Kospi still posted a small loss on Monday. The South Korean government pledged a $500bn investment in semiconductor chips, which boosted the overall index, although some of the big chip names did not join in the rally on Monday. SK Hynix fell more than 1%, although it is still higher by more than 12% in the past month. Stocks performed well in Q2; however, momentum has started to wane. For example, the Kospi in South Korea is higher by 60% so far but fell sharply last week and was lower by 10%.

Likewise, equity indices in the US were also lower last week, with hefty losses for Oracle, which dropped 18% last week, Qualcomm and Palantir both fell by double figures, and Nvidia was also down more than 7%. Asian stocks, especially in South Korea, have sold off sharply and remain sensitive to enthusiasm for the AI trade. The three biggest stocks listed on the Kospi include Samsung, SK Hynix and SK Square. These companies are all semiconductor heavyweights, so when there is a selloff in tech, South Korea is at the forefront. Leverage concerns in Asia, including heavy retail investment, surging margin calls and leveraged ETFs, particularly in South Korea, added to the sell off, and there were fears that contagion could trigger further volatility. For now, those fears have not been realized, and we expect to see continued stabilization in the AI trade, and in Asian indices in the coming days.

Tech sell off not driven by fundamentals

The sharp selloff across tech stocks has not been driven by fundamentals. For example, earnings growth for the S&P 500 for Q2 is expected to rise by 22%, largely driven by the tech sector. Although fears are rising about the AI trade and its sustainability, the Magnificent 7 are expected to continue to drive earnings growth this year, as they continue to ramp up capex spending on AI infrastructure. If Microsoft, Amazon and Alphabet continue to signal that they will spend big on AI when they report results in late July, then the rally may continue.

Capacity constraints bite

As we start a new week, the market will watch Apple’s share price. It fell 4% last week, but it recovered by 3% on Friday, after announcing it would substantially increase its prices due to surging memory chip costs. Concerns about the rising price of AI infrastructure, and whether that will cause demand destruction is top of the list of concerns for investors. Added to the list of worries is capacity constraints. Over the weekend, Alphabet announced that it would limit Meta’s use of its Gemini models because Meta required mor computing capacity than it could provide. This has delayed some of Meta’s AI projects, and staff have been told to ration the use of AI tokens.

This suggests two things, if you are not a full stack AI company then you could be in trouble, it also suggests that capex plans for the likes of Google could be maintained at elevated levels for some time as demand remains robust. Meta is not the only customer impacted by Meta’s capacity constraints, but it is one of the biggest. This tussle between demand and capacity constraints is why Meta is lower by 10% in the past month, and why Alphabet is lower by 12%. In the pre-market, both stocks are higher as the US tech sector is set for a broad rally at the start of the week. As mentioned above, the longer-term driver of tech, particularly AI-linked stocks in the US and South Korea, will be dependent on earnings data. The tech sell-off in recent weeks is divorced from the economic fundamentals, and the acceleration of the sell off last week was partly driven by quarter-end rebalancing, with investors booking profits after big gains for tech in Q2.

FTSE 100 flight risk

Rotation into non-tech names helped some European indices to outperform their US and Asian counterparts last week. The FTSE 100 eked out a gain, as industrials and consumer stocks outperformed. News that up to 20 of the UK’s largest listed companies could choose to dual list in the US, exposes the UK index’s weaknesses. Astra Zeneca triggered more anxiety about the UK market by upgrading its US listing. Although this happened back in February, the London Stock Exchange’s own research, released at the weekend, showed 20 other blue-chip UK-listed firms are now being monitored as a flight risk from the UK. This is not a vote of confidence in the UK and is something the new PM should address right away. Ahead this week, there are a few things to watch out for. The end of Q2 means that earnings season is on its way. Nike will report earnings this week, and investors will want to know if this helps the stock price to pick up, after falling 36% so far this year as Chinese demand remains subdued. Below, we look at three events that will determine market price action in the week ahead.

1, The US economy

This is a huge week for event risk. Firstly, there is the torrent of global economic data, including ISM and PMI reports, we also get the NFP report on Thursday, the US market is closed on Friday for the July 4th holiday, and new Fed chair Kevin Warsh is expected to speak at the ECB’s central bankers conference in Sintra, Portugal. Key data releases like payrolls have grown even more significant since Kevin Warsh has become chair of the Federal Reserve. He does not like forward guidance, so volatility around key economic releases could increase.

The market is expecting a reading of 114k for NFPs, the unemployment rate is expected to remain steady at 4.3%, and wage growth is also expected to remain steady at 3.4% YoY. There is some chatter that previous factors that boosted employment in May could wane in June, and the payrolls data could be weaker than expected. If that happens then the strong dollar narrative could be challenged, and we could see dollar weakness as we move into the end of next week. Post the June Fed meeting, there has been growing concern about underlying price pressures in the US economy.

According to the Atlanta Fed’s GDPNow model, the US economy is predicted to grow at a robust 2.5% growth rate for Q2. A strong economy and a pickup in consumer confidence is worrying the Fed, and the new Fed chair hinted that price stability is his main goal. While we believe that US inflation has peaked, and rate hike expectations will be scaled back from late summer, this is dependent on the oil price continuing to stabilize. Thus, we will be watching closely for any comments from Kevin Warsh during the ECB conference on Tuesday. While we expect him to remain guarded when giving speeches and press conferences, any sign that the recent decline in the oil price has shifted the dial for the inflation outlook could be pounced on by investors. This may weigh on the dollar and boost the outlook for stocks, including tech names in the days ahead.

2, European inflation

The preliminary reading for June inflation is the data point to watch in the Eurozone next week. The release on 1st July is expected to show headline price growth moderating to 3% from 3.2% in May, and core price growth remaining steady at 2.6%. A deeper moderation in price growth could lower the chances of another ECB rate hike. Interestingly, reduced chances of a future rate hike in the currency bloc could boost the euro and European stocks, which have been hurt by growth concerns linked to tighter monetary policy.

3, The UK: what are Andy Burnham’s plans for the economy?

The likely next PM of the UK, Andy Burnham, is set to outline his vision for the UK economy later on Monday. He is hamstrung by Starmer’s election manifesto, but this is still a major event for financial markets. Will he bow to the Labour left and raise taxes even further? If yes, the bond market might react in a way Mr. Burnham may not like. So far, he has backtracked on any suggestion that he will threaten the fragile fiscal balance in the UK, and this is why his first week as a new MP did not spook the bond market, and why Gilt yields fell sharply last week, including a 10bp drop in the 10-year yield. Yields are also mildly lower on Monday. The latest news reports suggest that he has already watered down his plans to decentralize power away from Westminster, and may not punish prosperous regions in favour of another levelling up agenda. He is expected to say that he wants to see growth in every postcode in the UK.

He is also expected to announce a 10 year growth plan, which could ease fears about an immediate nationalization agenda, or land tax reform, which could hit the south hard. The biggest announcement Burnham has yet to make is who his pick will be for Chancellor. This announcement could trigger the most volatility in the bond market. A centrist like Wes Streeting could be greeted with more warmth than Ed Miliband. However, Streeting’s lack of business experience, he was involved in local government and the charity sector before going into national politics, may dent his credibility if he is Burnham’s choice for number 11 Downing Street. Overall, the closer it gets to Burnham’s likely coronation as PM, the more scrutiny of his economic policies, and the greater the chance of volatility in UK asset prices, especially Gilts and the pound. Ahead of Burnham’s speech, the pound is stable and GBP/USD is trading around $1.32.