Shares unsettled as oil climbs, earnings loom for AI

SYDNEY – Shares slipped along with bonds on July 20 as the escalating conflict in the Gulf lifted oil prices and fanned fears of inflation, while a packed week of major tech earnings results will further test investor faith in the AI trade.

Brent crude climbed above US$90 a barrel for the first time in more than a month as the US military started a ninth straight day of attacks against Iran, which in turn struck targets across the region.

Brent added 2.4 per cent to US$90.18 a barrel, while US crude rose 2.1 per cent to US$84.18.

Just a handful of ships transited the Strait of Hormuz on July 19 and Tehran claimed to have hit two.

“The longer the strait remains closed and the war escalates, the greater the risk that oil prices will have to rise to around US$150 per barrel to bring demand down to match the hit to supply,” said Shane Oliver, head of investment strategy at fund manager AMP. “This is not our base case, but it’s a high risk again.”

The jump in fuel costs has revived worries about inflation even as US consumer price data surprised on the downside last week, leading futures markets to price in 29 basis points of US Federal Reserve rate hikes by the end of 2026.

“Our forecast is for a more gradual turn towards a Fed hike in 2027, but the balance of risks is shifting in the direction of an earlier hike than expected,” said Bruce Kasman, chief economist at JPMorgan, noting a recent hawkish tilt in Fed policy rhetoric.

Futures imply a 60 per cent chance of a rate rise as early as September, pushing yields on 30-year Treasuries back above the psychological 5 per cent barrier.

This is a level that tends to attract funds away from equities and towards fixed income, while lifting the valuation bar for future corporate earnings.

The shift has come just as investors question sky-high valuations for chip and AI stocks, which saw the Philadelphia Semiconductor Index shed 10 per cent last week to leave it 20 per cent down from June’s record high.

Lofty expectations for earnings

Markets took an added blow on July 17 when Chinese artificial intelligence firm Moonshot AI said it had a new open-weight model, Kimi K3, that it says delivers performance approaching US giant Anthropic’s frontier Fable model.

All of this raises the stakes for this week’s rush of profit results, which include Alphabet, Intel and Tesla.

Bank of America analyst Savita Subramanian remains upbeat on the earnings outlook, tipping a 5 per cent beat versus consensus, or 28 per cent growth.

Tech is expected to drive more than half of growth, with semiconductors expected to rise around 130 per cent year on year.

Such forecasts helped S&P 500 futures hold steady, while Nasdaq futures edged up 0.1 per cent.

In Europe, EURO STOXX 50 futures were little changed, while DAX futures and FTSE futures eased 0.1 per cent.

Japan’s Nikkei was closed for a holiday, having shed 6.4 per cent last week in a tech-led rout.

MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.3 per cent, while Chinese blue chips rose 1.4 per cent.

South Korea’s chip-heavy market lost a further 4.1 per cent, after diving almost 9 per cent last week in wild trade as retail investors were squeezed out of leveraged positions.

The latest spike in oil will be a headache for the European Central Bank, which meets on July 23 and is considered likely to hold rates at 2.25 per cent following June’s hike.

Attention will be on policymakers’ guidance, with markets almost fully priced for a rise at the Fed’s September meeting and rates of 2.75 per cent by early 2027.

The euro was flat at US$1.1442, having spent more than a week trading between US$1.1377 and US$1.1482.

The yen was steady at 162.36 against the US dollar, just below the recent 40-year peak of 162.84 yen as the Japanese authorities flag the threat of intervention should the yen weaken quickly.

The sterling held at US$1.3462 as bond markets waited for Britain’s incoming prime minister Andy Burnham to name a new treasurer.

In commodity markets, the rise in yields pressured non-interest-paying gold, which fell 0.1 per cent to US$4,013 an ounce. REUTERS