SYDNEY- Caution gripped share markets on Monday as investors braced for a US inflation report that could force another super-sized hike in interest rates and the start of an earnings season in which profits will be under pressure.
An upbeat US June payrolls report already has the market wagering heavily on a rise of 75 basis points from the Federal Reserve, sending bond yields and the dollar higher.
Underlining the global nature of the inflation challenge, central banks in Canada and New Zealand are expected to tighten further this week.
While Wall Street did eke out some gains last week, the market mood will be tested by earnings from JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo the day after.
“Consensus expects 2Q S&P 500 EPS (earnings per share) growth of just +6 percent year/year,” says Goldman Sachs analyst David J. Kostin. “While firms will likely clear this low bar, we expect cautious commentary will prompt cuts to forward estimates.”
If the economy does manage to dodge recession, Kostin sees EPS growth of 8 percent in 2022 and 6 percent in 2023, with the S&P 500 index rising to 4,300. In a moderate recession, EPS could fall by 11 percent.
On Monday, S&P 500 futures were down 0.7 percent and Nasdaq futures off 0.9 percent. EUROSTOXX 50 futures fell 1.3 percent and FTSE futures 1.0 percent.
Chinese blue chips lost 1.9 percent after Shanghai discovered a COVID-19 case involving a new subvariant, Omicron BA.5.2.1.
MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.7 percent and South Korea 0.1 percent. Going the other way, Japan’s Nikkei added 1.2 percent.
Japan’s conservative coalition government was projected to have increased its majority in upper house elections on Sunday, two days after the assassination of former prime minister Shinzo Abe.
