Key takeaways

• Delayed reaction to payrolls report for US
• USDJPY intervention risk
• Opec supply boost weighs on oil price
• EasyJet takes the transatlantic route
• US data watch
• South Korean chip makers in focus

The Week Ahead: EasyJet full of wonder at new offer, as earnings season kicks off Financial markets are reflecting the mood of England fans this morning, European stock indices have opened on a positive note and US equity futures are expected to follow suit. The dollar is rising against the yen, and USD/JPY is back above 162.00, which means there is a higher chance of more intervention from Japanese officials to stem yen weakness. There have been no big market-moving stories over the weekend, aside from EasyJet’s likely takeover by Castlelake, its share price is higher by 10%. The Strait of Hormuz remains open, the start of earnings season kicks off in the next few days, and the World Cup is dominating the news after England’s emphatic march into the quarter-finals.

Payrolls to get priced in by the US

At the start of the first full trading week of Q3, news that the US jobs market is softening is still being digested. Payrolls grew by 57,000 last month, and there were downward revisions for the two months prior. Combined with the ongoing decline in the oil price, Brent crude is back below $72 per barrel, this has dramatically reduced the chance of a Fed rate hike in the near term, although cuts also appear to be off the table. After the soft labour market data, the FOMC minutes this week will be worth watching as the battle between FOMC members who are worried about sticky inflation, including the new governor Kevin Warsh, and those who are worried about the jobs market, continues to play out.

AI trade hits a road bump

Last week’s market moves were notable for a few reasons: 1, much weaker than expected payrolls for June, combined with Kevin Warsh’s comments that inflation expectations are falling, should ease fears of a Fed rate hike, however, Treasury yields still rose last week. The 10-year Treasury yield rose by 11bps,which is worth watching. However, Treasury yields could retreat on Monday, as US bond markets were shut on Friday for the 4th July holiday. So far, European yields are flat, which suggests the bond market may look to the US for direction later today. 2, Major US indices like the Dow Jones, the S&P 500 and the Nasdaq all extended gains and were close to record highs at the end of last week, even though the AI trade hit a speedbump.

Opec boost to oil supply weighs on crude

Deflating oil premiums continue, as the ceasefire holds in the Middle East, and Opec have agreed to boost output once targets by another 188,000 barrels. This is adding to excess oil supply and could keep downward pressure on the price of oil. and talks to ensure a longer-term peace are continuing as we start a new week. The key factor for financial markets is the Strait of Hormuz. For now, the Strait is operational and there have not been incidents that could close it to traffic. This is one reason why the oil price fell more than 1% last week, and Brent crude is trading in the low $70s. This is a welcome respite for the global inflation outlook, and ultimately it could keep a lid on rate hikes across the globe, regardless of how hawkish the FOMC minutes are. As we mentioned, although major stock indices had a strong week and posted gains, there was more turbulence under the hood, particularly in the AI trade.

The semiconductor sector remains volatile at the start of Q3, after an incredible performance in Q2. While a pullback is to be expected, it is worth noting that July tends to be a bullish month for equities on a seasonal basis, so the volatility in some AI names may not signal the top for the AI trade. There are two developments that triggered last week’s near 6% decline in the Philadelphia semiconductor index. Firstly, news that Apple can now buy memory from China. This sent shockwaves through some of the memory chip makers that are listed in the US. SanDisk fell 13% last week, Micron was lower by 14%, and Intel, another big name in the memory space, also fell 6.5%.

The index, which includes names like Nvidia, AMD and Arm Holdings, is higher by 76% YTD, so the recent moves look like a pullback, rather than a capitulation, but it does suggest that the easy gains for the AI trade might have already been made. While the Apple news is worrying for some of the US’s biggest memory chip makers, it could also boost the inflation outlook and it may prevent multiple price rises from Apple. The second development was news that Meta is starting to sell its AI compute. Essentially this means that 1, it has overbought during the hyperscaler capex boom, which may suggest that we are near the peak of AI investment, and 2, AI infrastructure is so expensive these days, selling it could be a lucrative revenue stream for the social media giant. Ahead today, we will be watching to see if fears that we are at peak AI spend continue to weigh on the semiconductor names and the memory chips, or if chip stocks will rally on the back of falling US rate hike expectations.

EasyJet takes the transatlantic route

EasyJet’s share price is surging on Monday, and is above 10%, after the board said that an outline offer had been agreed with private credit firm Castlelake, to the budget airline private. After multiple rejected offers from Castlelake, the £6.90 per share offer seems ot have hit the spot. This values EasyJet at £5.5bn, and Castlelake now has until August 3rd to make a firm offer. This takeover could ignite more arguments that American firms are picking up iconic UK brands on the cheap. 7 EasyJet’s share price has fully recovered from its sell off after the start of the Iran war, but it has never recovered back to its pre-Covid highs, when the company was trading at £14 a share.

Thus, time may have run out for EasyJet executives to boost the share price internally, leaving a takeover the most likely option. EasyJet is a relatively small US firm these days and is listed on the FTSE 250. While it is a loss for the mid-tier UK stock market, what is a bigger issue is that EasyJet is an iconic British aviation name that is now in US hands. This deal is symbolic, as it suggests a lack of stock market growth, and persistent underperformance of UK equities means that there is a massive for sale sign above US corporates. Ahead this week, economic data is fairly light, but the start of Q2 earnings season will be critical for the direction of stocks in the coming days

1, South Korean chip makers in focus

The South Korean index has been grabbing the spotlight this year, after a 90% gain YTD for the Kospi. The index has wobbled in recent days as semiconductor stocks sold off, however, this week could see a different set of challenges. Chip maker SK Hynix will start trading in the US as a secondary listing from Monday. The company aims to raise $28bn, which will be another test of demand for AI stocks. Added to this, Samsung will report results on Tuesday. It is expected to post an 18-fold jump in profits and Q2 is expected to be the third straight record quarter for sales. Q2 revenues are expected to come in at $56.3bn, it may also post strong forward guidance, which will be key for investors, as demand for memory is likely to remain robust into next year. Samsung is a key supplier for Nvidia, Google and Apple, so if it does deliver strong forward guidance, this could rejuvenate the AI semiconductor trade as it would suggest that we are not yet at peak AI capex spend.

2, US ISM services sector PMI

After the weak jobs data last week, the focus is on how strong the US economy is once you strip out the AI spending boom. One way to gauge this is with the US ISM service sector. The market is expecting a slight moderation from 54.5 to 54.0 for June, all eyes will be on the employment component and the new orders, if they show a decline, then it could signal that the US economy is slowing, which may not be good news for equities as it would suggest that the wider US economy is not keeping pace with the AI boom. This could halt some of the rotiation that we have seen into other sectors of the market such as healthcare and some consumer stocks. The Atlanta Fed GDPNow estimate of Q2 GDP moderated sharply last week from 2.5% to 1.2%. Although this is an envious growth rate compared to most of Europe, it still needs to be watched closely, and it suggests that the slowing laboru market is reflective of a deeper moderation in the pace of economic activity in the US.

Octalas AI

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