April 17 (Reuters) – Financial markets are in a buoyant mood as U.S. President Donald Trump signals confidence that the war in Iran will end soon, with talks probably on the cards again this weekend.
The optimism may be tested by a batch of data likely to show stuttering business activity and growing price pressures, alongside a potentially bruising Congressional grilling for the Federal Reserve’s prospective new chair.
Here’s all you need to know about in the week ahead in financial markets by Lewis Krauskopf in New York, Gregor Stuart Hunter in Singapore and Amanda Cooper, Alun John and Marc Jones in London.
FED CHAIR, HOT SEAT?
Investors will learn more about Trump’s pick to lead the Federal Reserve when the former Fed governor Kevin Warsh appears before Congress for his confirmation hearing on April 21.
Warsh steps into a tricky backdrop to achieve Trump’s desire for lower rates, with the Iran war’s energy-price surge driving concerns about higher inflation. Fed funds futures have swung from pricing in two quarter-point cuts by December to virtually none since the war started in late February.
Trump has openly vented his frustration at current Chair Jerome Powell for not lowering rates more. This week, he escalated his pressure campaign, threatening to fire Powell from his separate Fed board seat if he doesn’t leave when his term as Chair ends on May 15.
Elsewhere, Tesla headlines a packed for U.S. corporate earnings, while March retail sales data could shed light on whether higher prices are hurting consumer spending.
BARREL HALF-FULL, OR HALF-EMPTY?
Iran remains the dominant market risk as the U.S. and Pakistan talk up the prospects for a deal to end the conflict and open the crucial Strait of Hormuz.
Stocks, especially in the U.S., are betting on a happy outcome. The S&P 500 has bounced back to record highs, and, despite worries about Japan’s heavy reliance on energy imports, the Nikkei is also at a record.
Traders are wagering that peace will allow a rerun of the pre-war playbook where strong earnings supported stocks.
Oil markets are less convinced. Benchmark Brent crude may be below $100 a barrel, but not by much, and it’s still 33% above late February levels. Even more striking, prices of physical crude for delivery are at records.
Should talks fail to open the Strait, energy prices will remain high, forcing central banks to keep borrowing costs elevated and threatening corporate earnings.
A GLOOMY SPRING
The coming week brings a first look at how companies around the world were coping as the Iran war passed the one-month mark in April. Surveys for March showed a steep rise in input costs and a slowdown in overall business activity, as firms everywhere grappled with volatile energy markets, disrupted supply chains and a dizzying news cycle.
Even though oil prices have eased, the threat of a global inflation shock has diminished, but not disappeared.
First-quarter earnings, especially in imported energy-dependent Europe, are showing airlines, retailers and manufacturers grappling with deep uncertainty that could weigh on profits.
The United States, a net energy exporter, is relatively insulated but not immune from the effects of higher fuel prices. Investors will look closely at the prices and employment components of the upcoming purchasing managers’ indices (PMIs) for signs of stress.
Inflation figures from Japan, Britain, New Zealand and Canada are also unlikely to paint a pretty picture.
ASIA FEELS OIL PINCH
Central banks in emerging Asia will feel the pinch too. China sets its loan prime rate on April 20, though analysts see the central bank keeping its benchmark unchanged through the end of the year as the economy regains momentum. Even if growth is expected to cool as the effects of the Middle East crisis hit corporate profits and overseas demand, Asia’s largest economy is still better off than many.
Bank Indonesia, which meets on April 22, must defend a rupiah that has recently fallen to record lows. The central bank governor recently said it needs a recalibration of policy to support financial market stability. Meanwhile the Philippines’ central bank, which meets on April 23, has warned of ‘spillover effects’ after inflation accelerated in March and breached policymakers’ target range.
THE BIG 4-0
Turkey’s central bank holds one of its most consequential policy meetings on Wednesday, providing a litmus test of its commitment to orthodox monetary policy.
Given its huge dependence on imported energy, the country has been among the hardest hit by the economic blowback of the Iran war. It burned though nearly $50 billion of its reserves to keep the lira stable last month and been one of the few nations to see its credit rating outlook cut.
The prospect of a durable ceasefire will certainly be part of the discussion. But with inflation still likely to be nearly 30% by the end of the year now according to economists, the likes of JPMorgan and Bank of America expect rates to be hiked 300 basis points back to a bruising 40%.
(Graphics by Mayank Munjal, compiled by Samuel IndykEditing by Shri Navaratnam)
