Markets Brace for High-Stakes Week: Earnings, Inflation, and Oil Prices in Focus

In the coming week, Wall Street is set to face its biggest test of the year as Q2 earnings season gains momentum, amid significant economic data drops from the U.S., China, and the U.K., along with an expected surge in oil prices.

In the spotlight, leading the earnings march, is electric vehicle pioneer Tesla, kicking off the reporting season on Wednesday. Tesla is part of the "Magnificent Seven," a group that also includes Apple, Microsoft, Alphabet, Amazon, Nvidia, and Meta Platforms, which have spearheaded the U.S. stock market boom this year. This star-studded group, whose shares have skyrocketed between 40% and over 200%, is responsible for almost the entirety of the S&P 500's rally. With such lofty growth, any underperformance could pack a severe punch to equity indexes.

Meanwhile, other major players like Bank of America, Goldman Sachs, Johnson & Johnson, Netflix, and Philip Morris are also set to disclose their numbers, keeping investors on their toes.

On the domestic economic front, the U.S. retail sales data for June, due Tuesday, are projected to report a 0.5% increase, bolstered by auto and gasoline station sales, painting a picture of a resilient consumer demand. Housing sector indicators, alongside data on manufacturing activity and jobless claims, will also be in focus.

On the other side of the Pacific, China is grappling with an economic slowdown, as its post-pandemic recovery appears to be waning, fueling expectations of impending stimulus measures from Beijing. Key indicators like GDP growth and manufacturing data due on Monday will provide further insight into the health of the world's second-largest economy.

Meanwhile, the Bank of England is keeping a close eye on U.K. inflation data set to drop on Wednesday, which could heavily influence the size of its next rate hike. While the headline CPI is expected to moderate, consistent inflationary pressures, especially in the services sector, could push the central bank towards a heftier rate increase in August.

Finally, oil markets are prepping for another rally, as easing inflation, supply disruptions, and plans to refill the U.S. strategic reserves underpin prices. Despite a minor setback on Friday due to a strengthening dollar and profit-booking by traders, oil prices could be "grinding higher," as per Rob Haworth of U.S. Bank Wealth Management.

Market events

Japan is observing Marine Day, and the markets are expected to be closed, limiting the liquidity of JPY.

A series of Chinese economic data is due for release. A decline in the YoY Fixed Asset Investment and Industrial Production could indicate a slowdown in economic growth, potentially weakening the CNY. However, a forecasted increase in GDP (QoQ and YoY) could offset these effects if the numbers come in as predicted. An unexpected shift in the Chinese Unemployment Rate could also impact the CNY, with an increase possibly leading to a depreciation.

Indonesia's Trade Balance is expected to post a significant increase, which could strengthen the IDR as it indicates higher demand for Indonesian exports.

The Italian CPI is forecasted to remain unchanged on a MoM basis. A significant deviation from the forecast could impact the EUR. Also, a speech from ECB President Lagarde will be closely watched for any hints on future monetary policy, which could cause EUR volatility.

The Turkish budget balance for June will be released. An improvement in the budget balance could support the TRY, while a deficit could pressure it.

For Brazil, the IGP-10 Inflation Index will be closely watched, especially after the previous month's negative figure. A return to positive territory could strengthen the BRL. Also, the BCB Focus Market Readout could provide insights into the country's economic outlook, potentially influencing the BRL.

The NY Empire State Manufacturing Index is expected to drop significantly, which may weaken the USD if the forecast is accurate. However, stronger-than-expected data could lend some support to the currency.

Canada is expected to release data on Foreign Securities Purchases and Wholesale Sales. An increase in foreign securities purchases would imply greater demand for the CAD, potentially strengthening it. Meanwhile, a recovery in the Wholesale Sales figure could also support the CAD, suggesting improved domestic demand.

Investors are advised to watch these data points closely as they could induce significant volatility in the respective currencies and wider financial markets.

In short, the coming week promises to be a roller coaster ride for investors, with high-stakes earnings reports and significant economic data releases offering a litmus test of the global economic recovery.