Earnings Dominate but Commodities Remain in Focus

U.S. indices are expected to open higher on Thursday, tracking gains made in Europe as earnings season continues to dominate, while commodities remain largely in focus and Greece votes to pass further reforms needed to begin negotiations on its third bailout.

Commodities have seen widespread selling as of late, with the strong U.S. dollar being a particular hindrance as it makes them more expensive to holders of other currencies. There is a fairly strong inverse correlation between the dollar and commodities as a result and that is contributing largely to the recent decline.

Of course there are other factors feeding into the sell-off. For example, Gold has seen strong selling pressure this week, the lack of inflation, prospect of higher interest rates in the U.S. and weaker physical demand in China all weighing on the price. Oil, meanwhile, took another hit yesterday due to a larger-than-expected build in inventories.

In Greece, another vote on reforms passed with relative ease which will allow Greece to enter into negotiations with its creditors on a bailout that has already been agreed in principal for around €86 billion. Once again, Prime Minister Alexis Tsipras was forced to rely on the support of opposition lawmakers, although there were slightly fewer dissenters within his own party than at the first vote.

Regardless, with Tsipras appearing to have lost the support of many of the far left within his own party, more elections are looking increasingly likely. However, this is not likely before September at which point the country’s third bailout should have been agreed and all necessary reforms passed into law. Any elections prior to this could create turmoil in the markets again as it would cast doubts on a deal being reached.

The European Central Bank has recently started increasing the amount of liquidity it offers to Greek banks again, raising the ceiling again this week by €900 million. Any fresh elections before the bailout is agreed could prompt them to again freeze the amount it is willing to offer as the risk of the bailout falling apart would rise. As mentioned though, this is unlikely which is why the markets are far more relaxed on Greece than they were only a few weeks ago.

Focus is very much on earnings season now with investors looking for evidence that the US economy is on a strong sustainable path. The appreciation in the dollar over the last year – dollar index up a little more than 20% – remains a strong headwind for US companies, particularly exporters and multi-nationals who’s profits abroad are being eroded by the strength of the dollar. There are a number of big companies reporting again today, including Amazon, Caterpillar and 3M among others. Earnings are likely to be a key driver of market sentiment in the coming weeks, while people will also look to these for evidence that it is too soon for the Fed to hike interest rates, with the stronger dollar being key to this. Any rate hike is likely to strengthen the dollar further, creating even more difficult conditions for many U.S. companies.

This week has been pretty quiet for economic data but there are a couple of notable releases today. U.S. jobless claims are due ahead of the open and are expected to fall slightly to 280,000 from 281,000 last month. Shortly after this we’ll get the preliminary eurozone consumer confidence reading for July, which is seen falling slightly to -5.68.

The S&P is expected to open 3 points higher, the Dow 21 points higher and the Nasdaq 12 points higher.

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.