Market indecision reigns on Middle East stability concerns

• European markets uncertain as Israeli holds off on ground offensive for now
• US banks continue to dominate as we enter week two of earnings season
• UK data to dominate this week, but energy prices will be key to inflation outlook

European markets have kicked off the week on an indecisive footing, with Friday’s concerns over a potential weekend offensive in Gaza failing to come to fruition. The potential escalation throughout the region has been a key concern for markets, with Iranian commentary followed closely for signs that they will seek involvement in the event of an Israeli ground offensive. Undoubtedly, traders remain concerned that this will turn into a wider Middle Eastern conflict, further damaging the already fractious relationships in the region. Energy prices remain a key signal for markets, and today’s stability for crude highlights a tentative level of confidence that Iranian the conflict will not expand into a wider war involving Iran and the US.

This week sees earnings season ramp up following last week’s soft launch. The banking theme continues to dominate, following a raft of better-than-expected reports from the likes of JP Morgan Chase, Citi, and Wells Fargo. Outperformance on earnings and revenues provide confidence that we will see something similar this week, with Bank of America, Goldman Sachs, and Morgan Stanley set to report. Meanwhile, American Express data will provide a key gauge of US consumption and travel habits amid claims of deteriorating savings that holds negative connotations for Q4 spending.

From an economic perspective, this week sees a focus on the UK ahead of the jobs (Tuesday) and inflation (Wednesday) reports. The pound spent much of the past week trying to regain lost ground following the surprise dovish shift from the BoE. Nonetheless, the recent surge in natural gas prices will raise the possibility of a second wave of inflation, with the BoE’s stance likely to come into question should that occur. In Europe, the outlook for a relatively warm period ahead eases any immediate concerns over a drawdown in gas reserves, which thankfully appear to be filled to the brim. However, markets will remain increasingly sensitive to energy price movements going forward, with the potential for a wider conflict in the Middle East providing yet another reason to expect higher oil & gas prices.