Watching Iran and Oil, Investors Prep for Earnings

**Keith Lansford** (0:05)
Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.
I'm Keith Lanceford, and here is Schwab's early look at the markets for Thursday, July 9th. To investors, apparent chagrin, Middle East fighting resumed this week. It's an inopportune time from a Wall Street perspective as earnings season is about to start, and that typically turns focus towards corporate health and away from volatile geopolitics. PepsiCo earnings this morning and Delta Airlines tomorrow set the stage for big bank earnings next Tuesday. President Trump's declaration early Wednesday that the ceasefire is over, accompanied by US and Iranian strikes around the Persian Gulf, shifted attention back to an arena companies have no control over, raising concerns that rising oil and yields could hurt their businesses. Unless this flare up is brief, discussion on earnings calls in coming weeks could again focus on the potential impact and distract from what appears to be solid corporate growth even away from the bustling chip business. President Trump made his ceasefire comments after Iran fired on ships sailing through the Strait of Hormuz, and both countries exchanged fire in confrontations Wednesday. The Joint Maritime Information Center, a US. Navy-led coalition that works with merchant ships in the region, raised the maritime threat level from substantial to severe, according to the Marine Insight News Network. Though crude had been moving through the Strait and resupplying world markets before this week, Iran has been firing on ships traversing the Oman side of the Strait, part of an apparent effort to control shipping in the route between Iran and Oman. While President Trump said Wednesday he's not sure if the two companies can make peace, negotiations that halted this week for the funeral of Iran's former Supreme Leader hadn't been cancelled as of late Wednesday, and Trump said he doesn't believe the war will start again even while threatening new attacks. Despite the ceasefire's disruption and renewed Middle East hostilities, volatility stayed relatively in check Wednesday, suggesting market participants aren't convinced the war is back on in any long-term way. The CBO Volatility Index, or VIX, initially climbed double digits yesterday morning to above 18, then fell over the course of the session to below 17 VIX never tested levels near 20 that typically mark dramatically higher uncertainty. A move in that direction might be notable if it happens. VIX remains the measure to watch in coming days. Besides war and the start of second quarter earnings, investors appear concerned about potential central bank rate hikes and possible choppiness this fall approaching the US midterm election. If the futures market is right, those who think volatility is cheap now may not see it much cheaper. When the market appears weak, investors often purchase more options as a form of protection, without raising implied volatility.
Turning to monetary matters, minutes from the Federal Reserve's June meeting showed half of policymakers expecting at least one rate increase this year and six expecting at least two. Some thought a hike might be warranted as early as June, though none voted for one. The takeaway appeared to be that upside risks to price stability remained elevated, while downside risks to achieving maximum employment had moderated a bit, the minutes said. Next week brings more Fed headlines as market participants await Tuesday's semi-annual congressional testimony by Warsh. This gives legislators a chance to probe Warsh live on television to glean his thoughts on future policy, though he's typically played public appearances close to the vast. One question Warsh may have to handle is related to inflation expectations which rose to their highest level in almost three years last month despite falling oil prices at the time according to the latest New York Federal Reserve Consumer Survey. Typically under former Fed Chairman Jerome Powell, inflation expectations were front and center. Powell often talked about the importance of keeping those worries in check and Warsh, an inflation hawk in his previous Fed tenure, may have similar feelings.
PepsiCo kicks off the unofficial start of earnings season this morning after beating expectations last time out thanks in part to solid snack sales. At that time, the company also reiterated its full year forecast, the cited volatility and uncertainty related to the Iran situation. It now may face the same geopolitical risk as could Delta, which reports Friday. Airline stocks were among the hardest hit yesterday by resumption of Middle East hostilities and rising oil prices. For PepsiCo, snack sales remain in focus as investors wait to see if the lower prices instituted earlier this year kept consumers crunching. Delta might have benefited from the so-called K-shaped economy that generally kept spending solid among higher income consumers. The airline industry hasn't lowered fares despite the recent drop in oil prices. Next week brings earnings from the largest US banks, chip industry giants ASML and Taiwan Semiconductor Manufacturing and June inflation data. Speaking of data, weekly mortgage applications declined 2.2% from the prior week according to Wednesday's MBA Mortgage Applications Index. Today features initial weekly jobless claims before the open, seen at 220,000 according to Consensus from briefing.com. That's up slightly from 215,000 the prior week, but well within the long-term range. Existing home sales for June are due soon after the open today and also are seen sticking relatively close to recent numbers. The Consensus is for a seasonally adjusted annual rate of 4.2 million, as briefing.com said, up from May's 4.17 million. The mortgage rates remain high. Recent housing data showed some leveling off of prices and a slight rise in available homes.