Global markets brace for central bank decisions and AI earnings test

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Central bank & AI earnings week

Highlights

Federal Reserve, ECB, and BOJ rate decisions this week follow recent tightening, with markets watching for inflation signals amid elevated oil prices.
Alphabet, Microsoft, and Amazon report earnings as about one-third of S&P 500 companies release results, testing sentiment around AI-driven equity rallies and heavy data center spending.
UK finance minister John Healey’s first budget may narrow fiscal headroom to around £15 billion ($20 billion) without unsettling markets, while Israel’s vote follows a 135% Tel Aviv stock market rally since October 7, 2023.

Central banks and earnings drive the week

As reported by Reuters, the coming week puts the Federal Reserve, European Central Bank and Bank of Japan in focus as policymakers deliver rate decisions, while investors also assess whether results from Alphabet, Microsoft and Amazon can sustain momentum behind the AI-driven equity rally.

The Fed, Bank of Canada and Reserve Bank of New Zealand meet on Wednesday, followed by the ECB on Thursday and the BOJ on Friday. The Fed, ECB and BOJ face no immediate pressure to raise rates after tightening last month, but officials are still confronting the risk that elevated oil prices feed broader inflation pressures.

Markets expect Canada and New Zealand to raise rates to contain inflation. Fed Chair Kevin Warsh is likely to face questions on the rate outlook, the ECB is expected to address concerns over sharply higher French borrowing costs, and the BOJ may lift its inflation forecasts in its post-meeting report.

U.S. corporate earnings also form a major test for sentiment, with Alphabet, Microsoft and Amazon reporting as investors grow more cautious about heavy spending on data centers. About one-third of S&P 500 companies are due to report, making the week important for judging whether third-quarter profit growth meets elevated expectations.

Political risks add pressure across regions

In the UK, finance minister John Healey is set to present his first budget on Wednesday as he tries to ease the burden of higher energy prices on households without alarming bond investors through higher borrowing. Reuters polling of analysts suggests he may be able to let fiscal headroom narrow to about 15 billion pounds, or $20 billion, without unsettling the market.

Larger choices on spending for defense, public services and welfare are likely to be delayed until next year. That leaves investors watching whether geopolitical pressures, including the Iran war and its effect on government borrowing costs, ease enough to give the government more room to maneuver later.

Israel's election on Tuesday is shaping up as a closely contested vote, with polls indicating neither Prime Minister Benjamin Netanyahu's Likud bloc nor an opposition centered on former military chief Gadi Eisenkot is likely to secure a majority. For markets, the vote comes after a strong rally in Israeli assets, with the Tel Aviv stock market up more than 135% since the October 7, 2023 attacks and the shekel gaining 25%.

In China, top leaders gather in Beijing for the four-day Fifth Plenum beginning Monday to discuss advancing full and rigorous Party self-governance. While framed officially as an effort to strengthen Party discipline in a more difficult external environment, the meeting also takes place as China faces weak domestic demand and persistent strains despite stimulus efforts.

Our earlier article examined the S&P 500’s push toward the 8,000 level after a midsummer rally led by AI-linked megacaps, and why the coming earnings season is a crucial test. It highlighted that higher oil prices, elevated Treasury yields, and political uncertainty could raise the bar for third-quarter results, while narrow market breadth and concentration in a few leaders increase the risk of disappointment.

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