Oil, QE, Iran vs West, EU economic data – Interesting week ahead of us

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iran air flight 655 us navy
Iranian Revolutionary Guards drive speedboats in front of an oil tanker during a ceremony to commemorate the 24th anniversary of the downing of Iran Air flight 655 by the US navy, at the port of Bandar Abbas. The plane was shot down by the US navy's guided missile cruiser, USS Vincennes, on July 3, 1988, killing 290 civilian passengers and crew members. Photo - Atta Kenare/AFP/Getty Images

The start of the week saw the EU sanction being put in place against Iran and that was just a precursor of the events that were to follow.

This week is considered important, if not huge, for the crude oil market with talks of a third round quantitative easing (QE) from the US in order to stimulate the economy, the rise in tensions between Iran and the West, the decision by European Central Bank and the release of economic data. Breaking down all of these events, market expectations can be gauged regarding each event and all of them can be analysed in context to the market sentiments present.

Before the 1st of July, a stimulus by the Federal Reserve was expected. The quantitative easing will be in direct response to the slowing down of the US economy that has been seen over the past few quarters. The rise in unemployment rate, the fall in manufacturing and consumer confidence has proved to be a speed bump for the economy which was growing steadily and it has raised concerns over a slowdown in the following quarters. Many market analysts expect a stimulus to come soon on the back of corresponding economic data being released in Europe and China. The fall in manufacturing and production has taken its toll on oil prices bringing them down to a new low of $78/barrel. Already 2 rounds of QE have been implemented to sustain the economic gains and a third one is expected by the end of this week.

The 1st of July saw the imposition of EU sanctions against Iran based on the nuclear programme being carried out and was meant to be a deterrent. The economic sanctions are the toughest imposed on the country yet and it is expected that after using diplomatic means, the next step was to strangle the economic writ by putting necessary limits in order to coerce the desired result. The markets responded with oil reaching $85/barrel before the week started in response to the sanctions. On 2nd July, Iran tested its mid range missiles with nuclear warhead capabilities which have the ability to reach Israel. These came as a warning shot to the West with oil reaching $87.85/barrel on 3rd July and relations expected to worsen in the coming period of time.

The EU Summit that took place over last weekend proposed the use of the European Stability Mechanism Fund for the recapitalisation of the troubled Spanish banks based on a subordinated equity structure. The proposals saw a positive reaction from the markets. The ECB now meets on Thursday to formalise the proposals and the signal would determine how the investors react. At this point, it is expected that the ECB would quell the concerns of the investors by providing the necessary liquidity required. This is expected to be beneficial for commodities as well as capital markets. Lastly, unemployment data is set to be released by the Bureau of Labor Statistics on Friday which is expected to point towards a higher unemployment in the month of June which will further speed up the stimulus that is on the table right now.

The quantitative easing is becoming more and more likely now as markets around the world are gaining ground slowly, expecting the announcement to come sooner rather than later. Investors expect a stimulation package to boost manufacturing and production around the world. The tensions between Iran and West might be thawing based on recent diplomatic summit with major stakeholders wanting to calm down the situation on the backs of military exercises and EU sanctions. The rhetoric out of the summit seems to be positive with all parties looking for a middle ground to reach.

The ECB will pass the proposals presented in the EU Summit as there is little opposition from any side. The proposals got the approval from the leaders and investors last Friday and they are expected to be passed. In addition, the economic data to be released also point towards a response to the economic slowdown and appropriate response to be put in place by the Fed. Summarising the effects of all these into one position for the investor to take is difficult. However, one thing that can be agreed upon is the fact that there are interesting times ahead especially for the oil market. Any movement that can either compliment the recent gain in value or break the trend is set to start before this weekend.

Zain Naeem is the head of equity research at Maan Securities (Pvt) Ltd. He is a Lahore-based commentator with more than 3 years of experience in trading and research at the Karachi Stock Exchange and Lahore Stock Exchange. He enjoys writing and commenting on the finance front and presenting it to various audiences in different forums. Zain is deeply interested in politics, business and finance and is fascinated at how the three intermingle with each other.

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