EMEA Morning Briefing: Caution Ahead of U.S. CPI to Dent Shares


MARKET ENVELOPES

To watch:

EU industrial production; Germany CPI, balance of payments; CPI France; UK production index, trade index, services index, monthly GDP estimates; IEA Oil Market Report; OECD harmonized unemployment rates; Updates from Galp Energia, Inditex, Harbor Energy, Tullow Oil, Burberry

Opening call:

European markets are facing a negative start with the crucial release of US inflation expectations. In Asia, stocks were mixed; while the dollar, Treasury yields, oil and gold were little changed.

Shares:

European stocks are expected to open lower on Wednesday as investors brace for the release of the latest US inflation data.

The day ahead could prove pivotal for markets in the near term, with economists forecasting the second consecutive reading of annualized growth of more than 8% in US consumer prices.

If markets see the outcome as far too high, it will spur bets that the Federal Reserve is not yet close to slowing the pace of interest rate hikes. This could fuel a sell-off in the stock market. If inflation is weaker than expected, especially with lower oil prices, stocks could rebound.

“We expect equities to experience another near-term upside (upside risk) if the headline CPI is in line, slightly above or well below consensus,” wrote Chris Harvey, equity strategist at Wells Fargo.

Forex:

The dollar remained stable in Asia, little changed from the levels it hit on Tuesday, although lingering recession fears could spur further gains for the currency.

Robeco said the dollar will peak once interest rate and inflation expectations in the United States also peak.

“At the moment, the main drivers of the dollar are positive, namely interest rate differentials, growth differentials and safe-haven capital flows. As growth slows and rate expectations fall, the expensive dollar should weaken.”

EUR/USD was still around 1.004 and Silicon Valley said that while the parity may just be another number, it is a sign of the magnitude and speed with which the euro fell.

“It’s a lot for any currency to move in a short time,” he said, noting that EUR/USD was at 1.05 at the end of June. The dollar is up “essentially double digits” against all G10 currencies and it is only July.

Capital Economics said the European Central Bank is unlikely to intervene in the foreign exchange market unless there are big moves in the euro.

While the euro fell to parity against the dollar for the first time since 2002 earlier on Tuesday, the trade-weighted euro is not exceptionally weak.

“Even if the ECB wanted to intervene in the foreign exchange markets, it would be unlikely to get help from other central banks.”

Obligations :

Treasury yields rose in Asia as the curve inversion continued to steepen. On Tuesday, the three-month yield closed at 2.1795%, just 0.7785pp from a flat line that many see as a predictor of recession. The spread was 1.1132 pp a week ago.

“The combination of hawkish conviction from monetary policymakers, concerns over the economic slowdown and an emerging interest in buying duration has led to further curve compression/inversion,” said BMO Capital. Markets.

“The next relevant area is the -10bp to -20bp zone that was maintained for most of the period from November 2006 to March 2007. The 2006/2007 reversal episode occurred while the FOMC was reaching the final policy rate for this cycle – which was 5.25%.

Energy:

Oil futures have stabilized in Asia, reversing earlier losses in a possible technical rebound, but gains should be capped with prices currently still below $100.

Attempts to recover Brent have been relatively fleeting so far as headwinds such as global recession fears, the virus situation in China and the surging dollar have seemingly capped prices, IG said.

OANDA said the demand outlook appears likely to be reduced after the WHO on Tuesday evening advised governments to take action to curb transmissions of Covid-19 as the new wave progresses in the United States and in Europe.

“All the headlines turn bearish.”

Metals:

Gold was flat after stretching losses to a second day on Tuesday.

TD Securities said after a massive sell-off, the gold market is looking to stabilize ahead of the US inflation report.

However, the data could be particularly worrying for bullion, given the still significantly large long positions among proprietary traders.

Phillip Securities Research said recent dollar strength is stifling demand for the precious metal.

Copper prices fell on fears of slowing Chinese economic growth, with concerns heightened by further Covid-19 shutdowns in the country, ANZ said.

Nearly 30 million people are under some form of restriction as authorities seek to quell the latest outbreak, he said. The discovery of the virulent Omicron BA.5 subvariant in the Chinese city of Xi’an has also raised fears that the situation may be getting worse.

Iron ore futures were also a bit weaker. China’s strict zero-Covid policy and the country’s crackdown on the real estate sector have significantly affected demand for iron ore, BofA Global Research said.

In addition, the stimulus measures recently announced by the government may not be as effective for steel demand as in previous cycles, given that a greater proportion seems to be directed towards new electricity grid infrastructure and renewable energies, which are more copper and aluminum intensive.

   
 
 

THE BEST TITLES OF THE DAY

China’s first-half exports rose 13.2% in yuan

Chinese exports rose 13.2 percent in the first half of the year in yuan terms from the year-ago period, following an 11.4 percent increase in the first five months, data showed. Wednesday by the General Customs Administration.

Imports rose 4.8 percent in the first half in yuan terms, following a 4.7 percent increase in the January-May period, the customs bureau said.

   
 
 

Bank of Korea hikes rate by half a percentage point

South Korea’s central bank announced its first-ever rate hike of half a percentage point, joining aggressive policy tightening by the US Federal Reserve and other central banks to tackle high inflation . Analysts predict further rate hikes in the future.

The Bank of Korea on Wednesday raised its benchmark seven-day repurchase rate by 50 basis points – instead of its usual 25 basis points – to 2.25%, raising the rate for a third consecutive meeting and its sixth increase rates since August 2021.

   
 
 

RBNZ raises cash rate by half a percentage point for third consecutive meeting

WELLINGTON, New Zealand – New Zealand’s central bank raised its benchmark interest rate by 50 basis points for a third straight meeting on Wednesday as it tries to ease decades-high inflation , and promised further increases.

The rate decision takes the cash rate to 2.5% and is the Reserve Bank of New Zealand’s sixth increase since October, when it raised the benchmark rate from a record low of 0, 25%.

   
 
 

Fed’s Barkin wants to avoid a repeat of the stop-and-go monetary policy of the 1970s

The best policy for the Federal Reserve going forward is not to react when there is a month of weak economic growth, but to get inflation under control, Richmond Federal Reserve Chairman Tom Barkin said on Tuesday. .

Barkin said the overreaction to weak growth was a feature of the failed policy of the early 1970s that forced former Fed Chairman Paul Volcker to apply the brakes and rein in inflation in 1979-1980.

   
 
 

EU tech rule could complicate CIOs’ cloud strategy, experts say

Antitrust measures advanced last week by the European Union could derail a cost-cutting strategy used by corporate technology chiefs to buy bundles of cloud tools and software from the same supplier at a discount, according to industry experts.

The Digital Markets Act, one of two laws approved by European lawmakers last Tuesday, aims to prevent tech giants from using their size and market influence to keep customers on their digital platforms, their data tools or their business application suites, they say.

   
 
 

UBS promotes Khan and hires Hassan for US wealth push

UBS Group AG has appointed Iqbal Khan as sole head of wealth management and said the other co-head, Tom Naratil, is stepping down.

The Swiss bank said it has hired Naureen Hassan of the Federal Reserve Bank of New York to succeed Mr Naratil in the additional roles he holds as chairman of UBS Americas and managing director of its holding company Americas. The changes come into effect on October 3.

   
 
 

Macron ignores scrutiny of past Uber support

PARIS-French President Emmanuel Macron used a vulgar expression on Tuesday as he brushed aside scrutiny of his past conduct as economy minister in helping pave the way for ride-sharing app Uber Technologies Inc. to continue to operate in France.

Mr Macron came under fire from opposition lawmakers this week after the French daily Le Monde and other outlets published stories they said were based on internal Uber documents and text messages between executives of Uber and Mr. Macron when he was Minister of the Economy between 2014 and 2016.

   
 
 

Google will slow hiring for the rest of this year

Alphabet Inc.’s Google will slow hiring for the rest of the year, chief executive Sundar Pichai has told employees, making the search giant the latest tech company to pull new hires or cut staff.

In an email sent to employees on Tuesday, Mr. Pichai said that Google would “slow the pace of hiring for the remainder of the year, while supporting our most important opportunities.” Google hired about 10,000 new employees in the second quarter and more committed to starting this quarter, he added.

   
 
 

Microsoft and Gopuff are the latest tech companies to cut jobs

Microsoft Corp. is cutting a small percentage of its staff, the latest in a string of layoffs by top tech companies.

(MORE TO BE FOLLOWED) Dow Jones Newswires

July 13, 2022 00:40 ET (04:40 GMT)

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