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

MARKET WRAPS

Watch For:

EU Industrial Production; Germany CPI, Balance of Payments; France CPI; UK Index of Production, Trade, Index of Services, Monthly GDP Estimates; IEA Oil Market Report; OECD Harmonised Unemployment Rates; Updates from Galp Energia, Inditex, Harbour Energy, Tullow Oil, Burberry

Opening Call:

European markets face a negative start with the crucial U.S. inflation print awaited. In Asia, stocks were mixed; while the dollar, Treasurys yields, oil and gold were little changed.

Equities:

European shares are likely to open lower on Wednesday as investors prepare for the release of the latest U.S. inflation data.

The day ahead could prove crucial for markets for the near-term, with economists predicting the second consecutive reading of more than 8% annualized growth in U.S. consumer prices.

If markets see the result as far too high, it will spur bets that the Federal Reserve isn’t yet close to slowing down the pace of interest rate hikes. That could stoke a stock market selloff. If inflation comes in lighter than expected, especially with oil prices down, stocks could rally.

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

Forex:

The dollar was steady in Asia, little changed from levels it reached on Tuesday, although ongoing recession fears may spur further gains for the currency.

Robeco said the dollar will reach its peak once U.S. interest rate expectations and inflation also peak.

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

EUR/USD was still around 1.004 and Silicon Valley said while parity may just be another number, it’s a sign of how far and how quickly the euro has fallen.

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

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

It said while the euro fell to parity versus the dollar for the first time since 2002 earlier on Tuesday, the trade-weighted euro isn’t exceptionally weak.

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

Bonds:

Treasury yields nudged higher in Asia, with the curve inversion continuing to steepen. On Tuesday, the three-month yield closed at 2.1795%, just 0.7785pp away from a flat curve that many see as a predictor of recession. The gap was 1.1132pp a week ago.

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

“The next area of relevance is the -10 bp to -20 bp zone that was maintained throughout the bulk of the Nov ’06 to Mar ’07 period. The 2006/2007 episode of inversion occurred as the FOMC reached the terminal policy rate of that cycle–which was 5.25%.”

Energy:

Oil futures steadied in Asia, reversing earlier losses in a possible technical rebound, but gains are likely to be capped with prices currently still below $100.

Attempts to recover for Brent has been relatively short-lived so far, as headwinds such as global recession concerns, China’s virus situation and a surging dollar have seemingly put a cap on prices, said IG.

OANDA said the demand outlook appears like it could get slashed after the WHO late Tuesday advised governments to take steps to curb Covid-19 transmissions as the new wave progresses across the U.S. and Europe.

“All the headlines are turning bearish.”

Metals:

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

TD Securities said that after a massive liquidation, the gold market is looking to steady itself heading into the U.S. inflation report.

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

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

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Copper prices slid on fears of a slowdown in China’s economic growth, with concerns exacerbated by fresh Covid-19 lockdowns in the country, said ANZ.

Close to 30 million people are under some form of restriction as authorities seek to quell the latest outbreak, it said. The discovery of the virulent Omicron BA.5 sub-variant in the Chinese city of Xi’an has also sparked worries that the situation may get worse.

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Iron ore futures were also a touch weaker. China’s stringent zero-Covid policy and the country’s crackdown on the property sector have significantly affected iron ore demand, said BofA Global Research.

Also, the government’s recently announced stimulus might not be as effective for steel demand as in prior rounds, given a larger proportion seems to be directed toward new power-grid infrastructure and renewables, which are more copper and aluminum intensive.

TODAY’S TOP HEADLINES

China’s First-Half Exports Rose 13.2% in Yuan Terms

China’s exports rose 13.2% in the first half of the year in yuan terms from the year-ago period, accelerating from an 11.4% increase recorded in the first five months, according to data released Wednesday by the General Administration of Customs.

Imports rose 4.8% in the first half in yuan terms, picking up from a 4.7% increase in the January-May period, the customs bureau said.

Bank of Korea Raises Rate by Half Percentage Point

South Korea’s central bank has announced its first ever half-percentage-point rate increase, joining the aggressive policy tightening by the U.S. Federal Reserve and other central banks to tackle high inflation. Analysts forecast more rate increases down the road.

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

RBNZ Raises Cash Rate by Half-Percentage Point for Third Straight Meeting

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

The rate decision lifts 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 0.25%.

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

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

Barkin said that overreacting to weak growth was a hallmark of the failed policy in the early 1970s that forced former Fed Chairman Paul Volcker to slam on the brakes and bring inflation under control in 1979-1980.

EU Tech Rule Could Complicate CIO Cloud Strategy, Experts Say

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

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

UBS Promotes Khan, Hires Hassan for U.S. Wealth Push

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

The Swiss bank said it hired Naureen Hassan from the Federal Reserve Bank of New York to succeed Mr. Naratil in the additional roles he holds as president UBS Americas and the chief executive of its Americas holding company. The changes take effect Oct. 3.

Macron Shrugs Off Scrutiny of His Support for Uber in Past Role

PARIS-French President Emmanuel Macron used a vulgar expression Tuesday as he brushed aside scrutiny of his past conduct as economy minister in helping clear the way for ride-hailing app Uber Technologies Inc. to keep operating in France.

Mr. Macron came under fire from opposition lawmakers this week after French daily Le Monde and other media published reports they said were based on internal documents at Uber and text messages between Uber executives and Mr. Macron when he was economy minister between 2014 and 2016.

Google to Slow Hiring for Rest of This Year

Alphabet Inc.’s Google will slow hiring for the rest of the year, Chief Executive Sundar Pichai told employees, making the search giant the latest tech company to either pull back on new hires or trim staff.

In an email sent to employees on Tuesday, Mr. Pichai said Google would be “slowing the pace of hiring for the rest of the year, while still supporting our most important opportunities.” Google hired about 10,000 new employees in the second quarter and more who are committed to start this quarter, he added.

Microsoft and Gopuff Are Latest Tech Firms to Cut Jobs

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

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July 13, 2022 00:40 ET…