MARKET WRAPS
Stocks:
European stock markets managed to claw back early losses to
trade just in positive territory, although economic worries
continued to weigh on investor sentiment.
At the heart of investor concerns is the fact that inflation
remains at a multi-decade high, which makes the Federal Reserve and
other central bank poised to continue aggressively boosting
interest rates and tightening monetary policy. The risk is that
raising borrowing costs to dent economic demand could spur a global
recession.
"If you want the good news this morning it's that [the first
half of the year] is now finally over," said Jim Reid, a strategist
at Deutsche Bank.
"If you want the bad news it's that there's not much good news
around as we start [the second half] and U.S. equity futures are
already down...in the first few hours of the new half year."
Economic Insight:
Credit Suisse has forecast eurozone GDP growth of 2.4% in 2022
and 0.7% in 2023, well below the consensus of 2.8% and 2%,
respectively.
Inflation is likely to combine with rapid European Central Bank
tightening and deteriorating external demand to weaken consumption
and investment growth, Credit Suisse said, adding that inflation is
likely to rise further and surprise on the upside, forecasting the
headline figure to average 7.5% this year and 3% next.
"A recession is now a clear possibility, although still not a
given."
Credit Suisse said high excess savings and easier fiscal policy
should help prevent a recession but there are still potential
triggers such as Russian gas cuts that would lead to rationing.
U.S. Markets:
Stock futures were sliding as investors entered the second half
of 2022 with the same fears that made the first half the worst
start to a year since 1970: Higher inflation, higher interest
rates, and a higher risk of a U.S. recession.
In bond markets, the yield on the benchmark 10-year Treasury
note ticked up to 2.989% from 2.973% Thursday.
Shares of Kohl's fell more than 17% in premarket trading after
CNBC reported the company terminated talks with Franchise Group,
owner of The Vitamin Shoppe. CNBC's report cited two people
familiar with the matter.
Barron's has reached out to Kohl's and Franchise for comment on
the CNBC report.
Forex:
The dollar, recently 0.3% higher against a basket of currencies,
will continue to outperform as widespread risk aversion drives
investors toward safe havens, said MUFG Bank. It said the dollar's
strength has intensified as fears over weaker global growth
mount.
"It is difficult to envisage any turn to more favorable market
conditions."
The upcoming earnings season could show worse profits and
guidance as companies may no longer see recently robust margins as
sustainable, said MUFG. Rising natural gas prices due to the war in
Ukraine could also worsen investor sentiment.
---
Sterling will remain highly sensitive to global investor risk
appetite as the U.K.'s external deficit is worsening, said MUFG
Bank.
Sterling tends to perform poorly during periods of risk aversion
and data on Thursday that showed the U.K. had a record current
account deficit in the first quarter suggest the currency's
underperformance could continue as financial market conditions will
remain challenging in coming months, said MUFG.
"The overall external position is worsening which leaves the
U.K. more vulnerable at times when risk aversion becomes elevated
and capital flows can diminish as investors pull back from
financing."
Bonds:
Bond yields were slightly lower in early trading and Citi is
leaning to the view they may have peaked. "It feels like yields may
have peaked but we've been here before and there are reasons to be
anxious."
German Bunds remain very sensitive to spot inflation data but
have now overshot softening medium-term inflation anchors by a
distance, Cit said. It finds a trading range of 1%-1.5% for the
10-year Bund yield fairer than a range between 1.5%-2%.
---
Societe Generale remain bearish on German Bunds, targeting the
10-year yield at 2% in the second half of the year, on assumption
that the European Central Bank's hawkishness hasn't peaked yet.
Furthermore, if fiscal policy in the eurozone continues to
stimulate demand instead of prioritizing targeted and supply-side
measures, "the ECB eventually may be forced to hike rates above the
neutral level."
SocGen added that this isn't priced in by the market
currently.
---
The narrowing of the 10-year Italian BTP-German Bund yield
spread by more than 40 basis points and the more-than 80bp drop in
the 10-year BTP yield since the ECB's ad hoc meeting without the
central bank buying yet more BTPs seems encouraging, said
Commerzbank.
This tightening, however, also underscores the risk of setbacks
if the ECB fails to meet high expectations about its planned
anti-fragmentation tool at the July meeting, they add.
While Italy could still afford higher yields, investor sentiment
will be crucial as Italy will have to attract new investors again
next year, said Commerzbank.
---
The ECB will start applying flexibility in PEPP reinvestment
allocations as of July 1, but this flexibility might not be
sufficient to prevent a continued widening of country spreads, said
Societe Generale.
It considers a frontloading of reinvestments unlikely, while
reallocating all redemptions from core countries to peripheral
countries seems difficult to implement in practice.
The ECB's planned anti-fragmentation tool, details of which are
expected to be unveiled at the July policy meeting, is likely to
slow down spread widening and help control spread volatility, which
is a pre-condition before raising interest rates, SocGen said.
Energy:
Oil futures were lower and remained on course for their third
consecutive weekly loss, as recession fears continued to weigh on
demand.
Concerns are rising that central bank tightening and soaring
inflation will weigh on global growth and push the U.S. and other
major economies into recessions, reducing demand for oil.
"The inter-week collapse in oil price reflects growing
recessionary concerns," said SPI Asset Management. Oil prices have
risen too quickly and mounting risk of a recession is putting a cap
on prices, SPI said.
Read: Putin Orders Sakhalin Energy to be Transferred to New
Russian Company
Read Barrons.com: Putin Steps Up Natural Gas Restrictions for
Europe
Metals:
Copper and gold prices were weaker, with safe-havens such as the
dollar and bonds boosted, as markets remained risk off.
Copper prices were at their lowest level since February 2021, as
recession fears continued to hit demand for the red metal.
"Recession concerns have gained the upper hand and weighed on
metals prices," said Commerzbank. "The LME base metals index has
plunged by 25% in the past three months and finds itself at its
lowest level since April of last year. This was also the most
pronounced quarterly loss in nearly 14 years."
Silver prices remained down over 13% from the start of the year
and at their lowest level since July 2020 and UBS expects the metal
to test pre-pandemic lows amid "rising U.S. rates, a stronger
dollar and increasing U.S. recession risks."
UBS said: "We think fundamental conditions are also falling into
place for silver prices to reach pre-pandemic levels. In short, we
expect prices to test $19 an ounce."
UBS advised against adding silver exposure and "to hedge their
long silver positions over the next six months."
Other News:
Fitch said iron ore prices may moderate in the second half as
steel inventories have been building up.
"The longer it takes for construction and manufacturing sectors
in China to reopen, the more likely it is that steel margins will
come under pressure and some capacity is curtailed, putting
pressure on iron ore prices."
DOW JONES NEWSPLUS
EMEA HEADLINES
EU Targets Foreign Subsidies, Aiming at China but Worrying U.S.
Companies
BRUSSELS-European Union lawmakers struck a political agreement
on new rules for companies that reap financial benefits from
governments outside the bloc, pushing forward a proposal that
sparked concern from some U.S. business groups.
The regulation, under a deal reached late Thursday, primarily
targets companies from China and elsewhere with government backing.
It would allow the European Commission, the EU's executive body, to
block such businesses from making certain acquisitions or winning
large public contracts if they previously benefited from foreign
subsidies that regulators deem to be distortive.
Siemens Investment in Siemens Energy Could Hurt 3Q Earnings by
EUR2.8B
Siemens AG said Thursday it could see a non-cash impairment of
about EUR2.8 billion ($2.92 billion) on its investment in Siemens
Energy AG.
Siemens AG said that, with the closing share price of Siemens
Energy on Germany's Xetra, the market value of Siemens AG's 35%
investment in Siemens Energy is significantly below the book value.
Siemens Energy shares Thursday closed at EUR13.99, down about
4.3%.
Sodexo Backs Full-Year Guidance After Strong 3Q
Sodexo SA on Friday backed its guidance for the financial year
after reporting a strong third quarter.
The French food-services and facilities company posted revenue
of 5.52 billion euros ($5.79 billion) for the quarter, up from
EUR4.48 billion the year prior. It said that a minus 1.7% hit from
acquisition and disposals was more than compensated by a strong
positive currency impact of 6.6%, through the strength of the US
dollar and the Brazilian Real.
Julius Baer Agrees to Settlement in Long-Running Litigation
Case
Julius Baer Gruppe AG said it agreed to settle a litigation case
dating back more than a decade that sought hundreds of millions of
euros in compensation.
The Swiss private banking group said Friday that it would pay
105 million euros ($110.1 million) through existing provisions,
while the remaining amount will be charged against its first-half
results.
Aston Martin Lagonda Regularly Monitors Funding Options; Trading
in Line
Aston Martin Lagonda Global Holdings PLC said late Thursday that
it regularly keeps funding options under review and that any
financing, if made, would be used to support and accelerate the
company's growth.
The British luxury-car maker, which was responding to media
comments about a potential fund raising, added that it continues to
perform in line with expectations for this year.
Russian Missiles Kill 18 in Residential Area in Odessa Region,
Ukraine Says
Russian missile strikes on a neighborhood in the southern
Ukrainian region of Odessa killed at least 18 people, some of them
children, according to Ukrainian officials
The overnight attack, the latest in a surge of Russian strikes,
occurred hours after the conclusion of a North Atlantic Treaty
Organization summit where President Biden promised to support
Ukraine "for as long as it takes."
U.S. to Support Ukraine for 'As Long as It Takes,' Biden
Says
At the end of six days of international summitry, President
Biden pledged to support Ukraine for "as long as it takes," as
Russia's war drags on and Western countries pour billions of
dollars in arms and humanitarian aid into the conflict.
Speaking Thursday at the conclusion of the North Atlantic Treaty
Organization's gathering in Madrid, Mr. Biden pledged the war
wouldn't end with a Ukrainian defeat.
Shiploads of Russian Grain and Good Weather Temper Wheat
Crisis
Fine farm weather and a rush of Russian grain ships through the
Black Sea have taken the sting out of global wheat prices, a
welcome sign for vulnerable countries struggling with surging food
costs.
The right mix of sun and rain in the U.S., Europe and Australia
has raised hopes that end-of-summer harvests will be plentiful.
That should help balance the sizable quantities of Ukrainian wheat
stranded in the country by fighting and a Russian naval
blockade.
Biden Backs F-16 Sales to Turkey Amid Deal to Expand NATO
President Biden affirmed his support for the sale of a new fleet
of F-16 jet fighters to Turkey on Thursday, two days after the
Turkish president dropped his threatened veto of Sweden and
Finland's membership in the North Atlantic Treaty Organization.
"We should sell them the F-16 jets and modernize those jets as
well. It's not in our interest not to do that," Mr. Biden said at a
news conference after the NATO leaders' summit in Madrid.
New Zealand, European Union Settle on Free-Trade Agreement
SYDNEY-New Zealand has concluded negotiations for a free-trade
deal with the European Union, eliminating tariffs on exports
including wine, manuka honey, apples and most seafood.
The deal provides duty-free access on 97% of New Zealand's
existing exports to its fourth-largest trading partner after China,
Australia and the U.S.
GLOBAL NEWS
Most Countries Lack Crypto Information-Sharing Laws, Watchdog
Says
Most countries lack "travel rule" laws that could help prevent
illicit use of cryptocurrency by criminals and terrorists, a global
anti-money-laundering watchdog said Thursday.
China Manufacturing Output Rebounds as Covid Restrictions
Ease
A private gauge measuring China's factory activity rebounded to
its highest level in a year, pointing in the same direction as the
official gauge to reflect an economic recovery from the impact
Covid-19 lockdowns.
The Caixin China purchasing managers index rose to 51.7 in June,
up from 48.1 in May, ending a three-month streak of contraction,
according to data released Friday by Caixin Media Co. and S&P
Global. The 50 mark separates expansion from contraction.
Japan's Large Manufacturers Sentiment Deteriorates, Tankan
Survey Shows
TOKYO-Sentiment among Japan's large manufacturers deteriorated
in the three months to June, reflecting concerns over lockdown in
Shanghai and prolonged supply shortages.
The main index for sentiment among large manufacturers was +9,
compared with +14 in the March survey, according to the Bank of
Japan's quarterly tankan corporate survey released Friday. The
reading marked the second straight quarter of lower sentiment and
was below a projection for +12 from a poll of economists by data
provider Quick.
Japan GPIF Says It Has Been Selling Russian Assets Since
March
Japan's Government Pension Investment Fund said Friday that its
asset managers have been selling its holdings of Russian assets
since March following Moscow's invasion in Ukraine.
GPIF Chief Investment Officer Eiji Ueda said in a statement
included in the fund's annual report that its Russian bond holdings
had fallen sharply, while it still held some Russian stocks at the
end of March due to restrictions placed on trading and settlement
for international investors.
China's Xi Jinping Says Hong Kong's Loyalty to Beijing Will
Ensure Prosperous Future
HONG KONG-Marking a quarter-century since Beijing regained
control over this former British colony, Chinese leader Xi Jinping
urged Hong Kong to show more patriotic fervor and rally around his
vision of a strong and unified China as he prepares to extend his
rule.
In a Friday speech wrapping up a two-day visit to Hong Kong, Mr.
Xi declared that this Asian financial center is again poised to
prosper after Beijing imposed broad political changes to sweep
aside the social unrest that periodically plagued the city since
its handover to China in 1997. The key guarantors of Hong Kong's
future, he said, is a shared love for the Chinese motherland and
loyalty to Communist Party rule.
Write to paul.larkins@dowjones.com
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(END) Dow Jones Newswires
July 01, 2022 05:40 ET (09:40 GMT)
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