MARKET WRAPS
Watch For:
Italy Retail Sales; OECD Composite Leading Indicators; UK BRC-KPMG Retail Sales Monitor; Eurogroup meeting of eurozone finance ministers; no major earnings scheduled
Opening Call:
Shares in Europe are poised for hefty opening losses on China Covid-19 worries, with more curbs hitting stock benchmarks in Hong Kong and Shanghai. Elsewhere in Asia, the dollar jumped, while Treasury yields, oil and metals all weakened.
Equities:
European stocks face steep opening losses on Monday as fears of more Covid curbs in China add to caution ahead of the U.S. earnings season that kicks off this week.
In Asia, shares in Hong Kong and China were deep in the red as investors grow increasingly worried about the recent uptick in Covid-19 infections in China.
KGI Securities said the latest resurgence of the virus in several Chinese cities may prove to be a major drag on both business activity and investor sentiment in the near term. Most analysts have flagged Covid-19 as a key swing factor for China’s second-half outlook.
Elsewhere, Macau-focused casino stocks declined after city officials announced a weeklong shutdown of gaming venues and other businesses to combat a surge in Covid-19 cases in the Asian gambling hub.
In the U.S., investors expect concerns about hot inflation and strapped consumers to dominate the corporate-earnings season, creating winners and losers in the battered stock market.
Investors will review earnings reports this week from big financial companies, including JPMorgan and BlackRock, as well as other companies such as PepsiCo and Delta Air Lines. They will also parse fresh readings on inflation that will likely influence the pace of the Fed’s rate-hiking plans.
Forex:
The dollar was firmer in Asian trading as risk-off sentiment driven by losses in some regional equity markets and in U.S. stock futures steered direction.
CBA said the dollar could continue to track higher this week as the global economic outlook seems to be deteriorating.
It pointed to expected U.S. data due this week which is likely to show inflation stayed stubbornly high in June, particularly the trimmed mean and weighted median measures. Elevated inflation could encourage the FOMC to raise rates by 75 bps at its next policy meeting later this month, CBA said.
However, OANDA said the dollar reign’s “is slowly coming to an end as the Fed tightening gets fully priced into markets.”
It believes recession fears are elevated and that Wall Street is concerned the Fed will need to address weaker economic data points in the September meeting. OANDA believes investors are starting to guess the Fed tightening peak is close and that means “dollar strength is going to be limited from here on out.”
USD/JPY climbed 0.7% to 136.99 after earlier touching 137.28, its highest intraday level since September 1998 and JPMorgan said a further deterioration in Japan’s trade deficit spells fundamental headwinds for yen.
JPM said Japan’s trade balance seems to have been moving in line with the Brent price in yen terms, suggesting the trade deficit is likely to linger if oil prices remain at their current high levels, implying sustained yen-selling flow from importers.
Bonds:
Treasury yields eased back slightly early Monday after they had climbed following the robust U.S. jobs report. The yield curve remained inverted, with the yield on two-year Treasurys trading higher than the 10-year equivalent.
“The surprise of this is how strong the labor market still is,” said Chilton Trust. “That labor market equilibrium is still taking its effect here, and it affirms this muscular need that the Fed has and the prioritizing of fighting inflation versus unemployment.”
Chilton Trust expects the yield curve to remain inverted in the coming months and believes a 0.75-percentage-point rate increase is warranted.
Other News:
Global companies during the first half of 2022 raised less money by issuing sustainable bonds than during the prior-year period, according to Refinitiv.
Companies issued $264 billion of such bonds–a category that includes green, social and sustainability bonds–during the first half of the year, representing a 10% decline from the first six months of 2021. Many companies took advantage of the market last year when interest rates were lower, said Refinitiv.
It added that the market is still relatively new and operates at a different cadence than the traditional bond market, which companies utilize to fund acquisitions and other corporate events.
Energy:
Oil was lower in Asia, giving up earlier gains, on concerns over the latest Covid-19 outbreak in China.
The resurgence of the virus and the detection of a new, highly contagious Omicron subvariant in Shanghai will likely be negative for the oil market, said SPI Asset Management.
Shanghai officials have identified one case of the Omicron BA.5.2.1 variant, according to reports over the weekend. Meanwhile, neighboring Macau is set to enter a lockdown early Monday as authorities seek to contain a Covid-19 outbreak there.
Other News:
A likely outcome of this week’s meeting between Joe Biden and Saudi Arabia’s Mohammed bin Salman will be that the Saudis agree to loosen the oil taps, said RBC Capital Markets.
“We believe that he [Biden] will not only be seeking additional barrels but also a redirection of exports to Europe to backfill the looming Russian losses with the most serious energy sanctions set to take effect in several months’ time,” RBC said.
Any increase in Saudi oil output will likely be within the terms of the current OPEC+ production agreement. Saudi and UAE could compensate for the production underperformance of OPEC members such as Nigeria and Angola, RBC added.
Read: Manufacturers Brace for Nord Stream Repairs, Fearing Pipeline Won’t Reopen
Metals:
Gold futures edged lower as the dollar gained.
On the technical charts, gold has had a major downside breakout of pivotal support at $1,785/oz, so a further selloff is expected in the near term, said CMC Markets.
Gold is now falling into a descending channel on the daily chart, with pivotal resistance at the July 1 low of $1,785/oz. If the downward trend continues, subsequent support is likely to be at the 100% Fibonacci extension level of $1,700/oz.
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Base metals fell on fears of a slowdown in global economic growth.
Copper suffered its fifth straight weekly loss last week on concerns that central banks are pressing ahead with aggressive tightening to address persistently high inflation.
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Iron ore futures were weaker, extending their recent price swings, after a sharp selloff earlier this year.
Huatai Futures said the rise in new Covid-19 infections in China is likely to remain a “major disturbance factor,” as any tighter movement restrictions or production halts could weigh on demand for the steel-making ore.
In the longer run, Huatai warned of Beijing’s commitment to cutting steel output and achieving carbon neutrality as negatives for iron ore prices.
Other News:
Jefferies said commodity prices are headed for a trough in the second half, cutting its 2022 forecast for iron-ore fines by 9.8% to $121.78/ton, aluminum by 23% to $1.17/lb, copper by 16% to $3.79/lb, and gold by 3.1% to $1,938/oz, among other changes.
“While we expect a strong recovery from this downturn, it will take time as Chinese stimulus is likely to be partially offset by near-term weakness in the U.S. and Europe. We also believe that we will look back at this period with the benefit of hindsight as having been an excellent entry point that most in the market will have missed.”
The bank’s top picks are Rio Tinto, IGO and Oz Minerals.
TODAY’S TOP HEADLINES Write to paul.larkins@dowjones.com
Expected Major Events for Monday
06:00/DEN: May Balance of payments (provisional figures)
06:00/DEN: May External trade (provisional figures)
06:00/NOR: Jun CPI
06:00/NOR: Jun PPI
06:00/ROM: May International trade
06:00/DEN: Jun CPI
07:00/CZE: May Retail trade
07:00/SVK: May Industrial production
08:00/ITA: May Retail Sales
09:00/MLT: May International Trade
09:00/CYP: May Foreign Trade (provisional)
10:00/POR: May International trade statistics
10:00/FRA: May OECD Composite Leading Indicators
23:01/UK: Jun BRC-KPMG Retail Sales Monitor
All times in GMT. Powered by Onclusive and Dow Jones.
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(END) Dow Jones Newswires
July 11, 2022 00:37 ET (04:37 GMT)
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