EMEA Morning Briefing : Shares Set for Muted Start Amid Tug of War Between Bulls and Bears

MARKET WRAPS

Watch For:

EU harmonized CPI, construction output; UK producer prices, CPI, house price index, Bank of England Deputy Gov. David Ramsden's speech on quantitative tightening; trading updates from ASML, Volvo, Assa Abloy, SKF

Opening Call:

Shares seem poised for a cautious start in Europe on Wednesday. In Asia, stock benchmarks were mixed; Treasury yields fell; the dollar gained; while oil and gold declined.

Equities:

European stocks could head for muted trade on Wednesday after overnight gains sparked by U.S. corporate earnings.

There's a continuing tug of war between the bulls and bears, but for now the bulls are pulling harder, powered by earnings results and a picture of cooling inflation, LPL Financial noted.

On the other side, there's a "wall of worry" that keeps getting addressed, it said. Those include now-extinguished concerns about the debt ceiling, and fears that a flood of Treasury bills unleashed by the U.S. debt resolution would drain liquidity in equity markets.

Investors will be hoping that corporate results and management forecasts justify a market that sits at its best levels since April 2022, with the S&P 500 and Nasdaq Composite indexes up 18.6% and 37.1% for the year to date.

The Fed meets next week to discuss a potential interest rate rise. The central bank is widely expected to make a 25-basis point increase in the fed-funds rate, but the big question is what happens after that hike.

The health of U.S. consumers is another ongoing question. June retail sales showed a meager, below-forecast increase as consumers cope with the Fed's campaign of rate hikes and questions about what's next for the economy.

Forex:

The dollar strengthened as risk appetite deteriorated amid mild losses in U.S. stock-index futures.

Customers are aggressively long USD across the board, countering weakness in the greenback, and positioned for a short-term bout of "mean reversion," Pepperstone said.

Also, the interest-rate market indicates fewer immediate reasons to chase USD downside, it said, noting the implied probability of another Fed rate increase in September is 11%, which appears slightly too low.

Relative interest-rate and growth differentials still favor the dollar, but the currency has suffered from a massive drop in two-year yields even as markets embrace a soft-landing scenario, Brown Brothers Harriman said.

The euro and sterling are two of the top three performing major currencies year-to-date, but the relative view doesn't look as good for the euro and sterling as it used to, BBH says.

The Bank of England might tighten aggressively, tipping the economy into a deep recession, while the European Central Bank might end tightening earlier than expected, it said.

Bonds:

Treasury yields weakened, as markets stay convinced that a rate increase is imminent despite data showing the economy cooling.

Both U.S. retail sales and industrial production were below expectations, while housing starts, due Wednesday, are forecast to have contracted 9.3% in June, after expanding 21.7% in May.

Markets are pricing in a 97.3% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25%-5.5% next Wednesday, according to the CME FedWatch Tool. The chance of another hike of either the same size or bigger by November was seen at 29%.

The central bank is expected to take its fed funds rate target back down to around 5% or lower next year.

"The economy is plodding along without overheating," said TradeStation. "Americans have gotten relief at the gas pump, but also don't have an excessive demand for consumer goods. This is modestly positive news for investors worried about the Fed needing to hike after July. Goldilocks marches on."

Energy:

Oil futures were lower in Asia, but may be supported by signs of supply tightening.

Russia seems to be making good on its promise to reduce supply, ANZ Research said.

Crude-oil loadings are down sharply at three western Russian ports in the four weeks to July 16, according to ship-tracking data, while Russia's energy ministry said it would reduce third-quarter exports by 2.1 million tons, it added.

"Supply concerns could continue to support an uptrend in the market over the medium term as traders could remain cautious in the face of potential new intervention from OPEC+ to balance prices," CPT Markets said in a note.

"However, demand concerns could remain the center of attention for traders and could create some uncertainty and fuel some volatility and price corrections. In this regard, the market reacted to Chinese economic data which continued to show a weaker-than-expected recovery," it said.

Metals:

Gold slipped in a likely technical correction after prices settled at their highest level in six weeks on Tuesday.

The precious metal could struggle to make a run at the $2,000/oz level, but this might change if global bond yields continue to come down and the Fed signals they are likely finished raising rates next week after delivering one last 25bp rate increase , Oanda said.

Global bond yields appear to be falling, and that is good news for bullion investors, it said.

The recent gains for gold have been triggered by the U.S. dollar falling sharply last week amid expectations that the Federal Reserve is "close to reaching the end of its rate hiking cycle, after both CPI and PPI measures of inflation came in weaker than expected," said Fawad Razaqzada, market analyst at City Index and https://urldefense.com/v3/__http://Forex.com__;!!F0Stn7g!EVb0uJosoDNBTUd7QIFDyaQYu5gIdEmwtoxW9afGVGiXCnVfUccyXZnJRGU0_GzX4DzAGKI-yksSiqtTpnfVytNSn3GRMJHtWQJy0M0Vskg$ .

Data Tuesday showing weaker U.S. retail sales and industrial production data "further fueled those expectations, causing [Treasury] yields to fall, which in turn helped to support low- and zero-yielding assets, like gold and silver," he said.

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Copper fell amid continuing worries over China's economy.

Base metals are continuing their downtrend as China's weakness has "come front and center," TD Securities said.

This downtrend is likely to continue until such time that China announces stimulus measures that can possibly reverse the trend of deteriorating demand, it added.

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Iron-ore futures were higher in early China trade amid hopes for potential property stimulus policies following weak domestic economic data.

"Although the market has rebounded, traders are still cautious and speculative demand is weak," Donghai Futures said.

Persistent headwinds to a recovery in Chinese steel demand and strong seaborne iron-ore supply have been weighing on iron-ore prices, said major miner Rio Tinto.

"China's economic recovery has fallen short of initial market expectations, as the property market downturn continues to weigh on the economy and consumers remain cautious despite monetary policy easing," Rio said in a quarterly report.

TODAY'S TOP HEADLINES

Gucci CEO Marco Bizzarri to Leave in Leadership Shuffle

Gucci Chief Executive Marco Bizzarri is leaving as part of a management shuffle that will elevate two other executives at Kering, the luxury conglomerate that owns the fashion house and other brands.

Bizzarri has been Gucci's leader since 2015 and will step down in September. During his tenure, Bizzarri presided over a renaissance at Gucci, which had struggled to recover its mojo after designer Tom Ford left in 2004.

Rio Tinto Sees Strong Iron-Ore Sales; Cuts Guidance for Alumina, Refined Copper

Rio Tinto PLC said it expects full-year iron-ore shipments from its Australian mining operations to be in the upper half of company guidance, but cut production estimates for several other commodities it produces, including alumina and refined copper.

The world's second-largest miner by market value on Wednesday said 2023 iron-ore shipments are now expected to be in the top half of its 320 million to 335 million metric ton projection. The company, which relies on steel ingredient iron ore for the majority of its profits, said it shipped 79.1 million tons of the commodity from its Australian iron-ore mines in the second quarter of the year, down 1% on the same time last year.

U.S. House Backs Israel in 412-9 Vote After Democrat Called State 'Racist'

WASHINGTON-The House voted overwhelmingly to pass a resolution affirming America's strong support for Israel and condemning antisemitism, a move that sought to put Democrats on the spot after a progressive leader called the country racist.

The measure passed 412-9, with one member voting present.

Microsoft and Activision Blizzard Still Committed to $75 Billion Merger

Microsoft and Activision Blizzard plan to continue to work toward completing their $75 billion deal by sorting out lingering regulatory issues, people familiar with both companies said Tuesday, as the merger's closing deadline approaches.

The deal struck between the two companies early last year was set to expire at 11:59 p.m. Pacific time Tuesday, according to their merger agreement. It stipulates that Microsoft pay Activision a breakup fee of $3 billion if either party terminates the deal afterward. But neither company intends to do so, the people said.

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Expected Major Events for Wednesday

06:00/EU: Jun New Passenger Car Registrations in Europe statistics (EU27 + EFTA3)

06:00/UK: Jun UK producer prices

06:00/UK: Jun CPI

07:00/SVK: Jun Harmonized CPI

07:00/AUT: Jun CPI

07:00/CZE: Jun PPI

08:30/UK: May UK House Price Index

09:00/CYP: Jun Harmonised CPI

09:00/EU: Jun Harmonised CPI

09:00/MLT: Jun Harmonised CPI

09:00/EU: May Construction output

10:00/POR: Jun PPI

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07-19-23 0018ET