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EMEA Morning Briefing: Stocks to Fall as Recession Fears Linger

02/08/2022 5:48am

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UK July nationwide house price index, 2Q insolvency statistics; updates from Ferrari, Generali, Bouygues, Fresenius, Fresenius Medical Care, Siemens Gamesa Renewable Energy, BP, Fresnillo, Direct Line Insurance Group, Koninklijke, Sage Group

Opening Call:

Downbeat economic data and a gloomy outlook may continue to pressure European stocks on Tuesday. In Asia, stocks fell; Treasury yields and the dollar weakened; oil lost ground; while gold edged higher.

Equities:

European stocks look set to open lower Tuesday and extend Monday's losses, after U.S. equities closed lower following a strong July.

U.S. stocks had mounted a furious recovery in recent weeks, boosted by positive signals from earnings and expectations that the Federal Reserve may not need to raise interest rates as aggressively as once thought, spurring a rally in government bonds alongside stocks.

"The market's beginning to price in the end of Fed tightening rather quickly, and I think it's going to be disappointed. I think the market's a bit ahead of itself here," said Thomas H. MacCowatt, partner at Williams Jones Wealth Management.

Strong employment is the remaining pillar propping up consumer sentiment and stopping the economy from seeing a "full-blown recession," said Aoifinn Devitt, chief investment officer of Moneta.

"We are probably well poised for another good end to the summer. I see a lot of the negative negative news has been baked in," Ms. Devitt said.

Not all investors are feeling optimistic after July's market rally, however.

"We expect to have more pain ahead, more downside from here, even if it may take a few weeks to materialize," said Chris Wilde, managing director at NEIRG Wealth Management.

Mr. Wilde noted the recent dip in the 10-year real yield as a sign that the market remains in a "very tenuous spot." Enthusiasm among individual investors for riskier assets, such as big-name tech stocks, are also stopping the market from hitting a bottom, he said.

Forex:

The dollar weakened in Asia against major peers. On Monday, the dollar extended its losing streak after staging a prolonged rally this year.

--

Goldman Sachs downgraded its EUR/USD forecast, and now expects EUR/USD to trade below parity over the next three months and remain subdued through the rest of the year.

"Our economists now expect the Euro area to be in recession in H2, with risks still skewed towards a more severe downturn," the firm's Michael Cahill said.

"Over the last few weeks, with gas flows disrupted and spot activity data slowing, our economists cut their growth outlook for the next year from 1.6% to 0.4%."

He thinks the shifting growth outlook accounts for much of the recent depreciation, with more room to run.

Bonds:

Treasury yields fell in Asia, as traders continued to assess the possibility that rising fears of a recession will force the Federal Reserve to back off its aggressive rate hike campaign.

As of Monday, fed funds futures implied a 70% likelihood that policy makers will raise their main policy rate target by just 50 basis points, to between 2.75% and 3%, in September.

The 2-year yield continued to trade above the 10-year rate--a reliable recession warning signal.

Investors will be paying close attention to economic data, culminating in Friday's July jobs report. Nonfarm payrolls and other employment data will be parsed for signs a still strong labor market is beginning to show cracks.

Energy:

Oil futures declined in Asia, extending losses overnight on recession fears amid slower U.S. factory growth and weaker economic data out of China.

Competing gauges earlier this week measuring Chinese manufacturing activity in July pointed to a slowdown in activity.

The oil market was disturbed by the weakness in China's economic data, said CBA. This comes at a time when oil flows from OPEC+ appear to be strengthening, CBA added.

Metals:

Gold edged higher in Asia as the dollar lost steam.

A weaker USD together with deteriorating economic data are great news for the precious metal, said Oanda senior market analyst Edward Moya.

However, technical levels matter and gold will likely need a fresh catalyst to breach the $1,800/oz level, Moya said.

If USD's pullback continues, this could be enough for gold's rally to extend, he said.

--

Copper prices declined, weighed by recent weakness in global economic data, which has spurred concerns over demand for the base metal.

China's official gauge of factory activity indicated contraction in July, while the country's new home sales also plunged.

Sentiment has been further affected by weak manufacturing data in Europe and the U.S., ANZ said.

--

Chinese iron ore futures rose, as China's easy monetary policy may mean steel consumption could improve going into 2023, which is likely to support iron ore, Citi said.

On the supply side, China's port inventories of iron ore are currently sufficient to cover 3.4 weeks of steel production, which is another factor pushing iron-ore prices higher, Citi added.

   
 
 

TODAY'S TOP HEADLINES

U.S. Factory Growth Slowed in July on Decline in Orders

Growth at U.S. manufacturing companies was its weakest in two years in July, but inflationary pressures showed signs of cooling as commodity prices eased, according to surveys of purchasing managers released Monday.

The Institute for Supply Management's index of U.S. manufacturing activity was 52.8 in July as a drop in new orders signaled declining demand for factory products. That was its lowest reading since June 2020 and down from 53 the prior month.

   
 
 

Balkans Flare-Up Highlights Risk of Other European Conflicts

NATO and the European Union scrambled to calm tensions between Kosovo and Serbia after a weekend flare-up that some politicians and experts fear could be used by Russia to spark more instability in Europe.

On Sunday, NATO forces tasked with securing Kosovo threatened to intervene to prevent a bureaucratic dispute over cross-border trade from escalating beyond a war of words between Kosovo and Serbia. Kosovar authorities said shots were fired Sunday during a standoff between Kosovar police and ethnic Serbs near the Serbian border but no one was hit.

   
 
 

For Crypto Customers, a Long Battle Ahead in Bankruptcy

Millions of customers of crypto platforms Voyager Digital Holdings Inc. and Celsius Network LLC have been thrust into a potentially long and painful battle in bankruptcy trying to retrieve their money.

The chapter 11 filings of crypto brokerage Voyager and nonbank lender Celsius have tied up the holdings of their customers, who are realizing how little control they have over their funds and that they aren't likely to recover in full through bankruptcy court.

   
 
 

Nancy Pelosi to Visit Taiwan Despite Warnings From China

House Speaker Nancy Pelosi is planning to visit Taiwan and meet with government officials this week, defying warnings from Beijing not to do so and setting up the potential for increased tensions between the U.S. and China.

People whom Mrs. Pelosi (D., Calif.) is planning to see in Taiwan have been informed of her imminent arrival, a person familiar with the matter said, though some details remain in flux. Some meetings are scheduled for Tuesday evening, but most are set for Wednesday, the person said, saying that they include Taiwanese government officials.

   
 
 

Investors Fear Stock-Market Rally Will Be Short-Lived

Bearish investors aren't buying into hopes that July's rapid advance for stocks heralds the start of a new bull market.

If anything, they say the worst might be yet to come as inflation remains high, the Federal Reserve plans more interest-rate increases and stocks trade at valuations that still don't look cheap.

   
 
 

Ben & Jerry's Wants Unilever Back in Court Over Sale of Israeli Business

Ben & Jerry's is seeking a fresh court hearing to block Unilever PLC's sale of the ice-cream maker's Israeli unit after mediation talks between the brand and its parent company failed.

The brand on Monday filed a letter with the U.S. District Court in Manhattan asking the court to hear its request for a preliminary injunction. The move came after several days of in-person negotiations with Unilever that ended last week, according to a person familiar with the matter.

   
 
 

Blast Hits Ammunition Depot of Bulgarian Arms Dealer Involved in Ukraine Weapons Trade

Authorities in Bulgaria are investigating an explosion at an ammunition depot owned by an arms dealer who Bulgarian officials say is a middleman for exports of munitions to Ukraine.

The complex is owned by Emilian Gebrev, who survived a near-fatal 2015 poisoning, for which Bulgarian prosecutors have later charged three Russian citizens.

   
 
 

Activision Blizzard Profit Slumps as Sales Shrink

Activision Blizzard Inc.'s sales and earnings fell in the second quarter, the latest indicator that pandemic-fueled growth is slowing as consumers are limiting their spending in response to record inflation.

The videogame company, which in January agreed to be acquired by Microsoft Corp. for $75 billion, recorded $1.64 billion in sales, a roughly 28% decrease from $2.3 billion in sales in 2021.

   
 
 

Einhorn Bets That Musk Will Be Forced to Buy Twitter

David Einhorn's Greenlight Capital is betting against Elon Musk again, but this time it's all about Twitter.

Greenlight disclosed in a letter to partners viewed by Barron's that it's built a Twitter stake at an average price of $37.24 a share. Einhorn's firm believes Musk will be forced in court to go through with his acquisition at $54.20. Reuters first reported on the letter.

   
 
 

Write to hoishan.chan@dowjones.com

   
 
 

Expected Major Events for Tuesday

00:01/IRL: Jul Ireland Manufacturing PMI

06:00/UK: Jul Nationwide House Price Index

06:00/ROM: Jun PPI

07:00/SPN: Jul Unemployment

07:00/SWI: Jul Quarterly Consumer Sentiment Index

07:30/SWI: Jul procure.ch Purchasing Managers' Index

08:30/UK: 2Q Insolvency statistics

14:00/DEN: Jul Foreign Exchange & Liquidity

23:01/UK: 3Q CBI SME Trends Survey

All times in GMT. Powered by Onclusive and Dow Jones.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

 

(END) Dow Jones Newswires

August 02, 2022 00:33 ET (04:33 GMT)

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