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EMEA Morning Briefing: Volatility to Continue as Recession Fears Dominate

17/06/2022 5:52am

Dow Jones News

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Watch For:

EU Harmonised CPI; UK BOE Quarterly Bulletin/Market Participants Survey; Italy Foreign Trade EU; ECOFIN meeting of EU finance ministers; European Investment Bank Board of Governors annual general meeting; updates from Iberdrola, Tesco PLC

Opening Call:

Europe could be set for a steadier opening session, although any early gains will be limited on worries of a global economic pullback. In Asia, stocks followed Wall Street lower, the dollar and gold edged higher and oil prices dipped.


European and U.S. stock futures were slightly firmer early Friday, although market volatility is likely to continue as fears mount that drastic interest rate hikes may trigger a global recession.

U.S. equities were hammered Thursday, sending the Dow Industrials below 30000 for the first time since January 2021, with Nasdaq shedding 4% as rate-sensitive technology stocks led losses.

"I think this is the realization that we really could be heading for a recession. I am not sure that had really filtered through to the mind of the market until now," said Altaf Kassam, head of investment strategy for Europe, the Middle East and Africa at State Street Global Advisors.

Read: Wall Street Officially in a Bear Market: What Strategists Say Investors Should Do


The dollar steadied in Asia after it's slide Thursday on the notion that other central banks, globally, will need to follow the Federal Reserve's tightening path.

"The Fed was more aggressive than expected but counterintuitively the dollar sold off because the next step in the process is that foreign central banks have to step up their game and lend support to their currencies," said IGM's US-based FX and rates fundamental analyst Bruce Clark.

"Negative-rate regimes are going to start playing catch up in order to prop up their currencies to fight inflation," Clark added.

The yen weakened sharply after the Bank of Japan maintained its ultralow interest rates, standing pat on its yield curve control [YCC] policy.

There was arguably less of an impetus for an immediate move by the BOJ, given that domestic prices have yet to see runaway momentum and the economy is still in a fragile state, said Maybank.

However, there might still be some hawkish hints including chances for a YCC review going forward if inflation pressures broaden more sustainably.


Treasury yields extended declines in Asia as nervous investors continued to flock to bonds, following the Fed's biggest interest rate hike in 28 years.

"Central bankers are now faced with the no-win scenario of pushing nominal policy rates higher to chase soaring inflation in a bid to maintain inflation fighting credibility, regardless of the spillover effects on financial market stability or economic growth expectations," said BCA Research.

"'Overtightening' monetary policy is a growing risk, especially in Europe where the neutral interest rate remains much lower than in the U.S."

Read: U.S. Economic Growth Shows Signs of Slipping


Crude futures were lower as negative sentiment, spurred by Wall Street's losses and continued worries over the global economy, gripped Asian markets.

The oil market remains very tight despite fears of aggressive central bank tightening and the slower economic growth that will ensue, said OANDA's Edward Moya, adding that 'buy the dip' should probably still work for energy traders

Oil prices climbed on Thursday, shaking off early post-Fed losses, to finish higher after the U.S. announced new economic sanctions on Iran.

A visit by European leaders to Ukraine, meanwhile, was also likely supportive for oil prices as it signaled the potential for more sanctions against Russia's energy sector.

Read: Russia Slashes Gas Flows, Aiming Economic Weapon at Europe


Gold dipped in Asia as the dollar strengthened. However, risk-off sentiment prevails across markets, with safe-haven assets such as bullion and government bonds possibly benefiting, said Tina Teng of CMC Markets.


Base metals pared early gains as sentiment soured in Asia, but prices remained in positive territory.

However, a stockpiling impulse is no longer countering global macro headwinds, and prospects of continued Covid-19 flare-ups will probably constrain China's ability to boost growth in the near term, said TD Securities.


Chinese iron-ore futures fell close to 3%, extending recent weakness over worries about sluggish terminal demand.

Steel demand appears softer, and steel mills are restocking on the raw material according to their needs, said Huatai Futures, adding that Beijing looks set to push ahead with its policy to control crude steel output.

On the supply side, Australian and Brazilian iron ore exports should return to high levels as weather conditions improve.



Bank of Japan Maintains Ultralow Interest Rates

TOKYO-The Bank of Japan maintained ultralow interest rates on Friday, confirming that it won't join the Federal Reserve and other major global central banks in tightening monetary policy.

The Japanese central bank kept its target for short-term interest rates at minus 0.1% and its target for the 10-year Japanese government-bond yield at around zero.


Russia Slashes Gas Flows, Aiming Economic Weapon at Europe

Moscow's move to slash natural-gas exports to Europe has pitched the continent's energy crisis into a dangerous new phase that threatens to drain vital fuel supplies and kneecap the continent's economy.

Russia's state-owned gas giant Gazprom PJSC throttled deliveries via the Nord Stream pipeline to Germany this week, blaming missing turbine parts that were stuck in Canada due to sanctions.


U.S. Economic Growth Shows Signs of Slipping

The U.S. economy is starting to slow under the combined weight of soaring inflation and climbing interest rates-including the highest mortgage rates since 2008.

Recent reports show sharp declines in key sectors, raising the prospects of a stalled economic recovery and possibly a recession. Home construction across the U.S. fell sharply in May, the Commerce Department said Thursday. Factories in the mid-Atlantic region reduced activity for the first time in two years this month, the Federal Reserve Bank of Philadelphia said. And Americans broadly cut spending at retailers for the first time this year in May, the Commerce Department said earlier this week.


Fintech Giant Klarna Slashes Fundraising Ambition

Klarna Bank AB is considering raising fresh funds at a significantly lower valuation than it achieved a year ago, according to people familiar with the situation, a sign of the punishing environment for tech companies.

The Swedish payments firm is in talks with investors about a deal that could value the company at around $15 billion, the people said, less than it was seeking just last month. The Wall Street Journal reported Klarna was in talks to raise up to $1 billion at a low $30-billion-range valuation. One of the people said the current talks could yield at least $500 million. There is no guarantee a deal will take place.


AB InBev Is Trying to Catch Up With Inflation in Some Countries, CFO Says

Anheuser-Busch InBev SA/NV says some of its beverages are going to get pricier and come in variable sizes as the maker of Corona and Bud Light looks to catch up with inflation in the U.S. and elsewhere.

Leuven, Belgium-based AB InBev found that despite regular updates to its pricing, the company is lagging on cost increases in certain markets, including the U.S. and Brazil, as inflation accelerated since the beginning of the year.


France, Germany, Italy, Romania Back Ukraine's Bid for EU Membership


Adobe Stock Is Falling After Hours. Earnings Guidance Was Disappointing.

Adobe stock is losing ground in late trading Thursday after the provider of software for creativity, marketing, and documents provided softer-than-expected guidance for both the August quarter and the full fiscal year ending in November. Adobe is feeling the effects of both intensifying headwinds from negative foreign-exchange rates and the fallout from the war in Ukraine.

Adobe (ticker: ADBE) stock is down 4.4%, to $349 in late trading. In the regular session Thursday, shares fell 3.1%.


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Expected Major Events for Friday

06:00/ROM: 1Q Employment and unemployment

07:00/SVK: May Harmonized CPI

07:00/AUT: May CPI

08:30/UK: 1Q Bank of England statistics on UK banks' external claims

09:00/CYP: May Harmonised CPI

09:00/MLT: May Harmonised CPI

09:00/EU: May Harmonised CPI

09:00/ITA: Apr Foreign Trade EU

10:00/POR: May PPI

11:00/UK: 2Q Bank of England Quarterly Bulletin

All times in GMT. Powered by Kantar Media 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

June 17, 2022 00:37 ET (04:37 GMT)

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