MARKET WRAPS

Stocks:

European stocks made a positive start to the week despite escalating tensions in Ukraine.

However, rising inflation remains the key concern. Central banks have been raising interest rates to counter inflation, and investors are trying to gauge if the moves could lead economies into recession.

Factories around the world are reporting weakening demand for products. The development suggests that fervent demand for consumer goods during the pandemic boom could turn into a bust as surging prices and higher rates erode spending power.

Volvo Car said car sales fell 26.9% on year in June as Covid-19 lockdowns in China caused component shortages, which primarily hit production of its fully electric and plug-in hybrid cars.

The rise in European equities follows mixed trading in Asia overnight while the U.S. stock market is closed for the Fourth of July holiday, which may reduce trading volumes.

Stocks to Watch:

Sika has underperformed the market recently, with the stock dropping more than 40% in the year to date, but there is now an attractive entry point for investors, said Baader Helvea.

The building-products company's shares have been hampered by a correction of growth stocks and the fear of a worsening construction environment, which makes up around 80% of Sika's end market exposure.

However, the issues with its construction exposure is overestimated and Sika's high exposure to the refurbishment and infrastructure business is underestimated, they said. Baader sees potential full-year consensus upgrades, raising its rating on the stock to buy from add.

Economic Insight:

Eurozone inflation came in higher than expected in July, but the European Central Bank is likely to go for an interest-rate increase of 25 basis points as previously guided, Pantheon Macroeconomics said.

There has been a fall in market expectations of rate increases, relieving the pressures on the central bank, and there is the chance that the ECB tightens policy just as the region's economy falls into a recession, they said.

"We think [the ECB] will stick to the script and do 25 basis points. We still see a 50 basis-point hike in September, followed by three 25 basis-point rate hikes in October, December and February," Pantheon said.

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In the construction of the ECB's planned anti-fragmentation tool, the market will be looking for "as much as needed" or "unlimited" commitments from the ECB, Barclays' said.

Such a pledge was one of the key strengths of the ECB's Outright Monetary Transactions program, and the lack of such a commitment a weakness of the Securities Markets Programme during the eurozone debt crisis from 2010 to 2012. .

"We think anything short of an as-much-as-needed pledge is likely to be met with a negative market reaction," Aksu said.

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U.S. Markets:

U.S. stock futures retreated to start the week, while global indexes were mixed, as investors assessed downbeat signals about the health of the global economy.

The pullback in futures suggested the U.S. stock market, which is closed Monday for the Fourth of July holiday, could come under renewed pressure Tuesday.

The S&P 500 last week closed out its worst first half since 1970.

Forex:

The dollar could rise this week, supported by safe-haven flows and potentially strong U.S. jobs data, Unicredit Research said. Risk aversion should continue over the coming days, reinforcing the dollar's safe-haven role, Unicredit said.

Data on Friday could show that U.S. nonfarm payrolls rose 300,000 in June, moderating from May's 390,000 increase but still a robust pace, which should keep the dollar firm.

"It will thus continue to be crucial for EUR/USD to remain close to 1.04 to avoid a retest of the year-to-date low of 1.0348 and below." .

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The euro could fall below parity versus the dollar in the event of a European gas supply crisis due to the fallout from the Russia-Ukraine conflict, Commerzbank said.

A gas supply crisis would be a Europe-specific problem, Commerzbank said.

If things turn out as badly as that, it would only affect Europe, would only affect the European Central Bank's monetary policy and would therefore constitute a reason for idiosyncratic EUR weakness."

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Sterling hasn't benefited much from the Bank of England raising interest rates due to the poor U.K. economic growth outlook, Rabobank said.

This was demonstrated in May when the BOE's 25 basis-point rate rise failed to prevent the pound falling as the market instead focused on the central bank's downward revision to growth, Rabobank said.

"There is a risk that aggressive rate rises now could accentuate downside growth risks in the medium-term and that this could further worry GBP investors." .

Bonds:

Rates markets could take a breather on Monday with the U.S. holiday and a light domestic data calendar, said Commerzbank.

"Recession trading continues to rule but the knock-on effects into Fed/ECB expectations are supporting risk assets," he said in a note.

Eurozone 10-year government bonds were lower, but Commerzbank said recession trading continued to rule.

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The eurozone's 11 largest government bond issuers have completed around 58% of their annual needs year to date, according to calculations by Landesbank Baden-Wuerttemberg, which forecast 2022 full-year bond issuance of EUR1.095 trillion.

This compares with a 59% funding progress at the same point of 2021, he said in a note. LBBW's analysts currently regard the forecast risks as almost balanced, he said.

"While the unexpectedly significant slowdown of primary market activity in Q2 tends to suggest downside risks, the consequences of the Ukraine war continue to result in upside risks."

LBBW said capital-market issuance of eurozone states in the first half of 2022 fell 10% compared to the first half of 2021 to EUR636 billion. This volume doesn't include bond issuance by smaller issuers such as Slovenia, Slovakia, Cyprus, Malta, Luxembourg or the Baltic states.

Debt-management offices might have responded to the massive increase in bond yields by deliberately making less use of their usual strategy of frontloading issuance, LBBW said, offering a possible explanation for the lower issuance volume.

Another reason might be that government revenue might have developed better than expected to date despite the growing economic risks due to the Ukraine war and thus reduced the overall financing needs..

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Rates markets could take a breather on Monday amid the U.S. holiday and a light domestic data calendar, Commerzbank's rates strategist Rainer Guntermann said.

"Recession trading continues to rule but the knock-on effects into Fed/ECB expectations are supporting risk assets," he said in a note.

Eurozone 10-year government bonds fall after opening, causing yields to rise, but Guntermann said that recession trading continues to rule.

Commodities:

Oil futures were flat ias concerns about slowing fuel demand growth counterbalanced global supply issues.

"The domestic refining sector [in China] is coming under growing pressure from concerns about slowing fuel demand growth and a deepening fuel glut at home," Fitch said, adding that refiners may be looking to export excess capacity.

That said, global supply issues remain a concern according to ANZ Research,

"OPEC production looks constrained amid output losses in Libya and Ecuador. Demand is strong despite high prices. Oil inventories should continue to diminish as European sanctions bite."

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Metals markets opened on a mixed tone, with economic growth worries hitting copper, while lifting gold. The copper-gold ratio has broken down, according to SPI Asset Management.

"The market has begun to worry more about economic growth than just liquidity withdrawal and inflation,. For the U.S., an acute decline in the ISM [PMI Index] new orders relative to inventories is the quintessential macro signal of weakness across the board."

DOW JONES NEWSPLUS

EMEA HEADLINES

Germany Posts Trade Deficit For May as Costs of Imports Jump

Germany swung to a trade deficit in May as exports fell and imports grew amid high energy costs.

Germany's trade deficit--the balance of exports and imports of goods--stood at 1 billion euros ($1.04 billion) in calendar and seasonally adjusted terms in May after recording a EUR3.1 billion surplus the previous month, data from German statistics office Destatis showed Monday.

Banks Get Burned by Risky Debt, Imperiling Buyout Activity

Investment banks are facing big losses on leveraged buyouts they agreed to finance before markets soured, further chilling the outlook for deal activity.

Bank of America Corp., Credit Suisse Group AG and Goldman Sachs Group Inc. are among the banks that could collectively lose billions of dollars on buyout loans they agreed to provide when demand for the debt was running high.

Russia Claims Control of Luhansk as Ukrainian Forces Retreat From Lysychansk

Russian forces have captured Lysychansk, the last major Ukrainian stronghold in Luhansk, effectively placing under Russian control the eastern region at the center of the war in recent months.

Russia's defense minister, Sergei Shoigu, told President Vladimir Putin on Sunday that Russian forces, together with militia from the self-proclaimed Luhansk People's Republic, had established full control over Luhansk, Russia's Ministry of Defense reported.

Strife Rises in Tunisia as Democracy Erodes, Economic Hardship Grows

TUNIS, Tunisia-A new constitution that would consolidate the power of Tunisian President Kais Saied is generating dissent among Tunisians who are angry at what they describe as his increasingly autocratic rule and who are grappling with rising food prices and economic hardship.

On Thursday, Mr. Saied presented a draft version of a new constitution that would grant him the ability to extend his tenure beyond the current limit of two presidential terms. It would also increase the powers of the presidency and curtail those of the parliament, which, under the existing constitution, check the executive's power.

Several People Killed in Shooting at Copenhagen Mall

Several people were killed in a shooting at a Copenhagen shopping mall on Sunday evening, according to local police, who said that one person had been arrested.

Police said three people were killed and three others were critically wounded, the Associated Press reported.

Israel Shoots Down Hezbollah Drones Headed for Mediterranean Gas Rig

TEL AVIV-Israel on Saturday shot down three drones that it said Iran-allied militant group Hezbollah launched toward an Israeli gas rig located in a disputed drilling area of the Mediterranean Sea, marking an escalation between two of the Middle East's fiercest foes.

Israeli Defense Minister Benny Gantz said Hezbollah, based in Lebanon, was trying to stymie U.S. efforts to broker a deal for maritime borders between Israel and Lebanon. At the heart of those talks are potentially lucrative new gas fields that Israel is moving to develop over the objections of Lebanon.

GLOBAL NEWS

China's Slowdown Could Tamp Down Global Inflation

China's slowdown may have a silver lining for the rest of the world: weaker inflation.

Growth in the world's second-largest economy has tumbled this year as Covid-19 outbreaks triggered mass lockdowns and business closures. The government has announced a range of stimulus policies, but many economists say Beijing's 2022 growth target of around 5.5% is unlikely to be achieved as long as the threat of new lockdowns hangs over the economy.

Bond ETFs Attract New Investors With Narrower Offerings

This wouldn't seem to be the best of times for exchange-traded funds that focus on fixed income. A resurgence of inflation not seen in 40 years has put upward pressure on interest rates, which, in turn, has sent prices of bonds and bond funds tumbling.

Yet new investment in fixed-income ETFs continues apace.

Crypto's Domino Effect Is Widening, Threatening More Pain

Turmoil in the digital-assets ecosystem has grown in recent weeks, with losses in cryptocurrencies blowing holes in balance sheets and pushing firms near bankruptcy.

After a pair of cryptocurrencies crashed, wiping out billions of dollars in value in May, a British Virgin Islands court this past week ordered a hedge fund that had survived several crypto downturns to liquidate. Another platform that counts the hedge fund as an investor capped withdrawals while evaluating how the hedge fund's woes would affect its liquidity.

Markets Had a Terrible First Half of 2022. It Can Get Worse.

We're halfway through the year, but markets are beginning to fear we're not even halfway through the bad news 2022 has in store.

The first six months were full of surprises: Inflation. The biggest selloff in bonds in four decades. A plunge in tech stocks rarely matched in history. And the implosion of crypto.

Americans Have Had It With Inflation

James Duffy used to frequent the coffee shop on weekends to enjoy an Americano and read a book. Then, rising inflation started to bite.

Mr. Duffy, 25 years old, began cutting back on coffee outings earlier this year. Now, he brews a big pot of coffee at home, part of a broader attempt to save money as prices rise for gas and groceries. The Greenwich, Conn., resident said he is becoming more of a homebody, limiting his outings to walks and get-togethers with friends.

Biden Faces Fresh Domestic Challenges After Europe Summits

President Biden returned from Europe with a deal to expand the NATO alliance and plans for the biggest U.S. military footprint in the continent since the Cold War. But awaiting him back home was a host of domestic challenges, including intraparty frustration with his response to the Supreme Court's ruling overturning abortion rights, continuing economic worries and questions about the fate of his legislative agenda.

With some fellow Democrats calling for him to be more forceful on abortion, Mr. Biden endorsed making an exception to filibuster rules to pass legislation codifying Roe v. Wade into law, as he wrapped up his trip. And on his first day back, he met virtually with Democratic governors, some of whom continued to push Mr. Biden to make more use of federal resources to protect access to abortion.

Jeff Bezos Criticizes Biden's Call for Gas Stations to Cut Prices

Amazon.com Inc. founder Jeff Bezos criticized President Biden for pressing gas-station companies to immediately lower their prices at the pump, accusing the president of "misdirection" or "a deep misunderstanding" of market forces that have driven up costs.

Mr. Biden wrote in a tweet on Saturday: "My message to the companies running gas stations and setting prices at the pump is simple: this is a time of war and global peril."

More Than Two Dozen Sailors Missing After Ship Breaks in Half During Typhoon off Hong Kong

Authorities in Hong Kong said they are conducting a search and rescue operation for more than two dozen seamen in the South China Sea after a ship broke in half during a typhoon.

The engineering vessel suffered heavy damage after being caught near the center of Typhoon Chaba, around 186 miles southwest of the city, the Hong Kong Government Flying Service said in a social-media post Saturday.

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(END) Dow Jones Newswires

July 04, 2022 05:09 ET (09:09 GMT)