MARKET WRAPS

Stocks:

European stock markets managed to claw back early losses to trade just in positive territory, although economic worries continued to weigh on investor sentiment.

At the heart of investor concerns is the fact that inflation remains at a multi-decade high, which makes the Federal Reserve and other central bank poised to continue aggressively boosting interest rates and tightening monetary policy. The risk is that raising borrowing costs to dent economic demand could spur a global recession.

"If you want the good news this morning it's that [the first half of the year] is now finally over," said Jim Reid, a strategist at Deutsche Bank.

"If you want the bad news it's that there's not much good news around as we start [the second half] and U.S. equity futures are already down...in the first few hours of the new half year."

Economic Insight:

Credit Suisse has forecast eurozone GDP growth of 2.4% in 2022 and 0.7% in 2023, well below the consensus of 2.8% and 2%, respectively.

Inflation is likely to combine with rapid European Central Bank tightening and deteriorating external demand to weaken consumption and investment growth, Credit Suisse said, adding that inflation is likely to rise further and surprise on the upside, forecasting the headline figure to average 7.5% this year and 3% next.

"A recession is now a clear possibility, although still not a given."

Credit Suisse said high excess savings and easier fiscal policy should help prevent a recession but there are still potential triggers such as Russian gas cuts that would lead to rationing.

U.S. Markets:

Stock futures were sliding as investors entered the second half of 2022 with the same fears that made the first half the worst start to a year since 1970: Higher inflation, higher interest rates, and a higher risk of a U.S. recession.

In bond markets, the yield on the benchmark 10-year Treasury note ticked up to 2.989% from 2.973% Thursday.

Shares of Kohl's fell more than 17% in premarket trading after CNBC reported the company terminated talks with Franchise Group, owner of The Vitamin Shoppe. CNBC's report cited two people familiar with the matter.

Barron's has reached out to Kohl's and Franchise for comment on the CNBC report.

Forex:

The dollar, recently 0.3% higher against a basket of currencies, will continue to outperform as widespread risk aversion drives investors toward safe havens, said MUFG Bank. It said the dollar's strength has intensified as fears over weaker global growth mount.

"It is difficult to envisage any turn to more favorable market conditions."

The upcoming earnings season could show worse profits and guidance as companies may no longer see recently robust margins as sustainable, said MUFG. Rising natural gas prices due to the war in Ukraine could also worsen investor sentiment.

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Sterling will remain highly sensitive to global investor risk appetite as the U.K.'s external deficit is worsening, said MUFG Bank.

Sterling tends to perform poorly during periods of risk aversion and data on Thursday that showed the U.K. had a record current account deficit in the first quarter suggest the currency's underperformance could continue as financial market conditions will remain challenging in coming months, said MUFG.

"The overall external position is worsening which leaves the U.K. more vulnerable at times when risk aversion becomes elevated and capital flows can diminish as investors pull back from financing."

Bonds:

Bond yields were slightly lower in early trading and Citi is leaning to the view they may have peaked. "It feels like yields may have peaked but we've been here before and there are reasons to be anxious."

German Bunds remain very sensitive to spot inflation data but have now overshot softening medium-term inflation anchors by a distance, Cit said. It finds a trading range of 1%-1.5% for the 10-year Bund yield fairer than a range between 1.5%-2%.

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Societe Generale remain bearish on German Bunds, targeting the 10-year yield at 2% in the second half of the year, on assumption that the European Central Bank's hawkishness hasn't peaked yet.

Furthermore, if fiscal policy in the eurozone continues to stimulate demand instead of prioritizing targeted and supply-side measures, "the ECB eventually may be forced to hike rates above the neutral level."

SocGen added that this isn't priced in by the market currently.

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The narrowing of the 10-year Italian BTP-German Bund yield spread by more than 40 basis points and the more-than 80bp drop in the 10-year BTP yield since the ECB's ad hoc meeting without the central bank buying yet more BTPs seems encouraging, said Commerzbank.

This tightening, however, also underscores the risk of setbacks if the ECB fails to meet high expectations about its planned anti-fragmentation tool at the July meeting, they add.

While Italy could still afford higher yields, investor sentiment will be crucial as Italy will have to attract new investors again next year, said Commerzbank.

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The ECB will start applying flexibility in PEPP reinvestment allocations as of July 1, but this flexibility might not be sufficient to prevent a continued widening of country spreads, said Societe Generale.

It considers a frontloading of reinvestments unlikely, while reallocating all redemptions from core countries to peripheral countries seems difficult to implement in practice.

The ECB's planned anti-fragmentation tool, details of which are expected to be unveiled at the July policy meeting, is likely to slow down spread widening and help control spread volatility, which is a pre-condition before raising interest rates, SocGen said.

Energy:

Oil futures were lower and remained on course for their third consecutive weekly loss, as recession fears continued to weigh on demand.

Concerns are rising that central bank tightening and soaring inflation will weigh on global growth and push the U.S. and other major economies into recessions, reducing demand for oil.

"The inter-week collapse in oil price reflects growing recessionary concerns," said SPI Asset Management. Oil prices have risen too quickly and mounting risk of a recession is putting a cap on prices, SPI said.

Read: Putin Orders Sakhalin Energy to be Transferred to New Russian Company

Read Barrons.com: Putin Steps Up Natural Gas Restrictions for Europe

Metals:

Copper and gold prices were weaker, with safe-havens such as the dollar and bonds boosted, as markets remained risk off.

Copper prices were at their lowest level since February 2021, as recession fears continued to hit demand for the red metal.

"Recession concerns have gained the upper hand and weighed on metals prices," said Commerzbank. "The LME base metals index has plunged by 25% in the past three months and finds itself at its lowest level since April of last year. This was also the most pronounced quarterly loss in nearly 14 years."

Silver prices remained down over 13% from the start of the year and at their lowest level since July 2020 and UBS expects the metal to test pre-pandemic lows amid "rising U.S. rates, a stronger dollar and increasing U.S. recession risks."

UBS said: "We think fundamental conditions are also falling into place for silver prices to reach pre-pandemic levels. In short, we expect prices to test $19 an ounce."

UBS advised against adding silver exposure and "to hedge their long silver positions over the next six months."

Other News:

Fitch said iron ore prices may moderate in the second half as steel inventories have been building up.

"The longer it takes for construction and manufacturing sectors in China to reopen, the more likely it is that steel margins will come under pressure and some capacity is curtailed, putting pressure on iron ore prices."

DOW JONES NEWSPLUS

EMEA HEADLINES

EU Targets Foreign Subsidies, Aiming at China but Worrying U.S. Companies

BRUSSELS-European Union lawmakers struck a political agreement on new rules for companies that reap financial benefits from governments outside the bloc, pushing forward a proposal that sparked concern from some U.S. business groups.

The regulation, under a deal reached late Thursday, primarily targets companies from China and elsewhere with government backing. It would allow the European Commission, the EU's executive body, to block such businesses from making certain acquisitions or winning large public contracts if they previously benefited from foreign subsidies that regulators deem to be distortive.

Siemens Investment in Siemens Energy Could Hurt 3Q Earnings by EUR2.8B

Siemens AG said Thursday it could see a non-cash impairment of about EUR2.8 billion ($2.92 billion) on its investment in Siemens Energy AG.

Siemens AG said that, with the closing share price of Siemens Energy on Germany's Xetra, the market value of Siemens AG's 35% investment in Siemens Energy is significantly below the book value. Siemens Energy shares Thursday closed at EUR13.99, down about 4.3%.

Sodexo Backs Full-Year Guidance After Strong 3Q

Sodexo SA on Friday backed its guidance for the financial year after reporting a strong third quarter.

The French food-services and facilities company posted revenue of 5.52 billion euros ($5.79 billion) for the quarter, up from EUR4.48 billion the year prior. It said that a minus 1.7% hit from acquisition and disposals was more than compensated by a strong positive currency impact of 6.6%, through the strength of the US dollar and the Brazilian Real.

Julius Baer Agrees to Settlement in Long-Running Litigation Case

Julius Baer Gruppe AG said it agreed to settle a litigation case dating back more than a decade that sought hundreds of millions of euros in compensation.

The Swiss private banking group said Friday that it would pay 105 million euros ($110.1 million) through existing provisions, while the remaining amount will be charged against its first-half results.

Aston Martin Lagonda Regularly Monitors Funding Options; Trading in Line

Aston Martin Lagonda Global Holdings PLC said late Thursday that it regularly keeps funding options under review and that any financing, if made, would be used to support and accelerate the company's growth.

The British luxury-car maker, which was responding to media comments about a potential fund raising, added that it continues to perform in line with expectations for this year.

Russian Missiles Kill 18 in Residential Area in Odessa Region, Ukraine Says

Russian missile strikes on a neighborhood in the southern Ukrainian region of Odessa killed at least 18 people, some of them children, according to Ukrainian officials

The overnight attack, the latest in a surge of Russian strikes, occurred hours after the conclusion of a North Atlantic Treaty Organization summit where President Biden promised to support Ukraine "for as long as it takes."

U.S. to Support Ukraine for 'As Long as It Takes,' Biden Says

At the end of six days of international summitry, President Biden pledged to support Ukraine for "as long as it takes," as Russia's war drags on and Western countries pour billions of dollars in arms and humanitarian aid into the conflict.

Speaking Thursday at the conclusion of the North Atlantic Treaty Organization's gathering in Madrid, Mr. Biden pledged the war wouldn't end with a Ukrainian defeat.

Shiploads of Russian Grain and Good Weather Temper Wheat Crisis

Fine farm weather and a rush of Russian grain ships through the Black Sea have taken the sting out of global wheat prices, a welcome sign for vulnerable countries struggling with surging food costs.

The right mix of sun and rain in the U.S., Europe and Australia has raised hopes that end-of-summer harvests will be plentiful. That should help balance the sizable quantities of Ukrainian wheat stranded in the country by fighting and a Russian naval blockade.

Biden Backs F-16 Sales to Turkey Amid Deal to Expand NATO

President Biden affirmed his support for the sale of a new fleet of F-16 jet fighters to Turkey on Thursday, two days after the Turkish president dropped his threatened veto of Sweden and Finland's membership in the North Atlantic Treaty Organization.

"We should sell them the F-16 jets and modernize those jets as well. It's not in our interest not to do that," Mr. Biden said at a news conference after the NATO leaders' summit in Madrid.

New Zealand, European Union Settle on Free-Trade Agreement

SYDNEY-New Zealand has concluded negotiations for a free-trade deal with the European Union, eliminating tariffs on exports including wine, manuka honey, apples and most seafood.

The deal provides duty-free access on 97% of New Zealand's existing exports to its fourth-largest trading partner after China, Australia and the U.S.

GLOBAL NEWS

Most Countries Lack Crypto Information-Sharing Laws, Watchdog Says

Most countries lack "travel rule" laws that could help prevent illicit use of cryptocurrency by criminals and terrorists, a global anti-money-laundering watchdog said Thursday.

China Manufacturing Output Rebounds as Covid Restrictions Ease

A private gauge measuring China's factory activity rebounded to its highest level in a year, pointing in the same direction as the official gauge to reflect an economic recovery from the impact Covid-19 lockdowns.

The Caixin China purchasing managers index rose to 51.7 in June, up from 48.1 in May, ending a three-month streak of contraction, according to data released Friday by Caixin Media Co. and S&P Global. The 50 mark separates expansion from contraction.

Japan's Large Manufacturers Sentiment Deteriorates, Tankan Survey Shows

TOKYO-Sentiment among Japan's large manufacturers deteriorated in the three months to June, reflecting concerns over lockdown in Shanghai and prolonged supply shortages.

The main index for sentiment among large manufacturers was +9, compared with +14 in the March survey, according to the Bank of Japan's quarterly tankan corporate survey released Friday. The reading marked the second straight quarter of lower sentiment and was below a projection for +12 from a poll of economists by data provider Quick.

Japan GPIF Says It Has Been Selling Russian Assets Since March

Japan's Government Pension Investment Fund said Friday that its asset managers have been selling its holdings of Russian assets since March following Moscow's invasion in Ukraine.

GPIF Chief Investment Officer Eiji Ueda said in a statement included in the fund's annual report that its Russian bond holdings had fallen sharply, while it still held some Russian stocks at the end of March due to restrictions placed on trading and settlement for international investors.

China's Xi Jinping Says Hong Kong's Loyalty to Beijing Will Ensure Prosperous Future

HONG KONG-Marking a quarter-century since Beijing regained control over this former British colony, Chinese leader Xi Jinping urged Hong Kong to show more patriotic fervor and rally around his vision of a strong and unified China as he prepares to extend his rule.

In a Friday speech wrapping up a two-day visit to Hong Kong, Mr. Xi declared that this Asian financial center is again poised to prosper after Beijing imposed broad political changes to sweep aside the social unrest that periodically plagued the city since its handover to China in 1997. The key guarantors of Hong Kong's future, he said, is a shared love for the Chinese motherland and loyalty to Communist Party rule.

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(END) Dow Jones Newswires

July 01, 2022 05:40 ET (09:40 GMT)