EMEA Morning Briefing: Inflation Worries, U.S. Tech Rout to Weigh on Europe – Morningstar

MARKET WRAPS

Watch For:

EU Long Term Interest Rates; Germany, Italy CPI; updates from E.ON, TUI, Avast, Deliveroo, Prudential, Admiral, Provident Financial, ABN AMRO, Ahold Delhaize

Opening Call:

Europe faces another cautious opening session as investors position for the key U.S. inflation data. In Asia, stocks were mostly lower, with the dollar, Treasury yields and commodities all weaker too. On the data front, China’s consumer inflation rose to the highest level in two years, but the 2.7% year-on-year CPI rise undershot consensus expectations.

Equities:

European stocks are likely to open in the red on Wednesday, as anxieties about looming U.S. inflation data and a selloff in semiconductor stocks on Wall Street, drag on investor sentiment.

Hopes that inflation had peaked briefly helped the S&P 500 bounce more than 13% off its June low, as some investors embraced the theory that slowing inflation could empower the Federal Reserve to pivot toward a less aggressive pace of monetary tightening.

However, many analysts and several senior Fed officials have warned that hopes for such a shift might be premature.

“For traders, there is an innate risk associated with the widespread expectation that inflation will remain at 9.1%, for any upside surprise could easily spark fears of another sharp increase in rates thanks to Friday’s bumper jobs report,” Joshua Mahony, senior market analyst at IG, said.

“With [U.S.] earnings season drawing to an end, there is a distinct possibility that we will see the focus shift back to the worrisome economic and monetary policy outlook that lies ahead.”

Warnings from chip maker stalwarts Nvidia and Micron Technology helped drive the Nasdaq to its third straight daily loss on Tuesday, while the Dow and S&P 500 suffered more milder losses.

Read: Chip Makers Expect Demand Slowdown to Expand Beyond PCs, Smartphones

Economic Insight:

U.S. inflation is likely to have slowed in July, but there could be unpleasant surprises, Amherst Pierpont said.

“Virtually every set of inflation data [including wage measures] over the past two or three months has brought an upside surprise.”

Amherst Pierpont sees the core monthly measure slowing to 0.6% in July from 0.7% in June, versus consensus of 0.5%. It said a likely decline in energy prices could cause a steeper fall in the headline figure and might counter increasing inflation expectations.

But Amherst Pierpont is “growing quite concerned that inflation is taking root. The longer consumers and businesses see and suffer high inflation, the more they begin to embed it into their expectations.”

Forex:

The dollar continued to weaken in Asia in cautious trading ahead of the U.S. July CPI report.

MUFG Bank said the consensus is for a slight slowing in headline inflation but an acceleration in core inflation and under such a scenario, a 75bp rate increase by the Fed in September probably remains on the table.

Silicon Valley Bank said higher-than-expected CPI will fuel even higher rate expectations, which could further dampen the mood in equity markets and send the dollar up. But weak CPI could signal to the market that a soft landing is possible, an encouraging sign for equities that should cause the dollar to sell off.

Strong demand for Norway’s energy exports is likely to keep the Norwegian krone well supported, Rabobank said.

“The absence of an energy crisis of the sort facing the eurozone should also allow for moderate downward trend in EUR/NOK.”

Norway clearly doesn’t face potential shortages of gas and oil supply unlike other European countries suffering as a result of the fallout from the Russia-Ukraine conflict, Rabobank said, which expects EUR/NOK to fall toward 9.40 in the next 12 months.

Bonds:

U.S. bond yields eased lower in Asia, after traders sold off government debt on Tuesday, sending the 2-year rate to its highest in almost two months.

The benchmark 10-year Treasury yield has fallen sharply from its multi-year high in mid-June, partly on hopes that inflation has peaked and the Fed may not need to be as aggressive in raising interest rates as first feared.

Markets are pricing in a 67.5% probability that the Fed will raise its benchmark interest rate by another 75 basis points to a range between 3% and 3.25% at its Sep. 20-21 meeting. The central bank is mostly expected to take its borrowing costs to a range between 3.5% and 3.75% by next March, according to fed funds futures.

Bank of America estimates the 2 year-10 year curve inversion could end up as wide as 0.85pp if investors price in a terminal rate for Fed funds of 4% or higher.

Energy:

Crude-oil prices extended losses in choppy Asian trade as investors weigh renewed supply-side issues alongside signs of rising demand.

Russian pipeline operator Transneft said that Ukraine halted flows through a pipeline, which could impact up to 250,000 barrels a day of crude-oil deliveries, ANZ said. However, there are also early signs of demand recovery for crude in China, ANZ added.

Late Tuesday, the API reported U.S. inventories of crude oil rose by a sizable 2.2 million barrels in the latest week, while gasoline supplies declined by 627,000.

The mixed-to-bearish results were released ahead of official inventory data from the EIA. Average forecasts in a WSJ survey indicate the EIA report will show crude inventories rose by 200,000 barrels and that gasoline supplies decreased by 500,000 barrels.

Metals:

Gold futures edged lower after prices settled at a six-week high on Tuesday, topping $1,812.

Goldman Sachs said bullion could trade sideways in the near term as the market continues to weigh the balance between Fed tightening and economic growth risks. It expects prices to reach $1,850/oz in three months, before rising to $1,950/oz over six to 12 months.

Base metals futures also dipped in Asia.

Aluminum futures fell on signs of increased supply, with data from Shanghai Metals Market [SMM] showing China’s aluminum production rose 6.7% on year to 3.5 million tons in July.

The SMM data also revealed that an aluminum smelter in Sichuan province suffered an accident which affected its output by 190,000 tons, and this latest disruption threatens to tighten the market further, ANZ said.

Iron ore futures were weaker ahead of the U.S. CPI report, although losses may be limited as signs emerge of stability in steel markets.

In Europe, producers have adjusted to prospects of rising energy costs this quarter, especially in Germany, said Rystad Energy.

 

TODAY’S TOP HEADLINES

China’s Inflation Rises to Highest Level in Two Years

China’s consumer inflation rose to the highest level in two years, driven by soaring pork prices, official data showed Wednesday.

The consumer-price index rose 2.7% from a year earlier in July, up from a 2.5% increase in June, the National Bureau of Statistics said.

 

Chip Makers Expect Demand Slowdown to Expand Beyond PCs, Smartphones

The chip industry that was bracing for a difficult period with laptop sales slumping is adjusting to a wider and sharper slowdown even as semiconductor companies prepare to spend billions of dollars on new factories.

“The market is worse than we thought it would be,” Mark Murphy, chief financial officer at memory maker Micron Technology Inc., said Tuesday. On the same day, President Biden signed an investment plan that allocates more than $50 billion to finance future U.S. chip development and production.

 

Inflation Reduction Act’s $27 Billion in Green Funds Could Spur Private Investment

The energy package recently passed by the Senate includes $27 billion for what are called green banks that funnel money into renewable projects, although some of the biggest beneficiaries could ultimately be private-sector investors.

The legislation allocates the money to a greenhouse-gas reduction fund, with about $20 billion earmarked for national or regional funds that would be overseen by the Environmental Protection Agency. The rest of the money is designed to go to state and local recipients.

 

Rapid Wage Growth Keeps Pressure on U.S. Inflation

Workers’ wages are rising briskly, a factor contributing to four-decade high U.S. inflation.

Average hourly earnings grew 5.2% in July from a year earlier, and annual wage gains have exceeded 5% each month this year, the Labor Department said Friday. The rapid earnings growth adds to other evidence that employers are continuing to increase pay as they try to find and keep workers in a tight job market.

 

Blasts Rock Russian Air Base in Crimea

Explosions at a Russian air force base on Crimea triggered an evacuation of local residents as Ukrainian officials vowed to liberate the peninsula, though Kyiv didn’t take responsibility for the blasts.

The Russian Defense Ministry said that the explosions, which came as Ukraine presses on with a counteroffensive aimed at liberating the south of the country from Russian control, were caused by exploding air-force ammunition and there was no shelling of any kind aimed at the base. Aircraft stationed there were undamaged and there had been no injuries, the ministry said.

 

Elon Musk Sells Nearly $7 Billion Worth of Tesla Stock Amid Twitter Uncertainty

Elon Musk sold nearly $7 billion worth of Tesla Inc. stock in recent days, regulatory disclosures show, amid uncertainty over the fate of his $44 billion deal to buy Twitter Inc.

Mr. Musk, Tesla’s chief executive and largest shareholder, sold around 7.9 million shares between Friday and Tuesday, the disclosures show, leaving him with a 15% stake in the company.

 

Coinbase Posts Steep Second-Quarter Loss Amid Crypto Meltdown

Coinbase Global Inc. reported a surprisingly large second consecutive quarter of losses, driven by the crypto market’s spring meltdown.

Coinbase lost $1.1 billion, or $4.98 a share, in the second quarter, the company said Tuesday, compared with a profit of $1.6 billion, or $6.42 a share, a year ago. Revenue fell to $808 million from $2.2 billion a year ago.

 

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August 10, 2022 00:30 ET (04:30 GMT)

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