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EMEA Morning Briefing: Stocks to Edge Higher as Focus Turns to U.S. Jobs Report - Morningstar

MARKET WRAPS

Watch For:

Germany June industrial production index; France June foreign trade, June balance of payments; June industrial production index, 2Q flash estimate of job creation; Italy June industrial production; UK July Halifax house price index, Bank of England market participants survey results; updates from Deutsche Post, Allianz, London Stock Exchange, WPP, AngloGold Ashanti, Capita, Hargreaves Lansdown, Sberbank, Naturgy Energy Group

Opening Call:

European equities may push a tad higher ahead of the U.S. jobs report later today. In Asia, stock benchmarks rose; the dollar edged higher; Treasury yields fell; oil and gold rose amid choppy trade.

Equities:

European stocks appear poised to make slight gains at the open on Friday after U.S. closed mixed Thursday as investors weighed a fresh batch of corporate earnings reports as they looked ahead to Friday's U.S. jobs report.

"We are getting some updated outlook from a lot of the management of these companies, it wasn't as pessimistic as some had feared," said Shawn Cruz, head trading strategist at TD Ameritrade. "I think the worst-case scenario has been pulled off the table and that's bringing some buyers back into the market."

But some investors say volatility is likely to return, especially if the slowing economy begins to take a toll on the outlook for corporate earnings later in the year.

Some money managers also say markets have been overly eager in predicting that the Fed will stop raising interest rates and then cut them next year.

"We could be in a bit of a bear-market rally," said Desmond Lawrence, senior investment strategist at State Street Global Advisors.

Investors appear to be reasoning that slowing economic growth will pull the Fed back from raising interest rates, which would boost the price of stocks and bonds, Lawrence said. "That might be a little bit premature," he said, adding that expectations of corporate earnings "are pretty elevated for what seems to be turning into a slowdown."

Saira Malik, chief investment officer at Nuveen, said market expectations of Fed rate cuts in early 2023 are "optimistic."

"We think the Fed will have to continue to increase rates for the foreseeable future until inflation gets to a much lower level," Malik said. "And it could take a recession in order for us to get there."

Employment gains in July are expected to drop to 258,000 from 372,000 in the prior month, a poll of economists by The Wall Street Journal estimated. If so, it would mark the smallest increase since December 2021.

"We should anticipate a drop from recent levels, but perhaps not too big a drop, as demand remains strong. The 250,000 expectations look reasonable, and perhaps even a bit conservative," said Brad McMillan, chief investment officer at Commonwealth Financial Network. "If we get anything in the 200,000-300,000 range, that would be in line with the data so far this year and support continued growth."

However, worse results would signal that the U.S. economy has "suddenly gotten much worse, and a recession is going to happen sooner rather than later--and that would spook markets," according to McMillan.

Forex:

The dollar edged higher in Asia amid mixed signals.

USD should track Treasurys, so market participants should watch two-and five-year yields as they'll guide USD moves, said Chris Weston, Pepperstone's head of research.

The Fed has made itself data dependent; thus bad data should be bad for USD and good data should boost USD, Weston added.

Capital Economics thinks the dollar still has further to run, Senior Markets Economist Jonas Goltermann said.

"We think the dollar will appreciate further through at least the end of the year as the global economy continues to falter and 'safe-haven' demand remains strong."

"Although we see limited scope for a further widening of expected interest rate differentials in favor of the greenback, we expect an environment in which the Fed and other major central banks continue to tighten monetary policy, even as economic growth slows, to support further dollar strength," he said.

Bonds:

Yields fell in Asia as the Treasurys selloff stopped overnight ahead of key U.S. employment data due today.

Investors are worrying about a possible recession and U.S. jobless claims data overnight sparked projections of labor markets loosening up, which could lead to a less hawkish interest rate move next month.

The Bank of England on Thursday was the latest central bank to deliver an outsize rate increase, as it warned that inflationary pressures continued to build and said a recession was likely to begin later this year.

The BOE decision comes as there "now seems to be a view among investors that, across DM (developed markets), any acceleration in monetary tightening will only lead to a weaker economy, and hence less rate hikes further ahead and/or earlier rate cuts," said Franziska Palmas, markets economist at Capital Economics.

"Indeed, sovereign bond yields have also fallen in the wake of recent chunky hikes by other DM central banks," including the Fed, the European Central Bank, the Bank of Canada and the Reserve Bank of Australia, she wrote.

Energy:

Oil futures rose in Asia amid somewhat choppy trading.

Liquidity in the crude oil markets has evaporated, leading to a choppy trading environment, spurring financial players to rapidly shift positions and focus more on intraday trading, Citi said.

Aggregate open interest across the ICE Brent and Nymex WTI crude oil futures curves stood below 3.5 million contracts, a multiyear low, Citi noted.

Oil had tumbled overnight after the U.S. EIA said crude and gasoline supplies rose.

The price action shows that "demand concerns are now the dominant influence on the global energy market and even though supply worries will persist with the Russia-Ukraine war, we will need to see evidence of demand stabilizing for the oil market to begin to find a near-term bottom," Sevens Report Research said.

Metals:

Gold edged higher in early Asia trade, buoyed by safe-haven demand driven by global recession risks.

Central banks worldwide are acknowledging recession risks, said Oanda senior market analyst Edward Moya.

The Bank of England had a rather gloomy outlook and the Czech central bank surprised markets by halting its rate-increase cycle, Moya noted.

--

Zinc rose in Asia as rising energy costs threaten to curtail more supply, ANZ said.

Commodities giant Glencore, which has already suspended one of its zinc smelters in Europe, warned that Europe's energy crisis poses a substantial threat to supply.

"These concerns also helped reverse an earlier decline in copper, as investors weighed up threats to growth amid a hawkish Fed," ANZ added.

--

Chinese iron-ore futures moved slightly higher.

Sentiment may be weighed in the near term by worries that conditions in China's property sector will worsen, CBA said.

Property construction in China accounts for around 30% of the country's steel demand and 20%-30% of its copper, aluminum and zinc consumption, CBA noted.

"Over 300 property projects under construction are facing a mortgage boycott as homeowners lose faith property developers will complete the projects as promised," CBA added.

 

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August 05, 2022 00:47 ET (04:47 GMT)

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