North American Morning Briefing: Tech to Lead Fresh Gains as Investors Await Bank Earnings – Morningstar

MARKET WRAPS

Watch For:

Canada Housing Starts for June; earnings from Bank of America, Goldman Sachs, IBM

Opening Call:

Stock futures rose on Monday as investors awaited a fresh batch of earnings reports from major companies and looked ahead to a week of key central-bank meetings.

Investors are trying to reconcile a dire economic outlook with still relatively positive earnings forecasts. Economic growth is showing signs of slowing while inflation is soaring. Meanwhile, central banks are raising interest rates rapidly, adding another cloud on the economy’s horizon. So far, corporate reports have been lackluster.

“It feels like something is wrong: Either the economic story is wrong or analysts are being too optimistic on earnings, and it feels like the latter,” said Altaf Kassam, head of investment strategy for Europe, the Middle East and Africa at State Street Global Advisors. “If you scrape the text of company earnings announcements, many are complaining.”

Data due Monday are expected to show declining confidence among home builders as mortgage rates are rising. Economists surveyed by The Wall Street Journal expect the National Association of Home Builders to report a seventh consecutive month of declining confidence in July.

The European Central Bank is expected to raise interest rates for the first time in 11 years at a meeting on Thursday. The region’s economy is feeling the effects of the war in Ukraine and an energy crisis more acutely than other economies. The Bank of Japan is expected to buck the trend among global central banks and keep rates unchanged on Thursday.

Overseas, global markets were higher across the board. In Europe, the pan-continental Stoxx Europe 600 rose 1.2% with oil and gas and mining stocks leading the gains as commodity prices rose.

In Asia, the Hang Seng Index jumped 2.5% while in mainland China, the Shanghai Composite Index rose 1.6%. Markets in Japan were closed for a holiday.

Economic Insight:

The economy is unlikely to fall into a recession as consumer spending is expected to support growth amid a strong labor market, said Oxford Economics.

Inflation pressures are unlikely to ease markedly and the near term, and headline CPI inflation is set to fall to 7% at year-end from the current 9.1%, it said. The Fed looks likely to continue to hike interest rates aggressively, and another interest-rate increase of 75 basis points is the most likely outcome for July’s meeting.

“Recession isn’t inevitable but risks are running high, especially for 2023.”

Forex:

The dollar was weaker, extending Friday’s losses, as market speculation cools over the Fed raising interest rates by 100 basis points at its next meeting.

“The week starts with improved odds of seeing a 75bp hike at the next FOMC meeting, rather than a 100bp hike,” Swissquote Bank said.

The probability of a 75bp hike is back to 70%, up from around 20% following the stronger-than-expected June inflation report released, it said. Investors reversed bets for a 100bp rate rise after comments from Fed officials and after data from the University of Michigan on Friday showed consumers’ inflation expectations eased in July.

UniCredit Research said the euro-dollar exchange rate could weaken if the ECB disappoints markets at Thursday’s meeting with the details of its tool to address eurozone fragmentation risks.

“We think that the downside potential for EUR/USD if the ECB disappoints will likely be larger than the upside potential if it delivers a credible tool,” UniCredit said. Since EUR/USD already dropped below parity, any relief rally is unlikely to exceed 1.0150-1.02 much, it said.

If the ECB underdelivers on its anti-fragmentation tool, EUR/USD could fall below last week’s low of 0.9950 and slip towards 0.98, considering the impact such a development would have on eurozone periphery bond yield spreads, uniCredit said.

Bonds:

The economic backdrop isn’t currently favorable for adding significant risk to fixed income portfolios through increased allocations to corporate credit, said J.P. Morgan Asset Management.

Instead, adding high-quality investment grade credit, which will likely perform well if core yields move lower, could be a preferable way of altering current portfolios, it said.

JPMorgan AM considers corporate fixed income valuations attractive, but said that spreads are primed to widen if a recessionary environment comes to the fore. It favors scaling positions in corporate credit as spreads widen and the economic environment becomes clear, rather than pursuing the market as spreads tighten.

Energy:

Oil prices rose over 2% in Europe on reports that China’s central bank chief had pledged stronger support for the economy.

PBOC Gov. Yi Gang reportedly told a meeting of G-20 central bank leaders that China’s economy was under pressure due to the Covid-19 pandemic and global economic issues and said he would seek to increase assistance to the economy, Bloomberg reported.

Weakness in the Chinese economy has been a cause for concern in commodity markets. Stronger stimulus measures could buoy commodity demand in the world’s biggest commodity consumer.

Other News:

The Nord Stream 1 gas pipeline’s scheduled maintenance period ends on Thursday, but it is possible that supply will remain uncertain for a while, said Deutsche Bank.

“Whatever Russia’s plans for supply through the autumn and winter, we may not fully see it in the next few days and weeks.”

Further delays to the restoration of gas flows could arise as repairs take time to be fully integrated, Deutsche Bank said.

“We may get a few clues from Friday but it is unlikely we’ll know all the answers.”

Metals:

Metals moved higher, spurred by the Chinese stimulus reports as well as expectations of less aggressive monetary tightening from the Fed.

 

TODAY’S TOP HEADLINES

 

Jeep Owner Stellantis to End China Joint Venture

Stellantis NV said it would end the joint venture that makes and distributes its Jeep brand in China and focus instead on selling imported Jeep vehicles in the country.

The Netherlands-based car maker blamed a lack of progress in its plan to take a majority share in the joint venture with China’s Guangzhou Automobile Group Co. Ltd.

 

GSK Spins Off $36 Billion Consumer-Healthcare Business Haleon

GSK PLC completed the spinoff of its consumer-healthcare business, a bet that greater focus on innovative drugs and vaccines will help accelerate growth at the pharmaceuticals giant.

The new stand-alone company, called Haleon PLC, fetched a market value of about GBP30.5 billion, equivalent to $36.4 billion, at its stock-market debut Monday. The listing is one of the largest in London for years and the biggest corporate change for GSK-until recently called GlaxoSmithKline-since it was formed through a megamerger in 2000.

 

Boeing Closes In on Making New Dreamliner Deliveries

LONDON-Boeing Co. commercial airplanes chief Stan Deal said Sunday the manufacturer was “very close” to resuming 787 Dreamliner deliveries after a nearly two-year pause.

Mr. Deal said the regulatory process to win approval for resolving various production defects with the wide-body jets was close to finished.

 

Chip Investment Decisions Await Congressional Action on $52 Billion Funding Bill

Political wrangling in Congress over government funding for the semiconductor industry is leaving tens of billions of dollars of potential factory projects hanging in limbo and could dent the ambitions of some political and industry leaders to recharge America’s chip-making prowess.

Numerous companies are waiting for Congress to pass a $52 billion incentive package for chip production and research before committing to significant expansion efforts, according to company executives and funding proposal documents. The expansion plans anticipated getting part of their funding from the subsidy package, which early on had bipartisan support in Congress and has been backed by the Biden administration.

 

Grubhub Hustles to Catch Up in Business It Once Led

Grubhub recently offered New Yorkers a deal that the online food-ordering company hoped many couldn’t refuse: free lunch.

The May promotion, which promised $15 worth of free food to people who ordered through Grubhub’s app, overwhelmed Grubhub’s system, with as many as 6,000 takeout and delivery orders coming in each minute at the peak of the promotion.

 

Supermarkets, Restaurants Hire Security, Limit Hours to Combat Crime

Restaurants and grocery stores said they are revamping operations in response to crime, with some operators limiting hours, spending more on security and closing stores entirely.

Starbucks Corp. last week said that it was permanently closing 16 U.S. stores after workers reported incidents related to drug use and other disruptions, and would likely close more. Casual dining chain Noodles & Co. has encountered drug use in bathrooms in certain markets, and is training workers on how to respond, Chief Executive Dave Boennighausen said. Supermarket giant Kroger Co. last year listed organized theft among the factors pressuring its profit margins for the first time.

 

Fed Officials Preparing to Lift Interest Rates by Another 0.75 Percentage Point

Federal Reserve officials have signaled they are likely to raise interest rates by 0.75 percentage point later this month, for the second straight meeting, as part of an aggressive effort to combat high inflation.

Policy makers left the door open to a larger, full-percentage-point increase at the July 26-27 gathering. But some of them simultaneously poured cold water on the idea in recent interviews and public comments ahead of their premeeting quiet period, which began Saturday.

 

Strong Dollar Extends Gains With No End to Rally in Sight

Fears of a global recession and deepening woes in Europe are pushing the dollar higher, and few on Wall Street expect to see a change in its trajectory soon.

(MORE TO FOLLOW) Dow Jones Newswires

July 18, 2022 06:05 ET (10:05 GMT)

Copyright (c) 2022 Dow Jones & Company, Inc.

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