GLOBAL CAPITAL MARKETS OVERVIEW:
European shares rose to an eight-week high after the opening bell on Wednesday, with Germany's Dax up 1 percent and the Stoxx 600 up 0.5 percent, led by technology stocks. Investors focused on corporate results, shrugging off U.S.-China geopolitical tensions escalated by House Speaker Nancy Pelosi's visit to the island and poor economic data, including services PMI and retail sales, which It is increasingly showing that Europe is about to fall into recession. On the corporate front, Societe Generale reported a lower-than-expected second-quarter loss, and Commerzbank posted a higher-than-expected net profit. AXA's profit rose, Siemens Healthineers kept its fiscal 2022 guidance, while Just Eat Takeaway's loss and revenue missed expectations. BMW, on the other hand, warned of a highly volatile second half. On Wednesday, the FTSE MIB index recovered early losses, rising 1% to close at 22,575, a seven-week high buoyed by the strong support of Milan's financial sector, as investors focused on geopolitical challenges between the United States and China. Shares of Banca Mediolanum surged nearly 6% after the insurer posted record operating profit margins in the first half of the year. Banco BPM and BPER Banca later rose 4% as investors awaited their earnings release after the trading day. Elsewhere, Telecom Italia shares rose 5% after the company increased its guidance for the rest of the year. On the other hand, automakers underperformed the overall index. The latest PMI data showed that Italy's services sector unexpectedly contracted in July, adding to recession fears after a manufacturing slump. Meanwhile, domestic retail sales fell 1.1% in June. France's main stock index rose to its highest close in nearly two months on Wednesday, with the benchmark CAC 40 closing above 6,470, boosted by gains in real estate and financial stocks. Positive corporate results were the main driver of sentiment, with investors brushing aside concerns of a worsening economic outlook and escalating tensions between the U.S. and China. AXA SA jumped more than 5 percent to its highest level in the benchmark after reporting a better-than-expected first-half profit and announcing a 1 billion euro share buyback program. Societe Generale also posted a lower-than-expected loss in the second quarter. The FTSE 100 reversed early losses on Wednesday, closing up 0.5% at 7446, halting two days of losses as concerns over the pace of monetary tightening by the Bank of England was offset by a 43% surge in Avast shares, which traded at Norton Life ROC rose after regulatory approval for its $8.6 billion deal. Meanwhile, investors weighed more economic data, earnings reports, and geopolitical tensions. A new PMI survey showed that growth in UK services sector activity slowed to the slowest pace since February 2021, when the country was in Covid-19 lockdown. On the earnings front, Hillsmith Holdings' operating profit jumped 16%, and Tyler Wimpey expects full-year profit to be in the range of consensus estimates. The ruble-based MOEX-Russia index erased early gains on Wednesday, falling 0.5% to settle at 2,130. After a third session, investors digested a raft of macroeconomic data, and new U.S. sanctions fell. Shares in the mining and metallurgy sector fell sharply after the U.S. added steel-producing giant MMK and its chairman to a new sanctions list, forcing stocks to plunge nearly 10 percent. Rusal, Severstal, and Polyus tracked the decline in confidence in the sector, down more than 3%. On the other hand, the financial sector closed slightly higher, with TCS Group up 1.5%. The Dow rose nearly 300 points on Wednesday, while the S&P 500 and Nasdaq rose 1.1% and 2.1%, respectively, as investors digested a slew of upbeat gains from U.S. corporate and economic data. Paypal rose more than 10% after reporting solid second-quarter results and positive forward guidance, while SoFi rose more than 20% on earnings and revenue. Modena shares rose 15% on quarterly results that beat Wall Street expectations. On the other hand, shares of chipmaker AMD surprised investors by falling more than 3% after it released third-quarter revenue guidance. On top of that, better-than-expected economic data, including a rebound in the ISM non-manufacturing PMI, eased fears of an impending recession. Canada's S&P/TSX Composite rose 0.5% on Wednesday, hovering above 19,600, rebounding from yesterday's losses, with all sectors trading in the green as investors continued to digest after U.S. House Speaker Nancy Pelosi exited Taiwan corporate earnings and pressure on geopolitical risks. Toronto's heavyweight energy sector rose sharply, with gains in gold prices supporting mining stocks. Meanwhile, the healthcare sector averaged more than 1.1% growth as cannabis growers rebounded sharply. Finally, tech stocks rose an average of 1.5%, recovering from yesterday's losses. Hong Kong stocks pared losses on Wednesday, with the benchmark Hang Seng index rebounding from its lowest level in nearly three months to close at around 19,770, led by technology and materials stocks. On the data front, Hong Kong's private sector rose for a fourth straight month, although growth fell to a three-month low. Xinyi Glass Holdings and Semiconductor Manufacturing International were the two biggest gainers on the index, rising more than 4 percent. New Zealand NZX 50 rose 172.57 points, or 1.5%, to a three-month high of 11,705, its fifth straight session of gains and tracking gains in U.S. stock futures on a positive earnings report. Traders also hoped that the Royal Bank of New Zealand would not raise interest rates significantly in the future after official data showed New Zealand's unemployment rate at 3.3% in the second quarter of 2022, missing the market consensus of 3.1%; while the employment rate edged down to 68.5 %. However, the central bank plans to review its key interest rate later this month, with markets expecting another 50-basis point hike. Meanwhile, annual wage inflation rose 3.4% in the second quarter, the highest rate since 2008, as wages rose in both the public and private sectors. Third Age Health Services surged by 11.9%, followed by Me Today Limited (7.1%), Ventia Services Group (6.9%), and TruScreen Group (6.3%). Investors continued to focus on news that U.S. House Speaker Nancy Pelosi's visit to Taiwan has led to tensions between Washington and Beijing. China Shanghai Composite dropped 0.71 percent to close at 3,164. In comparison, the Shenzhen stock market fell 1.14 percent to close at 11,982, extending losses from the previous session, as traders focused on support for House Speaker Nancy Pelosi. China's stock market remains highly volatile amid heightened Sino-US tensions over a visit to Taiwan. Chinese Foreign Ministry spokeswoman Hua Chunying said on Twitter that Pelosi's visit was a "major political provocation," while the People's Liberation Army (PLA) will reportedly hold military exercises around Taiwan from August 4 to 7. . The risk of escalation across the Taiwan Strait is expected to keep markets on edge once Pelosi leaves the region. Investors also reacted to upbeat data on China's services sector activity in July, as an improvement in the domestic coronavirus outbreak boosted the sector. Heavyweights in new energy, consumer, retail, and financials led losses, while semiconductor and defense stocks mostly rose. Japan Nikkei 225 gained 0.53% to close at 27,742. In comparison, the broader Topix index rose 0.27% to close at 1,931 on Wednesday, recouping some losses from the previous session, with tech stocks leading gains and investors nervous about the U.S. and China. The intensification of the situation and hawkish comments from Fed officials were dismissive. A sharp fall in the yen also boosted shares of export-oriented Japanese companies, while upbeat corporate earnings further increased sentiment. The tech sector was led by SoftBank Group (0.8%), Tokyo Electron (1%), Lasertec (2.8%), M3 Inc (2.1%), and Z Holdings (2.3%). Other index heavyweights also rose, including Fast Retailing (1.5%), Sony Group (2%), Daikin Industries (4%), Mitsubishi Corporation (4.1%), and West Japan Railway (3.5%). Meanwhile, Mitsubishi UFJ fell 1.8% after reporting a 70% drop in first-quarter net profit, while Nintendo fell 1.9% ahead of its quarterly results. Australia S&P/ASX 200 index fell 0.32% to 6976 on Wednesday, retreating from a seven-week high, led by bank stocks. Investor sentiment was also affected by escalating tensions between the U.S. and China over Taiwan and comments from Fed officials suggesting further rate hikes to combat high inflation. The move comes a day after the Reserve Bank of Australia raised its cash rate in a widely expected move and tempered its guidance for future rate hikes amid expectations of a slowing economy. Financial stocks led losses, with the "big four" banks down 0.7%-1.6%. Other index heavyweights also fell, including Newcrest Mining (down 1.7%), Macquarie Group (down 1.6%), and Santos Ltd (down 1.9%). Meanwhile, Lynas Rare Earths rose 7.6 percent after announcing plans to invest $500 million to expand capacity, while Pinnacle investment surged 12.2 percent on solid results.
REVIEWING ECONOMIC DATA:
Looking at the last economic data:
- FR: The French government budget deficit fell to 76.1 billion euros in January-June 2022 from 131.3 billion euros in the corresponding month of the previous year. Government spending fell 8.2 percent to 238 billion euros, while revenue rose 25.2 percent to 177 billion euros. Meanwhile, the Treasury's particular account, which tracks the inflow and outflow balances of targeted revenues and expenditures, such as those from local governments, posted a deficit of 14.8 billion euros, a bigger deficit than a year ago of 11.2 billion euros.
- US: In June 2022, new orders for U.S. manufactured goods rose 2% month-on-month, extending May's upwardly revised 1.8% gain and well above consensus forecasts of 1.1%, reflecting strong demand for products. Orders in the non-durable goods sector rose 2%, supported by petroleum and coal products (6%) and chemicals (1.1%).
- US: The S&P Global US Services PMI was revised to 47.3 in July 2022 from an initial 47 but declined from 52.7 in June, marking a rise in output in May 2020, The most significant drop in a month. While new orders have returned to growth, the pace of expansion has been historically slow and much lower than earlier this year. Service providers' expectations for output prospects subsequently weakened, with confidence falling to a 22-month low. Nonetheless, the company has expanded its workforce at a solid pace, with sufficient capacity to allow the company to deal with the backlog of work efficiently. In July, inflationary pressures remained at record highs but eased further. As a result, input and output expenses rose slowly in five and 16 months, respectively.
- US: The S&P Global-U.S. Composite Purchasing Managers' Index was revised to 47.7 in July 2022 from a preliminary 47.5, down from 52.3 in June, marking the first contraction in private sector business activity since June 2020. Total sales rose in July despite a drop in new order inflows from manufacturing, as service providers said customer demand returned to growth. New export orders again weighed on overall new business as demand from foreign customers deteriorated. While cost inflation is rising significantly, it has fallen to its lowest level in six months. Higher input prices have been linked to higher fuel, transport, wage, and material costs, which continue to be passed on to customers. Still, output charges have grown at the slowest pace since March 2021. The labor force in private companies grew at the slowest rate since January. Capacity pressure on service providers has eased, while manufacturers' jobs on hand have risen only marginally.
- US: U.S. mortgage applications rose 1.2% in the last week of July, the first increase in five weeks, as both the refinancing index (1.5%) and the home purchase index (1%) rose. Meanwhile, the average rate on a 30-year fixed-rate mortgage fell for the second time in a row, down 31 basis points to 5.43%. It was the most significant drop in mortgage costs since 2020. “Mortgage rates fell last week, with further rate hikes likely, following the Federal Reserve’s renewed announcement of monetary policy tightening. U.S. Treasury yields fell as investors continued to expect weaker macroeconomic conditions in the coming months. "Lower mortgage rates, coupled with signs of more inventory entering the market, could lead to an economic recovery," Joel Kan, MBA's vice president for economic and industry forecasting.
- US: In July 2022, the U.S. Logistics Managers Index fell for the fourth consecutive month to 60.7, the lowest level since May 2020, mainly due to lower transport prices. The index fell below its historical average of 65.3 for the second time but still indicated a healthy pace of expansion in the logistics industry. Shipping prices shifted from development to contraction (49.5) for the first time in two years as capacity (69.1) rose to its highest level since April 2019. However, in the last week of July, the growth in shipping capacity was even slower. Meanwhile, warehouse utilization (68.8) and inventory levels (68.80) remained strong.
- EU: Annual producer inflation in the eurozone fell to 35.8% in June 2022 from 36.2% in May, the lowest in four months and slightly above market expectations of 35.7%. Prices of energy (92.8% vs. 94% in May) and intermediate goods (23.8% vs. 25%) slowed, while capital goods (7.6% vs. 7.1%), consumer durables (9.5% vs. 9.1%) and non-durables cost faster (12.5% vs. 12.1%). Excluding energy, producer prices rose 15.6%, down from 16% in May.
- EU: In June 2022, retail sales in the euro area fell by 1.2% month-on-month, the most significant decline this year and far below market forecasts of flat. Earlier, it edged up 0.4% in May as high consumer prices, borrowing costs, and low confidence weighed on consumer spending. Retail sales figures for the eurozone have been adjusted for inflation. Sales of food, beverages, and tobacco (down 0.4% for the third month) and non-food (also down 2.6% for the third consecutive month) fell, with motor fuels down 1.1%. Compared with last year's period, retail sales fell by 3.7%, well above the consensus forecast of 1.7%.
- EU: In June 2022, the Eurozone producer price index rose 1.1% month-on-month, up from a downwardly revised 0.5% gain in May and above market expectations of 1%. The rise in monthly producer inflation was mainly due to a rebound in energy prices (2.7% vs -0.5% in May), while intermediate goods (0.4% vs 1.7%), capital goods (0.4% vs 0.6%), consumer durables (0.7%) than 0.9%) and the cost of non-durable consumer goods slowed (0.7% vs. 1.1%).
- IT: The S&P Global Italy Composite PMI fell to 47.7 in July 2022 from 51.3 the previous month, indicating the Italian private sector contracted for the first time since January 2021. Activity in both manufacturing (48.5 vs. 50.9 in June) and services (48.4 vs. 51.6) declined, as a decline in new jobs for the first time in 18 months forced a contraction in total output. Manufacturers' declines were more pronounced but still widespread. The reduction in business activity has prompted companies to catch up with good businesses, easing pressure on capacity. Meanwhile, firms continued to take on more workers in July, albeit at the slowest pace in 15 months, as manufacturers took up less. In addition, input inflation in both sectors is generally low but still well above the long-term average. Geopolitical uncertainty and a negative economic outlook have lowered business confidence to its lowest level since May 2020.
- GE: The S&P Global German Services Purchasing Managers' Index was revised to 49.7 in July 2022 from a preliminary 49.2, but still indicated the services sector contracted for the first time since December, as customer confidence weakened and household and corporate finances tightened. New business fell for a second straight month, but the labor market continued to show resilience as companies sought to expand capacity. At the same time, input and output price inflation has fallen but is still rising. Finally, business expectations have turned negative for the first time since the first wave of Covid-19 in 2020, amid concerns over high inflation and rising interest rates, and the prospect of gas shortages.
- UK: In July 2022, the S&P Global/CIPS UK Services PMI was revised down to 52.6 from a preliminary estimate of 53.3, indicating that the expansion of services activity was the weakest in 17 months, as inflationary pressures and a tightening cost of living led to economic uncertainty Sexual intensification. Therefore, new business gains are limited. Although inflation has eased considerably since June, operating expenses and average prices are still proliferating. Meanwhile, confidence in the future remains at historically low levels. The more positive news is that the labor market continues to strengthen, with employment increasing rapidly. However, challenges remain in recruiting appropriately qualified staff.
- UK: The S&P Global/CIPS UK Composite PMI was revised from a preliminary reading of 52.8 to 52.1 in July 2022, down from 53.7 in June. The latest figures show that this is the slowest expansion since February 2021. New orders rose only marginally in July, reflecting weak demand in domestic and foreign markets. The latest data showed that export sales fell again, mainly reflecting a decline in new overseas jobs across the manufacturing sector. The average cost burden on the UK private sector rose sharply again in July, but the pace of inflation slowed to a 10-month low. Softer input price pressures and weak customer demand contributed to the smallest increase in average prices since February.
- SWL: Sweden's July 2022 Services PMI was revised downward to 58.8 from 62.3 in the previous month, indicating that the sector has grown the weakest since December 2020, with the most significant negative contribution from new orders (55.3 vs. 59.5 in June), followed by were employment (56.1 vs. 62.8), business volume (53.1 vs. 56.1), while the delivery time sub-index remained unchanged (74.7). Meanwhile, the supplier input price index fell for the second month to 84.1 in July from 86.8 in June. "These are still at elevated levels, indicating that increased price pressures in the services sector are still widespread, even if there are signs of a decline in prices," said Jörgen Kennemar, head of PMI analysis at Riksbank.
Today, investors will receive:
- USD: Challenger Job Cuts y/y, Unemployment Claims, Trade Balance, Natural Gas Storage, and FOMC Member Mester Speaks.
- EUR: German Factory Orders m/m, ECB Economic Bulletin, Spanish 10-y Bond Auction, and French 10-y Bond Auction.
- GBP: Construction PMI, BOE Monetary Policy Report, MPC Official Bank Rate Votes, Monetary Policy Summary, Official Bank Rate, and BOE Gov Bailey Speaks.
- AUD: Trade Balance.
- CA: Building Permits m/m and Trade Balance.
KEY EQUITY & BOND MARKET DRIVERS:
- FR: French 10-year oats yielded near 1.5%, rebounding from a three-month low of 1.1%, as investors continued to assess the extent to which major central banks may raise interest rates against a backdrop of slowing economic activity. Fed policymakers said the central bank's priority is to keep inflation healthy by limiting interest rates, even as recent economic data has fueled recession fears. In addition, the latest Eurozone inflation data showed consumer prices hitting record highs again, while Eurozone and domestic second-quarter GDP figures beat expectations. Meanwhile, a lack of natural gas supplies in Russia has raised concerns about energy rationing in the winter, coupled with a halt in production at multiple nuclear power plants and low domestic output as corrosion problems and heat waves across the continent dry up rivers.
- IT: Italy's 10-year BTP yield rose above 3%, rebounding from a two-month low of 2.9% hit on Aug. 2, as investors continued to weigh on expectations that major central banks would raise borrowing costs in response to recession fears and Geopolitical tensions. Fed policymakers noted that despite a recent flurry of worrying economic data, the central bank remains determined to fight inflation, upping the ante on sharp interest rate hikes. In addition, the latest Eurozone inflation data showed consumer prices hitting record highs again, while Eurozone and domestic second-quarter GDP figures beat expectations. Meanwhile, Italian debt continued to benefit from the support the ECB's TPI provided to credit risk in heavily indebted economies. As a result, the spread between 10-year British and German bunds remained at 220 basis points, down from 250 at the end of July, reflecting a lowering of perceptions of Italian debt risk.
- US: On Wednesday, stock futures contracts linked to the three major indexes rose 0.5%. Wall Street was poised for a rebound as investors assessed the prospect of tightening monetary policy while focusing on developments in Taiwan. Several Fed policymakers, including Chicago Fed President Charles Evans, reassured markets that the central bank would remain fully committed to containing inflation despite recession risks. Meanwhile, China halted some trade with Taiwan in retaliation for a visit to Taiwan by U.S. House Speaker Nancy Pelosi. On the corporate side, Paypal surged more than 10% in pre-IPO trading on solid second-quarter results and a positive outlook. SoFi is also up about 15% in earnings and revenue. On the other hand, chipmaker AMD surprised investors by falling more than 5% after it released its third-quarter revenue guidance.
- GE: Germany's 10-year bond yield rose above 0.8% after hitting a four-month low below 0.7% earlier this week, as investors will watch after three Fed officials said further rate hikes are needed to combat high inflation. The force turns back to interest rates. Investors rushed to seek debt safety this week as the U.S.-China conflict escalated. Meanwhile, the European Union agreed to cut gas use by 15% by March. Final PMI data showed private sector activity in the eurozone contracted for the first time since February 2021. The European Central Bank started raising interest rates last month on the monetary policy front. It announced a larger-than-expected 50 basis point hike, but markets began lowering expectations for a September hike due to recession fears. Meanwhile, investors continued to assess the possible impact of the TPI on bond yield spreads.
- UK: Britain's 10-year gilt rebounded to 1.9% from a 2-1/2-month low of 1.7% earlier this week, as investors braced for another rate hike by the Bank of England. The central bank is expected to raise interest rates by 50 basis points, the most significant rate hike since 1995, bringing borrowing costs to the highest since 2008, as inflation accelerated more than expected in June. Meanwhile, the final Purchasing Managers' Index showed the UK economy slowed more than initially expected at the start of the third quarter but remained at a robust pace. Three Fed officials said further rate hikes were needed to combat high inflation.
STOCK MARKET SECTORS:
- High: Consumer Discretionary, Communication Services, Real Estate, Information Technology, Financials.
- Low: Energy.
TOP CURRENCY & COMMODITIES MARKET DRIVERS:
- USD: The U.S. dollar index regained 107 points, recovering further from a one-month low of 105, as investors reassessed the prospect of tightening monetary policy by the Federal Reserve. Several Fed policymakers, including Chicago Fed President Charles Evans, tend to be very dovish, saying they are firmly committed to reducing inflation to the central bank's 2 percent target. Better-than-expected economic data also added to the bullish tone. The ISM non-manufacturing purchasing managers index was well above expectations, easing fears of an impending recession and cementing the view that the policy focus is unlikely to materialize anytime soon. Three-month U.S. dollar borrowing costs surged to 2.83%, the highest level since November 2008, as hawkish Fed rhetoric sparked demand for the greenback. Several Fed policymakers, including Chicago Fed President Charles Evans, usually the most dovish member, expressed a firm commitment to reducing inflation to the central bank's 2 percent target. The U.S. central bank's apparent hawkish turn eased speculation about a policy shift, even as the world's largest economy slowed.
- OIL: U.S. crude inventories rose by 4.467 million barrels in the week to July 29, while the market expected a decline of 629,000 barrels. Cushing, Oklahoma, rose by 926,000 barrels, up from 751,000 barrels in the previous period. Gasoline inventories rose by 0.163 barrels. Distillate stockpiles, which include diesel and heating oil, fell by 2.4 million barrels.
- CNY: The offshore yuan rose to 6.75 against the dollar after hitting a two-month low of around 6.80 but was expected to remain volatile as traders focused on heightened Sino-U.S. tensions over House Speaker Nancy Pelosi's visit to Taiwan. Chinese Foreign Ministry spokeswoman Hua Chunying said on Twitter that Pelosi's visit was a "major political provocation," while the People's Liberation Army (PLA) will reportedly hold military exercises around Taiwan from August 4 to 7. . The risk of escalation across the Taiwan Strait is expected to keep markets on edge once Pelosi leaves the region. Meanwhile, investors cheered upbeat Chinese service-sector activity data for July, which heralded a potential economic rebound amid an improving Covid-19 situation; however, this is offset by weak domestic manufacturing data and divergent monetary policy in China, raising the risk of increased capital outflows and further depreciation of the yuan.
CHART OF THE DAY:
The euro remained below $1.02, not far from the key $1 parity line, on fears of a looming recession. Final PMI data confirmed that private sector activity in the eurozone contracted for the first time since the beginning of the third quarter of February 2021, with retail sales falling sharply in June. Meanwhile, the EU agreed to cut gas use by 15% between August 1, 2022, and March 31, 2023, to save money ahead of winter in response to a possible disruption to Russia's gas supply addition, the European Central Bank started raising interest rates last month on the monetary policy front and delivered a more-than-expected 50 basis point hike. Still, markets began lowering expectations for a September hike due to recession fears.
- EURUSD - D1, Resistance (target zone) around ~ 1.04450, Support (target zone) around ~ 0.99950.