EMEA Morning Briefing: Market Volatility Likely to Persist

MARKET WRAPS

Watch For:

EU retail trade; Germany manufacturing orders; trading updates from Bayer, Travis Perkins, abrdn, InterContinental Hotels Group, Norwegian Air Shuttle, Zalando

Opening Call:

European stock futures are broadly lower even as US stock futures turned higher. Asian benchmarks broadly rose; the dollar and Treasury yields gained; oil and gold futures also pushed higher.

Equities:

European stock futures retained a broadly negative bias early Tuesday even as several markets in Asia rebounded from yesterday’s sharp selloff. However, investors were still betting on choppiness ahead.

“It is hard to know what the stress point for the selloff was. We think it’s a combination of many factors that have led to too many leveraged trades heading for an exit that can’t fit all of them,” said Rob Almeida, Global Investment Strategist and Portfolio Manager at MFS Investment Management.

“The market is telling us that whatever is bothering it right now, there is not a simple solution to turn off the stress and worry,” said Mike Thompson, a co-portfolio manager at Little Harbor Advisors.

Investors have been expecting the Fed to cut rates at its September meeting but last week’s weak US data has stirred a debate on whether the Fed might take the rare steps of making a larger-than-usual half-percentage-point cut or even lowering borrowing costs between meetings.

Some reassuring comments by Fed officials such as San Francisco Fed President Daly have helped to allay some of the markets’ worries, ING economists said.

Forex:

The euro’s gains against the dollar could be limited as panicked market conditions should ease in the coming sessions, Rabobank said.

“In the near-term, a settling of nerves regarding Fed rate cut risks and a waning of intra-meeting speculations should provide the (dollar) some support.”

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Sterling could further weaken as investors scale back excessive long positions–or bets that the currency will rise–amid global risk aversion and increased expectations of UK interest-rate cuts, MUFG Bank said.

Long sterling positions–held by leveraged funds before the recent correction lower in global equities–had reached their highest levels since April 2018, leaving sterling vulnerable, it said.

Bonds:

The recent market selloff shows that bonds are once again acting as a hedge against a stock market crash, said Althea Spinozzi, head of fixed income strategy at Saxo.

Bonds provide better compensation for risk and a cushion against price declines compared to pre-Covid levels, she said, adding that central banks have ample room to cut interest rates, which further supports bond prices–pushing yields lower–in case of a crisis.

If there’s no crisis, markets will need to price out rate-cut expectations, causing Treasury yields to rise, she said. To mitigate these risks, Saxo prefers limiting duration exposure to bonds with maturities of up to five years.

Energy:

Oil climbed amid rising Middle tensions that could lead to supply disruptions. US Secretary of State Blinken said on a call Sunday with G-7 foreign ministers that Iran could attack Israel within 24 to 48 hours, according to two diplomats briefed on the call, the WSJ reported.

“While developments may lead to short-term volatility in the market, to see sustained strength, we would likely need to see some actual disruption to oil supply, which has been lacking so far,” the ING strategists said.

Metals:

Gold edged higher and remains supported by its still-intact bullish tone, analysts said.

During a global recession, if it ultimately emerges, could hit demand for gold jewelry, monetary component of gold’s value should benefit from the attendant rate cuts by central banks globally, making the precious metal relatively more attractive, said Matthew Weller, Global Head of Research at FOREX.com and City Index.

Although there are more crosswinds now for gold than there were a week ago, fundamental bullish thesis remains intact for now, Weller added.

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Lithium isn’t out of the woods yet, said UBS after a plunge in prices for the battery metal. “We had hoped Tianqi’s decision to take the extra 200,000 (metric tons) was a sign things might be improving, but with spot trading at US$870/ton, more needs to play out before the market rebalances,” it said.

UBS has a FY 2025 lithium-price forecast of US$1,000/ton, just below consensus of US$1,015/ton.

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Copper rose in Asian trade. Base metals weren’t immune from the global selloff with copper down as much as 4%, ANZ Research analysts said.

However, challenges in copper mine supply could keep the concentrate market tight, the analysts said, adding that this could subsequently reduce the output of refined copper, particularly in China.

TODAY’S TOP HEADLINES

Market Selloff Upends Fed Rate-Cut Calculus

Monday’s market rout increases both the risks of recession and a more harrowing financial-market accident. But for Federal Reserve officials who laid the groundwork last week to cut rates by a quarter-percentage point at their meeting next month, the outlook would likely need to deteriorate further in the coming weeks to compel a bigger response.

Fed officials don’t meet again until Sept. 17-18. There, they could debate whether to kick off their widely anticipated sequence of rate cuts with a larger reduction of a half-percentage point, or 50 basis points, if last month’s weak-across-the-board employment report is indicative of a new, worrisome trend.

Fed’s Daly Isn’t Worried About the Jobs Report-or an Impending Recession

San Francisco Federal Reserve President Mary Daly isn’t overly concerned about the July jobs report-and certainly not about an impending recession.

A “policy adjustment” is still coming sooner rather than later, she said on Monday, and there’s no cause for alarm.

Is This 1987 All Over Again? What’s Driving the Market Meltdown?

Financial markets are supposed to capture the wisdom of the crowd, but on Monday the crowd ran in all directions waving its hands in the air screaming. Japan’s stock market fell the most in 37 years and the VIX index of implied US stock volatility had the second-biggest rise in data back to 1990. Panic hit.

The Longest Inverted Yield Curve In US History May End Soon. What It Means for Stocks.

The financial market’s top recession warning, the inverted yield curve, looks ready to end its record stretch of flashing a warning signal.

That could spell good news for stocks-unless an economic downturn follows.

L’Oreal Buys Stake in Swiss Skincare Company Galderma

L’Oreal agreed to buy a minority stake in Swiss skincare company Galderma valued at $1.85 billion, bolstering its exposure to the fast-growing market for aesthetic injections such as fillers.

The deal marks L’Oreal’s return to Galderma, a company it co-founded with Nestle more than four decades ago and that it exited in 2014, and a high-profile backing for the skincare specialist nearly five months after its listing in one of the biggest initial public offerings of the year.

Infineon Cuts Jobs, Guidance as Chip Inventory Glut Weighs on Market Recovery

Infineon Technologies said it would cut about 1,400 jobs and lowered its sales forecasts for the third time this year as the inventory glut pervading the semiconductor industry continues to translate into fewer orders for chips in smartphones, cars and industrial machinery.

The German chip maker said it now expects sales of roughly 15 billion euros ($16.37 billion) in the fiscal year to the end of September compared with a previous forecast of about EUR15.1 billion and the EUR16.31 billion it reported for fiscal 2023. Its segment result margin-a key profitability measure-is still projected at around 20% compared with 27% the prior year.

US Faces New Challenges as Potential Iran Attack on Israel Nears

WASHINGTON-The Biden administration is working to blunt a potential Iranian attack on Israel, but it faces an array of fresh challenges as it seeks to replicate the success it had in April when a multinational coalition helped Israel intercept a barrage of Iranian missiles and drones.

US officials said they have since the weekend started seeing Iran moving missile launchers and conducting military drills, which could indicate Tehran is preparing for an attack in the coming days. Iran has signaled it plans to retaliate against Israel for the killing of a senior Hamas leader in Tehran.

Google Loses Antitrust Case Over Search-Engine Dominance

WASHINGTON-A federal judge ruled that Google engaged in illegal practices to preserve its search engine monopoly, delivering a major antitrust victory to the Justice Department in its effort to rein in Silicon Valley technology giants.

Google, which performs about 90% of the world’s internet searches, exploited its market dominance to stomp out competitors, US District Judge Amit P. Mehta in Washington, DC said in the long-awaited ruling.

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Expected Major Events for Tuesday

00:01/IRL: Jul Ireland Services PMI

04:30/NED: Jul CPI

05:45/SWI: Jul Unemployment

06:00/ROM: Jun Retail trade

06:00/GER: Jun Manufacturing orders

06:00/GER: Jun Manufacturing turnover

06:30/SWI: Jun Retail Sales

06:30/HUN: Jun Retail Sales

06:45/FRA: 2Q Flash estimate of job creation

07:00/SVK: Jun Internal trade, incl. Wholesale & Retail

07:00/AUT: Jul Wholesale Price Index

07:00/JUN: Jun Industry, Construction

07:00/Jun: Jun External trade

08:30/UK: Jul S&P Global UK Construction PMI

09:00/CRO: Jul PPI

09:00/EU: Jun Retail trade

All times in GMT. Powered by Onclusive and Dow Jones.

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August 06, 2024 00:15 ET (04:15 GMT)