New data shows the Eurozone Purchasing Managers' Index fell to 52.0 in June from 54.8 in May, marking an economic contraction.

In addition, the Bank of England also warned on Tuesday that the economic outlook globally had worsened since the start of the year and urged banks to increase their capital reserves to prepare for tough times.

In all the doom and gloom, there is some optimism about the prospect of an improvement in relations between the US and China. Investors believe that Washington and Beijing could make a "win-win" announcement in the short term. It was announced today that U.S. Secretary of State Antony Blinken will meet Chinese Foreign Minister Wang Yi alongside the G20 meeting of foreign ministers in Bali this week.

Specifically, the Biden administration could alleviate some of the trade tariffs that have affected imports of Chinese goods since the Trump era, particularly on consumer staples. Benefit for the US: send a deflationary signal on prices. Benefit for China: get a small gas pedal to boost a still sluggish economy. A discussion described as "constructive" took place last night between Chinese Vice Premier Liu He and US Treasury Secretary Janet Yellen.

The tariff narrative is a relatively powerful short-term catalyst for equities. Investors are indeed sorely lacking in positive news. It is an important building block for both the "curbing inflation" and the "China is waking up" themes, which are the two most credible drivers of an upturn at the moment. The timing would also be positive, as the announcement would come before the release of the big series of quarterly corporate results and ahead of important central bank meetings, on July 27 for the Fed. The United States can justify a reduction in tariffs by exceptional circumstances and a helping hand to Beijing, and China can take advantage of a windfall without having to beg Washington. I would add that the Caixin manufacturing PMI indicator rose to 51.7 points in June, which is higher than expected and is one more brick for the aforementioned "China is waking up" theme.

 

Economic highlights of the day:

The final reading of the June services PMIs for the major economies will be spread out over the day. In the US, durable goods and factory orders will be released at 10 am. All the macro agenda here.

The euro is trading at EUR 0.9717. The ounce of gold is stagnating at USD 1799. Oil is down with North Sea Brent crude at USD 110.73 a barrel and U.S. light crude WTI at USD 107.24. The yield on 10-year US debt is up a bit to 2.95%. Bitcoin is back up to USD 19401.

 

On markets:

Tesla reported on Saturday a 17.9% drop in second-quarter electric vehicle deliveries to 254,695 due to the impact of health restrictions in China on its production and supply chain.

Exxon Mobil - The U.S. oil company said Friday that higher margins on fuel and crude sales could generate a record second-quarter profit of $16 billion.

Warner Bros. Discovery was down 6% in premarket trading after reports in Variety magazine that its HBO Max video-on-demand service will cease production of original content in several European countries.

 

Analyst recommendations:

  • Antero Resources: Truist Securities upgrades to buy from hold. PT rises 63% to $50.
  • BAE Systems: AlphaValue remains at 'light' with a price target raised from GBp 760 to GBp 845.
  • Burberry:  Exane BNP Paribas downgrades to neutral from outperform. PT up 16% to 1,900 pence.
  • Croda: Jefferies remains "Hold" with a price target reduced from GBp 7,500 to GBp 7,000.
  • Diageo: Stifel resumes tracking to buy at GBp 4530.
  • Flutter: Jefferies remains Buy with a price target reduced from GBp 15,500 to GBp 12,900.
  • HP Inc: Evercore ISI cut its recommendation to inline from outperform. PT up 13% to $36.
  • Otis Worldwide: BNP Paribas Exane downgrades to Neutral From Outperform, Price Target to $80 from $95.
  • RS Group: Citigroup resumes monitoring at neutral, targeting GBp 900.
  • Teradyne: J.P. Morgan initiated coverage with a recommendation of neutral. PT rises 40% to $120.
  • Texas Instruments: DZ Bank downgrades to hold from buy. PT up 1% to $150.
  • Travis Perkins: Jefferies remains at Hold with a price target reduced from GBp 1049 to GBp 1040.