According to the CME FedWatch tool, investors now see a 70% chance of a third 75-basis-point rate hike at the Fed meeting later this month.

Yesterday, European equity markets all nosedived, erasing all or part of their Friday rebound. Only the UK held up well, with the commodity-rich FTSE 100 gaining 0.09%, lifted by oil and mining companies.

Was this a way of welcoming the arrival of Liz Truss at 10 Downing Street to replace Boris Johnson? The new British Prime Minister, whose hairstyle is far less disheveled than that of her predecessor, will be sworn in today. She will have her work cut out for her to get her country out of the rut.

In other news, the Bank of Australia raised rates today by 50 basis points (from 1.85% to 2.35%) as forecasters had anticipated. The country is facing the same price increase phenomena as elsewhere. The European Central Bank will unveil its policy decision on Thursday, followed by a speech by ECB Head Christine Lagarde and Fed head Jerome Powell on the same day.

This phase of monetary policy tightening comes at the worst possible time, as Europe is facing an unprecedented energy crisis. The explosion in energy prices has created a huge "tax" on the continent's consumers and businesses, paid not to governments but to external suppliers, as economist Erik Nielsen pointed out. This tax reduces the standard of living of Europeans by more than 3%, which is considerable. Nielsen speaks of a "permanent shock" that will only be resolved when alternative energies are deployed, which is costly and time consuming.

The energy crisis is leading to new measures in Europe, either to support energy companies financially (as in Finland and Sweden), or to support the consumer (the tariff shield will be renewed in France in 2023), or both (Germany has adopted a €65 billion plan). All this money will go into the pockets of fossil fuel suppliers. I quote again the work of Nielsen and Unicredit: before the pandemic, the EU was importing about 400 billion euros per year of oil (3/4) and gas (1/4), at prices of $55 per barrel and €20 per MWh respectively. At $100 per barrel and €100 per MWh of gas (which is half the current spot price), the bill would increase by 600 billion euros per year, which is a "new annual tax" of nearly 4% of GDP.

In the meantime, we will be watching in the US today the two main indicators of service sector momentum in August, the services PMI and its alter-ego the ISM services. These are refined versions of already known indicators, so some may not care.

Yesterday, seeing oil prices slide, OPEC+ drew its usual statement about a production cut the following month. But it’s not so bad,  as one industry insider explains, "the cartel has been pumping well below its production targets for some time now, so the impact of this cut on real supply is limited.” That said, it is still having a small effect: prices are up a bit.

 

Today's economic highlights:

The S&P Global PMI composite US (9:45 am) and the ISM services Index (10:00 am) are today’s main indicators All the macro agenda here. 

The dollar is still very high against the euro, at EUR 1.007. The ounce of gold is trading at USD 1712. A barrel of North Sea Brent is worth USD 92.99 and a barrel and US WTI light crude USD 86.91. The yield on US 10-year debt is up slightly to 3.21%, while the 2-year is at 3.44%. Bitcoin is sailing around USD 19,800.

 

On markets:

* CVS Health announced Monday that it has completed the acquisition of home health care group Signify Health for approximately $8 billion in cash.

* Meta Platforms - The Irish regulator announced Monday that it has fined Meta Platforms' Instagram €405 million over the handling of minors' data on the social network. The stock was gaining 0.6% in pre-market trading.

* Illumina - The European Commission announced Tuesday that it would ban Illumina's $7.1 billion takeover of Grail, saying the deal would have harmed competition in the cancer testing market. Illumina immediately said it would appeal the decision.

* EQT - The natural gas producer is in advanced discussions to buy THQ Appalachia and infrastructure associated with its operations for about $4 billion, sources close to the matter said Monday.

* Exxon Mobil and Shell have put their Dutch natural gas joint venture NAM up for sale, which could be acquired for more than $1 billion, two industry sources said.

* Bed, Bath & Beyond - The struggling group's chief financial officer, whose body was found Friday at the base of a New York skyscraper, committed suicide, the city's forensic services concluded Monday. The stock was down 16.5% in pre-market trading.

 

Analyst recommendations:

  • Associated British Foods: Jefferies downgrades from buy to hold, targeting GBp 1500.
  • Avon Protection: Jefferies remains Buy with a price target reduced from GBp 1490 to GBp 1120.
  • B&M European Value Retail: Jefferies downgrades from hold to underperform with a target of GBp 300.
  • BT Group: Berenberg downgrades from buy to hold, targeting GBp 190.
  • Burberry: Berenberg maintains a hold rating with a price target reduced from GBp 2050 to GBp 1730.
  • Ciena: J.P. Morgan downgrades to neutral from overweight. PT up 1.8% to $45.
  • Discover Financial: J.P. Morgan downgrades to neutral from overweight. PT up 14% to $113.
  • Discoverie Group: Jefferies maintains a Hold rating with a price target reduced from GBp 1070 to GBp 820.
  • Fedex: Citi analyst Christian Wetherbee cut its recommendation to neutral from buy. PT up 7.8% to $225.
  • Frontline: Jefferies raised the recommendation to buy from hold. PT up 34% to $16.
  • Greif: Wells Fargo Securities downgrades to equal-weight from overweight. PT up 5.6% to $71.
  • J Sainsbury: Jefferies downgrades from buy to hold targeting GBp 210.
  • JD Sports Fashion: Berenberg remains Buy with a price target reduced from GBp 200 to GBp 180.
  • Kingfisher: Jefferies downgrades from buy to hold, targeting GBp 240.
  • Marks and Spencer: Jefferies maintains a Hold rating with a price target reduced from GBp 170 to GBp 115.
  • Next: Jefferies maintains a Hold rating with a price target reduced from GBp 6,350 to GBp 5,500.
  • Ocado: Morgan Stanley resumes tracking at Underweight, targeting GBp 610.
  • Redde Northgate: Jefferies remains Buy with a price target reduced from GBp 506 to GBp 450.
  • Rollins: RBC Capital Markets raised its recommendation to outperform from sector perform. PT up 19% to $40.
  • Tesco: Jefferies downgrades from buy to hold, targeting GBp 260.
  • Tesla: Wolfe Research upgrades to outperform from peerperform. PT up 33% to $360.