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EMEA Morning Briefing: Fears Over Hawkish Fed, Europe's Energy Crisis to Sink Stocks

09/07/2022 | 12:28am EST

MARKET WRAPS

Watch For:

Eurozone GDP, Main Aggregates Estimate, Employment; Germany Industrial Production; Italy Retail Sales; UK Narrow Money; updates from EXOR, Tod's, Richemont, Barratt Developments, SAS, ConvaTec

Opening Call:

Continued hawkish Fed bets, following the ISM print, and the energy crisis in Europe will likely weigh heavily on shares on Wednesday. In Asia, most major benchmarks were weaker; Treasury yields and the dollar added to gains; while oil and gold prices fell.

Equities:

European shares are seen sharply lower to start Wednesday after U.S. indexes ended in the red in a volatile session, with Nasdaq suffering its longest losing streak since 2016.

Investor sentiment, once again, will be driven by expectations for tighter Federal Reserve policy and Europe's energy crisis.

Stocks to Watch:

Rio Tinto will likely need to draw additional debt, or cut its 2022 and 2023 dividend payout ratio, if its takeover of Turquoise Hill is successful, Macquarie said.

A binding agreement for Rio Tinto to take full ownership of Turquoise Hill marks a key milestone for the proposed deal. "We note the cash offer still requires majority approval from the 49.2% minority shareholders."

Forex:

The dollar continued to rally in Asian trading on fears of a global economic slowdown as the war in Ukraine weighs on the European economy and tighter restrictions to fight Covid-19 outbreaks across the China curb growth.

Meantime, some key Treasury yield-curve spreads have become less inverted, which could be a sign that investors see a U.S. recession as less likely than they did by mid-summer, potentially boosting the dollar as a safe haven.

Bonds:

Treasury yields added to gains in Asia, after Tuesday's U.S. economic data undermined recession forecasts and supported expectations of lasting monetary tightening.

On Tuesday, 2-year and 10-year yields posted their largest one-day gains in a month following a small rise in the U.S. ISM services index

Capital Economics said the data struck "a further blow against the idea the economy is close to recession, with a weighted average of the two ISM surveys consistent with GDP growth of around 3% annualised."

Other News:

Treasury swap rates are a better indicator of investors' sentiment because the swap market is less influenced by the Fed than the bond markets, Advisors Asset Management said.

Even as the Fed rolls back quantitative easing, its presence remains large. The swap market, on the contrary, "is less distorted [because] the Fed isn't doing a lot of swaps," Advisors Asset said.

According to Tradeweb data, the 2-year-10-year swap curve is inverted at around 44 basis points, after peaking at 70.2 a month ago. Advisors Asset said the 2-year-30-year swap curve has also inverted at historic levels, showing investors are very concerned with the risk of a recession.

---

Some key risk measures in the corporate debt market are flashing red as the rise in benchmark interest rates makes junk-rated leveraged loans much costlier to service for companies that borrowed them over the last decade--often to fund buyouts by private-equity firms.

Leveraged loan defaults hit $6 billion in August, the highest since October 2020, when pandemic shutdowns hobbled the U.S. economy, according to Fitch.

The rise comes as forecasts for Libor shot up in recent months as the Fed raised rates faster than expected to combat inflation. Traders now expect one-month Libor, which is currently around 2.6%, to hit 4.07% by May 2023, up from the 3.15% they had forecast in April, according to data from Chatham Financial.

A default-rate forecasting model operated by Barclays indicates the leveraged-loan default rate could exceed 4% in 12 months compared to about 1% now.

Energy:

Oil futures were around 1.6% lower in Asia due to the weak demand outlook. On Tuesday, Brent closed down 3%, while WTI was little changed.

Oil prices have retreated sharply from their levels in March, more than giving up gains that took crude to roughly 14-year highs following Russia's late-February invasion of Ukraine.

New lockdowns in China and worries about aggressive tightening of monetary policy by major central banks have raised concerns about global demand.

Metals:

Gold extended its retreat, weighed by the strengthening dollar.

Gold may be reaching a critical equilibrium as global recession fears spurred by the latest Covid lockdowns in China appear to be counterbalancing higher Treasury yields and a firmer dollar, according to some strategists.

While gold has outperformed stocks and bonds so far this year, the precious metal hasn't performed as strongly as some analysts had expected, given its longtime reputation as a hedge against inflation.

"Tough talk on inflation will likely continue to weigh on gold, rather than propel gold higher simply because inflation itself is high," RBC Capital said.

The "hawkish [versus dovish] views on the Fed and related rate hike implications for the dollar and rates themselves have been the biggest driver. It does not look good for gold in our view. A more hawkish Fed has clearly taken its toll most recently," RBC added.


TODAY'S TOP HEADLINES

China Export Growth Slowed in August; Trade Surplus Narrowed

China's exports grew at a slower pace in August, undershooting market expectations as global demand for Chinese goods softened, official data showed Wednesday.

Outbound shipments rose 7.1% from a year earlier in August, slowing from an 18% increase in July, the General Administration of Customs said. The reading was also slower than the 12.5% growth expected by economists polled by The Wall Street Journal.


SEC Warns Chinese Companies About Risks of Auditor Changes

The Securities and Exchange Commission on Tuesday warned Chinese companies not to violate legal and audit requirements as they switch to auditors based in the U.S. to comply with a law that threatens to delist the businesses from American stock exchanges.

More than 200 U.S.-listed Chinese companies are in danger of being booted off U.S. stock exchanges starting in early 2024 under the Holding Foreign Companies Accountable Act of 2020. It prohibits trading in companies whose auditors cannot be inspected by the Public Company Accounting Oversight Board-the U.S. audit watchdog overseen by the SEC-for three consecutive years.


Conflicting Surveys Paint Mixed Picture of Services Providers

The U.S. services sector either expanded or shrank faster in August than in July, according to two separate business surveys, adding to other mixed signals of the U.S. economy's strength in recent months.

The Institute for Supply Management on Tuesday said the nation's services sector grew faster in August than in July, according to its Services PMI-an index that tracks industries including healthcare, finance, agriculture and construction.


Investors Are Pouring Into U.S. Stocks to Avoid Greater Turbulence Overseas

Investors around the world are piling into U.S. stocks, even as they brace for the prospect of a rocky autumn, because they say there's nowhere better to shelter from the turbulence in global markets.

Skyrocketing inflation, worries about a potential recession, Russia's invasion of Ukraine, rising energy prices and new Covid-19 outbreaks have rattled everything from stocks to bonds to commodity prices this year.


Zambia Requests $8.4 Billion in Debt Relief From Foreign Creditors

Zambia has requested $8.4 billion in debt relief from its foreign creditors over the next three years, including from China, the country's single largest creditor and the largest lender to the developing world.

Zambia's debt restructuring is widely seen as a test of how much debt relief China will be willing to provide to countries that can't repay what they have borrowed from Beijing, which has shown a reluctance in recent years to write down its bilateral debts, preferring to lend more or reprofile them rather than accept haircuts.


Ukraine Seeks Corridor to Evacuate Civilians Near Zaporizhzhia Nuclear Plant

Scores of people were trying to evacuate from villages near the Zaporizhzhia nuclear-power plant, Ukrainian officials said, as an explosion cut off access to electricity and water at a nearby town.

Electricity and water supplies in Enerhodar, Ukraine, were stopped after residents reported a powerful explosion Tuesday that shook the town, said Mayor Dmytro Orlov. Ukrainian Deputy Prime Minister Iryna Vereshchuk appealed for Russia to allow civilians from the area-which is controlled by Russian forces-to cross into Ukrainian-held territory.


Solvay to Cut Waste From Soda-Ash Plant in Italy After Criticism

Belgian chemicals maker Solvay SA plans to cut waste that its Italian soda-ash plant discharges into the Mediterranean Sea following accusations of pollution.

Solvay's factory in Rosignano, Italy, on the Tuscan coast, has emerged as an environmental flashpoint in recent years, sparking discussion among European politicians and drawing criticism from environmentalists and a fund manager.


Write to paul.larkins@dowjones.com


Expected Major Events for Wednesday

06:00/NOR: 2Q Balance of Payments

06:00/GER: Jul Industrial Production Index

06:00/DEN: Jul Industrial production & new orders

06:00/NOR: Jul Industrial Production Index

06:00/ROM: 2Q GDP

06:00/UK: Aug Halifax House Price Index

06:00/SWE: Jul New orders & deliveries in industry

06:00/SWE: Jul Industrial Production Index

07:00/CZE: Jul Retail Trade

07:00/HUN: Jul Preliminary Industrial Production

07:00/AUT: Aug Wholesale Price Index

07:00/SWI: Aug SNB foreign currency reserves

07:00/AUT: Jun Foreign Trade

08:00/ICE: Aug External trade, preliminary figures

08:00/BUL: 2Q GDP - preliminary data

08:00/ITA: Jul Retail Sales

08:30/UK: Aug Narrow money (Notes & Coin) and reserve balances

09:00/GRE: 2Q Provisional GDP

09:00/GRE: Jul External Trade (provisional data)

09:00/EU: 2Q GDP and Main Aggregates Estimate

(MORE TO FOLLOW) Dow Jones Newswires

09-07-22 0027ET

Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / SWISS FRANC (AUD/CHF) -0.24% 0.6367 Delayed Quote.-3.58%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) 0.00% 0.6748 Delayed Quote.-6.82%
BARCLAYS PLC -0.23% 159.06 Delayed Quote.-14.94%
BARRATT DEVELOPMENTS PLC 0.57% 407.5 Delayed Quote.-45.52%
BRENT OIL -1.44% 83.79 Delayed Quote.9.14%
BRITISH POUND / SWISS FRANC (GBP/CHF) 0.15% 1.14442 Delayed Quote.-7.44%
BRITISH POUND / US DOLLAR (GBP/USD) -0.15% 1.2093 Delayed Quote.-10.48%
CANADIAN DOLLAR / SWISS FRANC (CAD/CHF) -0.09% 0.70673 Delayed Quote.-1.97%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.04% 0.7472 Delayed Quote.-5.27%
CHINESE YUAN RENMINBI / SWISS FRANC (CNY/CHF) 0.04% 0.132071 Delayed Quote.-8.06%
COMPAGNIE FINANCIÈRE RICHEMONT SA -1.03% 114.8 Delayed Quote.-16.17%
CONVATEC GROUP PLC 0.17% 231.4 Delayed Quote.19.80%
DANISH KRONE / SWISS FRANC (DKK/CHF) -0.05% 13.176 Delayed Quote.-5.40%
EURO / SWISS FRANC (EUR/CHF) 0.17% 0.98365 Delayed Quote.-5.33%
EURO / US DOLLAR (EUR/USD) -0.12% 1.0395 Delayed Quote.-8.46%
EXOR N.V. 0.68% 62.1 Delayed Quote.-21.35%
GOLD -0.06% 1754.26 Delayed Quote.-4.04%
HONGKONG-DOLLAR / SWISS FRANC (HKD/CHF) 0.24% 12.113 Delayed Quote.3.23%
INDIAN RUPEE / SWISS FRANC (INR/CHF) 0.17% 0.01158 Delayed Quote.-5.63%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.09% 0.012242 Delayed Quote.-8.76%
JAPANESE YEN / SWISS FRANC (JPY/CHF) -0.04% 0.6799 Delayed Quote.-14.17%
MACQUARIE GROUP LIMITED -0.02% 177.95 Delayed Quote.-13.36%
NASDAQ COMPOSITE -0.52% 11226.36 Real-time Quote.-28.24%
NEW ZEALAND DOLLAR / SWISS FRANC (NZD/CHF) -0.51% 0.5883 Delayed Quote.-5.38%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.21% 0.6245 Delayed Quote.-8.44%
RIO TINTO PLC -0.52% 5379 Delayed Quote.9.96%
RUSSIAN ROUBLE / SWISS FRANC (RUB/CHF) 0.03% 0.015638 Delayed Quote.28.64%
S&P GSCI CRUDE OIL INDEX -2.32% 418.0641 Real-time Quote.1.42%
SINGAPORE-DOLLAR / SWISS FRANC (SGD/CHF) -0.55% 0.6841 Delayed Quote.0.00%
SOLVAY SA -0.61% 97.62 Real-time Quote.-4.48%
SWEDISH KRONA / SWISS FRANC (SEK/CHF) 0.04% 0.09079 Delayed Quote.-10.01%
TOD'S S.P.A. -2.61% 33.6 Delayed Quote.-31.82%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) 1.51% 60.65 Delayed Quote.-19.47%
US DOLLAR / SWISS FRANC (USD/CHF) 0.26% 0.94593 Delayed Quote.3.43%
WTI -1.80% 76.529 Delayed Quote.3.43%
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