MARKET WRAPS

Watch For:

No major data or earnings scheduled; G7 summit continues; ECB forum on central banking

Opening Call:

The rebound in European stocks will likely continue on Monday as investors reassess the expected path of Fed interest-rate hikes. In Asia, stocks climbed; Treasurys sold off; the dollar steadied and commodities were mixed, with oil near-flat but gold rising.

Equities:

European shares look set to extend their advance on Monday after the latest U.S. economic data tempered investors' expectations of steep Federal Reserve interest-rate hikes, supporting strong gains on Wall Street.

The market now seems to be interpreting recent signs of slowing growth as a reason for the Fed to potentially have "a lighter touch" in its battle with inflation, said Dave Grecsek, managing director for investment strategy and research at Aspiriant.

The thinking seems to be that maybe "we really can avoid a recession," he said, with the Fed potentially needing to become less aggressive in hiking rates to bring down inflation as the economy slows.

Commodity prices have been falling recently, and judging by Fed funds futures, investors now see a lower peak in the path of the Fed's benchmark interest-rate target.

Investors expect the Fed funds rate to peak at between 3.25% and 3.50% in December, down from 3.50% to 3.75% one week ago. Furthermore, investors now expect the Fed to start cutting rates roughly one year from today.

"We've seen a two-week drop in commodity prices and now we are seeing Fed funds futures pricing in rate cuts out in 2023. The thing holding back the market was endless rate hikes, if we've found the terminal rate then stocks can make headway here," said Mike Antonelli, a market strategist at Baird.

Forex:

The dollar steadied in Asia having weakened on Friday, as concerns over aggressive Fed rate increases eased somewhat, helped by falling commodity prices.

But economic forecasts remain challenging, which could extend the dollar's rally. U.S. spending and inflation data this week are likely to be closely watched by currency investors.

Capital Economics said the global economy is likely to remain favorable for the dollar for the time being based on its assumption that growth will slow, although a recession will be averted. In this case, "the U.S. will remain relatively well-placed to weather tighter financial conditions." In a worse scenario, the greenback would still benefit from its safe-haven reputation.

Read: Central Banks Should Raise Rates Sharply or Risk High-Inflation Era, BIS Warns

Bonds:

Treasury yields continued to rise early Monday, as investors sell safe-haven bonds, with the latest U.S. data pointing to an economic slowdown that some investors hope will mean less aggressive monetary tightening.

UBS said there is a chance quantitative tightening could end next year, depending on the supply of short-term Treasurys. Its baseline scenario calls for the Fed to start talking about reducing the pace of its balance sheet runoff by mid-2023.

"Afterwards, we expect the Fed to implement a cut to the pace in late '23 or early '24." But UBS said that T-bill supply is falling, on track to end the second quarter with a decline of about $400 billion. A low level of bill supply could end up "increasing the probability of an end to QT already during 2023."

Read: Sanctions Push Russia to First Foreign Default Since Bolshevik Revolution

Energy:

Oil futures wavered between small gains and losses in Asia, as the tight supply outlook countered recession worries.

"Tightness in oil markets persists as disruptions to Russian oil grow. Crude oil remains in backwardation, in some cases at unprecedented levels, which indicates major supply scarcity," said ANZ.

That said, concerns about Fed rate rises and recession fears are weighing on investor sentiment and may cap any gains.

Other News:

The G7 was near to an agreement on a price cap on Russian oil imports in a bid to hurt Moscow's export revenues. Commonwealth Bank of Australia said this would be done by only allowing transportation and insurance of Russian crude and refined products that are below a yet-to-be-determined price, thereby bringing down the effective price of the exported oil.

CBA cautioned that it was unclear whether it would work due to possible retaliatory actions from Russia.

Read: G7 Nears Agreement on Exploring New Sanction Capping Russian Oil Price

Metals:

Gold prices were higher after the G7 said it would stop buying Russian bullion.

SPI Asset Management said the planned move might not support gold prices in the long term because Russia was already likely not exporting much of its domestic output.

"It was assumed that Russia would keep domestic production at home to soak up surplus dollars and prevent excessive appreciation of the ruble."

CBA said the ban on Russian gold imports was unlikely to materially move spot prices. Russia accounts for as much as one in every ten ounces of the precious metal produced globally, but gold prices typically don't gyrate with supply or demand headlines the way other mined commodities do.

"A ban also just formalizes what has largely been in place via sanctions, " CBA said.

Read: G7 to Expand Sanctions on Moscow With Ban on Russian Gold

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Copper rose slightly in a possible technical rebound after prices last week suffered their largest weekly drop since June 2021.

TD Securities said it has taken profit on its tactical short position in copper, owing to factors such as technically driven outflows running out of steam.

However, the brokerage's market-timing framework still suggests that LME price action is most consistent with a downtrend, and given a deteriorating macroeconomic backdrop, TD will seek to "re-engage downside in copper."

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Iron ore futures rose on possible bargain-hunting after prices recently dropped to attractive levels.

Citi Research said that following a recent selloff, it recommends buying the dip as iron ore looks well-positioned in the event of further stimulus measures.

Iron ore seems highly exposed to China's further policy easing, particularly relative to copper, which appears more globally focused and exposed to European and U.S. weakening.


TODAY'S TOP HEADLINES

China's Industrial Profit Fell by a Narrower Margin in May as Covid-19 Curbs Eased

BEIJING--China's industrial profit fell by a narrower margin in May, as Covid-19 restrictions gradually eased and production started to resume, according to official data released Monday.

Industrial profit in May dropped 6.5% from a year earlier, compared with an 8.5% decline in April, said the National Bureau of Statistics.


G-7 Nears Agreement on Exploring New Sanction Capping Russian Oil Price

The Group of Seven club of wealthy democracies is inching toward an agreement on expanding its sanctions against Russia by looking for a mechanism to cap the purchase price of Russian oil, officials said, but the details are still being worked out.

The move, under discussion at the three-day G-7 summit in the Bavarian Alps that began Sunday, would come on top of a ban on the purchase of Russian gold, officials said. They said oil is the most lucrative export for the Kremlin, while gold makes up a significant part of the state revenues that fund Russian President Vladimir Putin's war.


Sanctions Push Russia to First Foreign Default Since Bolshevik Revolution

Russia was poised to default on its foreign debt for the first time since 1918, pushed into delinquency not for lack of money but because of punishing Western sanctions over its invasion of Ukraine.

Russia missed payments on two foreign-currency bonds as of late Sunday, according to holders of the bonds. The day marks the expiration of a 30-day grace period since the country was due to pay the equivalent of $100 million in dollars and euros to bondholders.


Pension Funds Plunge Into Riskier Bets-Just as Markets Are Struggling

U.S. public pension funds don't have nearly enough money to pay for all their obligations to future retirees. A growing number are adopting a risky solution: investing borrowed money.

As both stock and bond markets struggle, it's a precarious gamble.


Central Banks Should Raise Rates Sharply or Risk High-Inflation Era, BIS Warns

FRANKFURT-From Sydney to Washington to Zurich, major central banks have stepped up the pace of interest-rate increases in recent weeks, reflecting concerns that inflation isn't retreating as expected.

It might not be enough.


G-7 to Expand Sanctions on Moscow With Ban on Russian Gold

TELFS-BUCHEN, Austria-The U.S. and the U.K. will join other leading countries in banning Russian gold imports, broadening a sanctions regime against Moscow as an international summit began Sunday, officials said.

The move, coming as part of the Group of Seven meeting in the Bavarian Alps, is the latest part of an effort to punish Russia for its invasion of Ukraine, officials said, noting that gold is a major Russian export commodity after energy.


Value Investors Bet Recent Market Leadership Is Just the Start

Cliff Asness and Rob Arnott say value stocks finally have room to run after years of lagging behind.

Although few corners of the stock market have emerged unscathed in 2022's dizzying selloff, value shares-traditionally considered those that trade at a low multiple of their book value, or net worth-have held up better than most. By one measure, they are on track to beat shares of fast-growing companies by the widest margin since 2001.


Europe Turns to an Unlikely Source to Replace Russian Energy: Ukraine

Europe has turned to an unlikely source for help in its race to keep the lights on this winter: war-torn Ukraine.

(MORE TO FOLLOW) Dow Jones Newswires

06-27-22 0033ET