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EMEA Morning Briefing: Investors on Edge Ahead of ECB, as Fears Over Italy, Nord Stream Mount

07/21/2022 | 12:42am EDT


Watch For:

ECB Interest Rate Decision; France Monthly Business Survey; UK Public Sector Finances; Bundesbank Monthly Report; updates from SAP, Publicis, ABB, Givaudan, Roche, Remy Cointreau, Siemens, Ocado, Saab, Nokia, Anglo American, SSE, 3i Group, Meggitt, Johnson Matthey, Anglo American Platinum, Vodacom, Halma, Intermediate Capital, Frasers, Fuller Smith & Turner

Opening Call:

Worries continue to deepen in Europe, as investors contend with political chaos in Italy, the ongoing energy crisis and a crucial ECB meeting. In Asia, stocks were mostly lower on concerns about inflation and China's economy; while the dollar, Treasury yields and commodities all weakened.


European shares are likely to extend losses early Thursday as worries persist over energy supplies and political turmoil in Italy.

"There was little to read from overnight price action, with many markets struggling to find a consistent direction as active investors were reluctant to chase, given the uptick in political risk in Italy and ongoing energy concerns in Europe," wrote Stephen Innes, Managing Partner at SPI Asset Management.

"But overall, the market seemed to be in derisking mode ahead of the ECB and uncertainty about Nord Stream 1."

U.S. stock futures were also lower, as markets appeared to reverse course following two days of consecutive gains for the major indexes.

They rose again on Wednesday on an especially strong day for tech stocks. Tesla became the latest major company to report earnings. Its revenues declined from the first quarter, largely due to Covid lockdowns in China that affected Tesla's Shanghai assembly plant and reduced sales, but the electric-vehicle maker still beat analyst expectations.

Looking Ahead:

The European Central Bank is set to raise interest rates for the first time in over a decade at Thursday's policy meeting, either by 25 basis points or possibly by a larger 50 basis points.

Investors will also watch for guidance on a likely rate rise in September and details on plans for an anti-fragmentation tool to ensure stable eurozone bond markets.


The dollar edged lower in Asia after its bounce on Wednesday, and it may strengthen again if the ECB's anti-fragmentation tool disappoints and/or if the deposit rate is increased by only 25 bps, said CBA analysts.

Bank of America said rising inflation will keep driving FX trends for a while.

"The USD may have peaked, but we argue it will remain strong until the Fed becomes more concerned about growth than inflation. This could take until the end of this year, or even next year."

As central banks raise rates at different speeds, the more hawkish ones will strengthen their currencies, BofA said.

"The USD stands out, as the U.S. has the highest inflation rate and the strongest currency. JPY is at the other extreme, as Japan has the lowest inflation rate and the weakest currency."


U.S. bonds were in demand in Asia, sending yields lower.

The Federal Reserve is in its media blackout period before the FOMC meeting that concludes in a week's time. The dearth of Fed speakers, alongside a thin few days of U.S. macroeconomic data, has left the bond market relatively calm.

U.S. jobless claims are also likely to be scrutinized for indications of how monetary tightening is affecting labor markets.

With Italian politics taking center stage in Europe, the Germany/Italy 10-year bond spread, a gauge that signals stress in the eurozone, had widened back up to 209 toward the end of Wednesday's session. By the end of the trading day in the U.S., reports indicated that Mario Draghi will likely resign as Italian Prime Minister after he said he would try to rebuild his ruling coalition.

Read: Italy's Mario Draghi Likely to Resign Despite Winning Confidence Vote


Oil futures extended losses in Asia. They settled lower on Wednesday, pulling back following a three-session climb, after the U.S. government reported a modest weekly fall in domestic crude supplies, but said gasoline inventories climbed by more than three million barrels.

CBA said growth concerns in the EU may persist due to a deepening energy crisis which has added to the sombre outlook for the global economy. Further, lockdowns and restrictions loom as ever--present threats to China's economy, due to the insistence of Chinese authorities to stick to their Covid--zero policy.

"How the fall in global oil demand tracks with the net reduction in global supply...will be crucial for price determination over the next 12 months," CBA said.


Natural gas prices in the U.S. finished the session with a massive 10.2% increase to a five-week-high, as investors become increasingly bullish on the commodity due to fears Russia may stop providing gas to Europe.

If gas to Europe is disrupted, it would likely cause global demand for commercially available natural gas to surge much higher.

Read: Natural Gas Remains Putin's Weapon of Choice


Gold was under $1,690.00 in Asia, after a stronger dollar dragged prices for the metal back down to their lowest settlement in more than 15 months on Wednesday.

The risk for gold appears to remain heavily skewed towards the downside, said OANDA, which put support at $1,675.00/oz.


Aluminum prices fell, with market sentiment affected by rising electricity costs in Europe.

The power-price surge is spurring worry that output of aluminum and zinc may be curtailed, said ANZ analysts. The EU has also asked member states to reduce their use of gas by 15% ahead of the winter, when the EU expects severe disruption to gas supplies from Russia.

Aluminum smelters are typically major consumers of gas and power.


Chinese iron ore futures were lower, with maintenance work at steel mills and the recent rainy weather weighing on demand, said Donghai Futures.

On the supply side, iron ore shipments from Australia and Brazil have risen sequentially this week, it said, adding that it expects the overall downtrend in iron ore prices to persist.


Bank of Japan Sees Inflation Hitting 2.3% This Fiscal Year

TOKYO-The Bank of Japan said Thursday inflation would likely rise above the bank's 2% target this fiscal year, but it kept ultra-low interest rates unchanged to support the nation's economic recovery from the Covid-19 pandemic.

The Japanese central bank maintained short-term interest rates at minus 0.1% and its target for the 10-year Japanese government bond yield at around zero.

ADB Cuts 2022, 2023 Growth Forecasts for Developing Asia

The Asian Development Bank has cut its growth forecasts over the next two years for developing countries in Asia, as the region's recovery is challenged by the Russia-Ukraine war, accelerated monetary-policy tightening and China's Covid-19 lockdowns.

The Manila-based multilateral bank said Thursday that although the impact of Covid-19 is waning in most of the region-with the notable exception of China-the economic fallout from Russia's invasion of Ukraine has increased. It projects 2022 gross domestic product growth of 4.6% versus 5.2% predicted in April. It trimmed its forecast for 2023 to 5.2% from 5.3%. Developing Asia comprises 46 ADB members, including China, South Korea and India. It excludes Japan, Australia and New Zealand.

Italy's Mario Draghi Likely to Resign Despite Winning Confidence Vote

Italian Prime Minister Mario Draghi will likely resign despite winning a confidence vote in the Senate on Wednesday, putting an end to a national unity government that lasted almost 1 1/2 years.

Mr. Draghi won the vote, but mass abstentions by three large parties indicated he no longer has the support of a majority of Parliament. Mr. Draghi could resign in the coming days after meeting with Italian President Sergio Mattarella.

Putin's Gas Game: Toy With Europe's Supply and Make Its Leaders Squirm

While Vladimir Putin wages a conventional war in Ukraine, he has opened a second front in Europe that is coming to a head: A battle over natural gas.

European countries have been nervously waiting to see if the Russian president turns the gas taps back on to the continent in coming days after a 10-day period when the main pipeline has been shut down for routine maintenance. On Tuesday, Mr. Putin said Russia would fulfill its obligations but warned that flows could be hit if sanctions prevent further maintenance from taking place.

Tesla's Tough Second Quarter Shows What Might Happen in a Recession

Tesla needs to keep growing to keep cash flowing.

The electric-vehicle pioneer reported free cash flow of just $621 million Wednesday, down from $2.2 billion in the first quarter. A poor performance was widely expected given the company's Covid-related production problems in China in April and May, and increasingly bearish commentary from Chief Executive Elon Musk. The final numbers came in slightly better than analysts had forecast-FactSet put consensus free cash flow at $487 million. The shares didn't move much after hours.

Write to paul.larkins@dowjones.com

Expected Major Events for Thursday

04:30/NED: Jun Unemployment

06:00/UK: Jun Public sector finances

06:00/NOR: 2Q Business tendency survey

06:45/FRA: Jul Monthly business survey (goods-producing industries)

08:00/POL: Jun Agricultural prices

08:00/POL: Jun Retail Sales

11:00/TUR: Turkish interest rate decision

12:15/EU: ECB interest rate announcement

15:59/GRE: May Balance of Payments

22:00/NED: Jun House Price Index

23:01/UK: Jul UK Consumer Confidence Survey

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

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

07-21-22 0041ET

Stocks mentioned in the article
ChangeLast1st jan.
3I GROUP PLC 0.18% 1119 Delayed Quote.-22.77%
ANGLO AMERICAN PLATINUM LIMITED 0.40% 1182.12 End-of-day quote.-34.93%
ANGLO AMERICAN PLC 3.25% 2728.5 Delayed Quote.-9.53%
AUSTRALIAN DOLLAR / EURO (AUD/EUR) -0.09% 0.66912 Delayed Quote.5.33%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.26% 0.64832 Delayed Quote.-10.87%
BANK OF AMERICA CORPORATION 1.64% 31.07 Delayed Quote.-31.29%
BRITISH POUND / EURO (GBP/EUR) -0.02% 1.11513 Delayed Quote.-5.98%
BRITISH POUND / US DOLLAR (GBP/USD) -0.21% 1.0803 Delayed Quote.-20.44%
CANADIAN DOLLAR / EURO (CAD/EUR) 0.01% 0.756058 Delayed Quote.8.86%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) -0.18% 0.7318 Delayed Quote.0.00%
EURO / BRAZILIAN REAL (EUR/BRL) -0.40% 5.206 Delayed Quote.-18.54%
EURO / US DOLLAR (EUR/USD) -0.19% 0.96859 Delayed Quote.-15.60%
FRASERS GROUP PLC 0.85% 713.5 Delayed Quote.-7.46%
GIVAUDAN SA 0.37% 2958 Delayed Quote.-38.50%
INDIAN RUPEE / EURO (INR/EUR) 0.14% 0.012647 Delayed Quote.8.09%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.32% 0.012244 Delayed Quote.-8.75%
INTERMEDIATE CAPITAL GROUP PLC -1.52% 1006 Delayed Quote.-54.15%
JOHNSON MATTHEY PLC 2.00% 1861 Delayed Quote.-9.04%
LONDON BRENT OIL 0.00% 88.86 Delayed Quote.7.68%
MEGGITT PLC 0.00% 798.8 Delayed Quote.8.24%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.46% 0.56861 Delayed Quote.-17.14%
NOKIA OYJ 1.56% 4.4785 Delayed Quote.-20.89%
PUBLICIS GROUPE SA 0.02% 48.6 Real-time Quote.-17.91%
S&P GSCI ALUMINUM INDEX 0.73% 135.3477 Real-time Quote.-24.97%
S&P GSCI NATURAL GAS INDEX 1.50% 330.5085 Real-time Quote.83.38%
SIEMENS AG 1.57% 99.46 Delayed Quote.-34.86%
TESLA, INC. 1.72% 287.81 Delayed Quote.-19.68%
US DOLLAR / EURO (USD/EUR) 0.19% 1.032429 Delayed Quote.18.19%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) -0.83% 57.45 Delayed Quote.-21.89%
VODACOM GROUP LIMITED -1.29% 124.44 End-of-day quote.-7.56%
WTI 0.13% 81.782 Delayed Quote.4.16%
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