MARKET WRAPS

Watch For:

Eurozone flash PMI, FCCI Flash Consumer Confidence Indicator; OECD trade statistics release; Germany flash PMI; France flash PMI; UK Flash PMI, CBI Industrial Trends Survey; trading updates from Sasol, Wood Group

Opening Call:

Stocks in Europe may face a subdued open Tuesday after all three major U.S. stock indexes declined and as recession fears persist. In Asia, stock benchmarks fell; the dollar edged lower; Treasury yields and gold wavered; while oil rose.

Equities:

European shares are likely to struggle for momentum at the open, as investors mull recession jitters and worries about further rate increases by central banks.

U.S. stocks ended Monday with chunky declines as investors expressed wariness over a series of monetary, technical and seasonal factors.

"Markets have been too complacent to the outstanding risks to the macroeconomic environment," said Michael Reynolds, vice president of investment strategy at Glenmede. "We see the risk of recession at 50%, maybe higher than that, in the next 12 months. Based on where we sit, the market looks a little overheated at these valuations and we continue to be underweight equities."

"The risk to earnings is what matters most to investors and there's downside risk here for markets," Reynolds said.

Powell's Jackson Hole speech on Friday will be a "double-edged sword" for markets, by giving traders and investors more certainty on the path of rates along with the need to adjust their expectations, according to Reynolds.

"Markets are underestimating how much the Fed needs to tighten and how high rates need to stay to bring inflation back under control. The market needs to come to terms with how hard the Fed needs to tighten here. Part of what we're expecting from Jackson Hole is for Powell to come out pretty strong and say that the Fed will tighten even if it risks a recession. It's a sobering message that could lead to further risk-off moves."

Forex:

The dollar edged slightly lower in Asia, ahead of a slew of manufacturing and services PMI data. The data are likely to show further moderation in economic conditions and leave markets with the glaring theme of recession risks, said Yeap Jun Rong, market strategist at IG.

"A regional rotation is moving the needle towards soft US exceptionalism and USD strength. The dollar smile remains narrow. US developments are encouraging (inflation, payrolls), but vulnerability is growing elsewhere (TTF spike, firmer European inflation, slowing China)," JPMorgan said.

The investment bank maintained its view of EUR/USD testing 0.95 in 2H and sees USD/JPY at 140 in December.

Bonds:

Treasury yields steadied in Asia after rising overnight, as markets braced for more monetary tightening in the developed world to fight stubborn inflation.

As Treasury yields continue to move higher, the 10-year note yield, often cited as the benchmark for Wall Street, topped 3% overnight as many traders see the Fed as determined to reaffirm its intention to quash inflationary pressures by aggressively raising interest rates this year.

Meanwhile, the 2-year yield, which is more sensitive to changes in the Fed's interest-rate policy, is nearing its highest level in more than a decade. "The Fed has pushed back consistently against the market's pricing of a Fed turnaround to easing rates next year with partial success, as expectations for rate cuts have shifted farther out the curve and from higher levels," Saxo Bank strategists said.

The Saxo strategists said the key test for markets this week may come on Friday when the Fed's preferred measure of inflation, the July PCE inflation data, is released.

Energy:

Oil futures rose in Asia as traders digested comments from Prince Abdulaziz bin Salman, Saudi Arabia's minister of energy.

In a written response to questions from Bloomberg, he said OPEC+ has the "commitment, the flexibility and the means" within its Declaration of Cooperation to deal with challenges in the market, including cutting production "at any time and in different forms."

The minister has pushed back on recent declines in oil prices and asserted that extreme volatility and lack of liquidity in the futures market are disconnecting prices from fundamentals and may force OPEC+ to act, NAB said.

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Meanwhile, natural gas stole the spotlight Monday as prices in the U.S. surged to fresh 14-year highs. ING attributed the move in gas prices to Russia's decision to halt flows to Europe along the Nord Stream 1 pipeline.

Gazprom announced late last week that its Nord Stream 1 pipeline will come to a halt for three days of maintenance. The "real concern for the market is whether flows will resume after this period," ING said.

Over in the U.S., the August/September period has "historically been a seasonally stronger time of the year for natural gas, related to a combination of potential supply disruptions from hurricanes and anticipation of the upcoming home heating season," said Colin Cieszynski, chief market strategist at SIA Wealth Management.

This year, however, "issues related to Russian natural gas supply into Europe have also been a factor," he said.

Metals:

Gold futures wavered in choppy trade after posting a sixth straight losing session on Monday in U.S. trading.

The precious metal is weighed by prospects of hawkish comments from Fed Chair Powell this week. Investors are bracing for a potentially hawkish speech by Powell at Jackson Hole, Oanda senior market analyst Edward Moya said.

While gold will eventually settle on a trading range, the price floor might be a little lower as the risks of energy and food inflation could keep Fed rate increases aggressive into 2023, Moya added.

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Aluminum futures rose in Asia, buoyed by prospects of production cuts that could limit supply.

China's Sichuan province has idled all of its operating aluminum smelters owing to a lack of hydroelectric power, ANZ said. This is exacerbating concerns of further reductions to output in Europe amid that region's power crisis, ANZ added.

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Chinese iron-ore futures extended gains early Tuesday after Chinese banks cut loan prime rates to support economic growth.

In the near term, the PBOC's interest-rate cuts should benefit ferrous metals, although the longer-term trend will depend on fundamental supply and demand, Huatai Futures said.

Given a relatively weak macro environment and lower profitability for steelmakers, demand upside for the raw material may be limited, Huatai said.


TODAY'S TOP HEADLINES

China's Central Bank Prods State Banks to Step Up Lending

China's central bank called on the biggest state banks for increased lending to support the world's second-largest economy, which has suffered renewed weakness from Covid-19 lockdowns earlier this year.

At a meeting chaired by the central bank Gov. Yi Gang, the People's Bank of China on Monday asked state-owned banks to take the lead in stabilizing the Chinese economy and step up credit to small business, green industries and the tech innovation sector.


Shrinking Deficits Cushion Fed's Retreat From Markets

A shrinking federal budget deficit is providing a major boost to investors, enabling the Treasury Department to cut longer-term debt issuance despite the Federal Reserve's recent move to buy fewer bonds.

The prospect of the Fed shrinking its bondholdings, a policy known as quantitative tightening, or QT, has long been a nagging concern for investors. While it is early to conclude that the Fed maneuver won't hit markets, the strong rally in stocks and bonds in recent months suggests that the relationships are more complicated than many analysts had assumed.


U.S. Warns Turkish Businesses Against Work With Sanctioned Russians

ISTANBUL-The Biden administration warned Turkish businesses against working with sanctioned Russian institutions and individuals, intensifying U.S. pressure on a NATO ally that has maintained a strong relationship with Russia during its invasion of Ukraine.

In a letter dated Aug. 22 to the American Chamber of Commerce in Turkey viewed by The Wall Street Journal, Deputy Secretary of the Treasury Wally Adeyemo said that Turkish companies were at risk of coming under U.S. sanctions if they did business with sanctioned Russian individuals.


British Airways to Cut Over 10,000 Flights as Industry Woes Threaten to Stretch Through Winter

LONDON-British Airways is cutting more than 10,000 flights through the rest of the summer flying season and into the winter, threatening to extend the aviation industry's chaotic postpandemic recovery in Europe into next year.

The airline said it is cutting flights to comply with an extension of London Heathrow Airport's cap on departing passengers. It has also revised down its flying schedule from November through March, consolidating same-day flights to destinations and offering to rebook affected passengers on other airlines according to availability, it said in a statement Monday.


Ben & Jerry's Independent Directors Lose Request for Injunction Over Israel Business

A judge denied a court petition by Ben & Jerry's independent board members that sought to stop parent Unilever PLC from transferring assets to a local licensee in Israel-a setback for the ice cream brand in an unusual legal fight between a wholly owned subsidiary and its corporate owner.

A judge for the Southern District of New York ruled Monday that Ben & Jerry's had failed to demonstrate irreparable harm in its request for a preliminary injunction against Unilever. Ben & Jerry's board members earlier this month had asked the court to stop Unilever from making the transfer, arguing in a court hearing that the move could allow the brand's products to be used to oppose social issues that it supports.


Pfizer, BioNTech Seek FDA Authorization for Updated Covid-19 Vaccine

Pfizer Inc. and BioNTech SE have asked U.S. health regulators to clear use of a Covid-19 shot modified to target the newest versions of the Omicron variant.

(MORE TO FOLLOW) Dow Jones Newswires

08-23-22 0019ET