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Geopolitical concerns and Fed officials' hawkish comments overnight will likely spill into European markets on Wednesday. In Asia, major benchmarks recovered after yesterday's selloff; the dollar and Treasury yields pared back some overnight gains; oil fell; while spot gold gained.
European stocks are likely to extend losses at the open on Wednesday following declines on Wall Street, as investors remain jittery over U.S.-China geopolitical tensions and comments from Fed officials indicate that their fight against inflation is still going strong.
U.S. House Speaker Nancy Pelosi met with Taiwanese President Tsai Ing-wen on Wednesday, defying repeated warnings from Beijing and fueling U.S.-China tensions. Pelosi is the highest-ranking U.S. official to visit the island in a quarter-century.
The visit has angered Beijing over what it regards as a challenge to its sovereignty and has unsettled the White House, which is wary that the trip could further undermine already-tense U.S.-China relations.
Overnight, San Francisco Fed President Mary Daly said in an interview with CNBC that the Fed was "nowhere near" done increasing interest rates. Separately, Chicago Fed President Charles Evans expressed hope that the U.S. central bank could slow its pace of rate rises, but indicated that another 0.75-percentage-point hike in September "could also be OK."
"Even if you think the inflation dragon has been slain there is still a lot to worry about," said Altaf Kassam, head of investment strategy for Europe, the Middle East and Africa at State Street Global Advisors.
"There are still too many unknowns out there. Markets are going to be more volatile because of the more data-driven approach adopted by central banks, and valuations aren't so incredibly low that you'd say it is time to buy," he said.
The dollar edged lower, paring back some gains overnight stemming from safe-haven demand.
Risk-off trades are likely to be the order of the day, said MUFG Bank's currency analyst Sophia Ng.
"A worsening in relations between the US and China is driving an exodus from risk-sensitive assets," Corpay's Karl Schamotta said.
He also noted that the yen is soaring, recovering from mid-July lows "as the flight to safety exacerbates an already-violent short squeeze."
Treasury yields edged lower in Asia after bonds slumped Tuesday.
Treasurys unwound much of their recent rally, pushing yields higher, after a trio of Fed officials emphasized that the central bank has more work to do to get inflation under control.
"Treasurys sold off rather decisively on Tuesday in response to comments from Daly, Mester, and Evans which effectively reiterated the tone of Powell's press conference," said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery.
The selloff was "aided by the safe arrival of Pelosi in Taiwan."
"We maintain that the combination of the Fed's hawkish commitment and the lagged nature of the data (and impact of policy changes) will provide sufficient cover for the Fed to deliver a minimum of 100 bp in additional tightening in 2022," BMO Capital Markets said.
"This either takes the form of 75 bp next month and another 25 bp immediately in front of the midterms or 50/25/25 over the next three meetings."
Inflation and recession concerns are jockeying for space in investors' psyches, and on Tuesday, inflation was reclaiming ground as the prime focus, said Andy Brenner of NatAlliance Securities.
Oil futures fell in Asia on uncertainty about the outcome of the OPEC+ meeting later today.
The current OPEC+ production agreement runs through to December and with softening economic dynamics, it's easy to see why the group may leave production quotas unchanged, said Chris Weston, head of research at Pepperstone.
But with inventories at low levels, the oil market is eyeing a reasonable deficit, so a small increase in production quotas may well actually play out, Weston said.
Spot gold prices rose in Asia, as U.S.-China tensions spurred possible safe-haven demand for the precious metal.
"Rising tensions amongst the two world largest economies won't support risk appetite anytime soon," said Edward Moya, senior market analyst at Oanda.
Iron ore prices declined in Asia.
China's property crisis may continue to weigh on sentiment, which could negatively affect demand for iron ore and steel, ANZ said.
Almost a third of China's steel mills could go into bankruptcy in a squeeze that could last five years, ANZ said, citing Hebei Jingye Steel Group founder Li Ganpo.
This is likely to hurt iron ore, ANZ added.
TODAY'S TOP HEADLINES
Fed Officials Signal Additional Rate Rises Warranted to Slow Economy
Federal Reserve officials said they expected to keep lifting borrowing costs through at least early next year to slow the economy and bring down high inflation, pushing back against some investors' hopes of a milder rate path.
Chicago Fed President Charles Evans told reporters Tuesday that he hoped the central bank would be able to moderate its interest-rate rises over the remainder of the year after increasing rates in unusually large increments at its past two meetings. But he held out the possibility of another supersize rate increase at the Fed's next meeting on Sept. 20-21.
Nancy Pelosi Meets With Taiwanese President as China Warns of Disastrous Consequences
House Speaker Nancy Pelosi met with Taiwanese President Tsai Ing-wen on Wednesday, in what she called a show of American solidarity for the island, defying repeated warnings from Beijing and fueling U.S.-China tensions.
Mrs. Pelosi, the highest-ranking U.S. official to visit the island in a quarter-century, said in a statement shortly after landing that the trip signaled "America's unwavering commitment to supporting Taiwan's vibrant democracy."
OPEC+ Considers Modest Oil-Production Increase, Output Freeze, Say Delegates
OPEC and its allies are considering either a modest increase in oil production or maintaining output at current levels when they meet Wednesday, delegates say, as the alliance seeks more time to assess a possible slowdown in global energy demand.
The Saudi-led Organization of the Petroleum Exporting Countries faces some pressure to boost supply and help lower oil prices after President Biden's high-profile trip to the kingdom last month. But it needs to coordinate such a move with a coalition of Russia-led producers with which it has an enduring alliance.
U.S. Sanctions Woman It Calls Vladimir Putin's Girlfriend
WASHINGTON-The Treasury Department unveiled a fresh raft of sanctions on Russian companies and people around Vladimir Putin on Tuesday, including a famed former Russian Olympic gymnast whom the U.S. government believes to be the Russian president's girlfriend.
The measures come as the Biden administration has been deploying actions that it had previously balked at in its quest to punish Moscow for its invasion of Ukraine. The gymnast, Alina Kabaeva, was named among some prominent Russian business leaders and officials who have played a role in supporting the Russian government during the invasion.
Russia Shells Apartment Buildings in Southern Ukraine
KYIV, Ukraine-Russian shells struck Ukrainian-held territory in the country's south Tuesday morning, according to local officials, as both sides shift their attention toward a looming fight for the area.
In the southern city of Mykolaiv, where early-morning shelling has become routine in recent weeks, rockets destroyed a student dormitory and damaged several apartment buildings and other civilian infrastructure, the city's mayor wrote on Telegram.
Chip Maker AMD Prospers as Rival Intel Struggles
Advanced Micro Devices Inc. reported a sharp increase in quarterly sales, driven by strength in its data-center business where rival Intel Corp. has been stumbling, but issued a muted outlook for the current period.
AMD on Tuesday said sales reached $6.6 billion in its second quarter, up 70% from a year earlier and ahead of Wall Street expectations. Profit fell 37% to $447 million, reflecting adjustments linked to AMD's acquisition of Xilinx Inc.
Robinhood Lays Off 23% of Staff as Retail Investors Fade From Platform
Robinhood Markets Inc. is slashing about 23% of its full-time staff as the flashy online brokerage continues to reel from a sharp slowdown in customer trading activity.
The job cuts mark the second round of layoffs this year at Robinhood, which in April reduced its staff by about 9%. Together, the two rounds have cut more than 1,000 jobs from the company.
Airbnb Swings to Profit as Rentals Remain Strong Despite Inflation Pressure
Airbnb Inc. swung to a profit in the second quarter on the back of strong revenue, as people continued to book suburban rentals despite hosts raising prices.
But the company issued a weaker-than-expected outlook that overshadowed otherwise strong results. Its stock retreated over 9% in after-hours trading Tuesday.
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Expected Major Events for Wednesday
06:00/ROM: Jun Retail trade
06:00/GER: Jun Foreign Trade
06:30/SWI: Jul CPI
07:00/CZE: 2Q LFSS Employment & Unemployment
07:00/TUR: Jul PPI
07:00/TUR: Jul CPI
07:00/HUN: Jun Retail Sales
07:00/SVK: Jun Internal trade, incl Wholesale & Retail
07:15/SPN: Jul Spain Services PMI
07:45/ITA: Jul Italy Services PMI
07:50/FRA: Jul France Services PMI
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