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EUROPEAN MIDDAY BRIEFING - Stocks Rally on Fed Hopes; Boris Johnson Quits, Lifting Sterling

07/07/2022 | 05:47am EDT

MARKET WRAPS

Stocks:

European stocks extended their recent rebound on Thursday as investors absorbed the Fed's minutes from its June meeting and even as recession fears on the continent continued to mount.

Since the Fed's last meeting,a growing body of economic indicators have raised fears of a recession, while the prices of commodities have slid. First-quarter U.S. GDP growth was slightly revised lower last week to a contraction of 1.6% and yield curve recently inverted.

Markets may be reflecting the belief that if growth and hiring slow quickly, the Fed. won't need to approve as many interest-rate hikes as traders and the FOMC expected at the time of last month's meeting.

In the U.K., the benchmark FTSE 100 held solid gains despite news that Boris Johnson will resign as prime minister later Thursday, according to officials, after a full-scale mutiny in his party.

Johnson will remain in office until his replacement is found, these people said, a process that could take several months.

Read more here .

Economic Insight:

Gas flows from Russia to Europe are widely expected to decrease further, pointing to downside risks for growth, according to Goldman Sachs.

Gas flows through Nord Stream 1 are expected to remain subdued at 40% of capacity after the July maintenance period, driving up gas prices and decreasing industrial demand, the bank said.

In this context, the eurozone economy is expected to grow by a marginal 0.1% in 3Q and to stagnate in 4Q, GS said. "We thus see the eurozone on the edge of recession in 2H, and expect a technical recession in Germany and Italy," it said, adding that the eurozone would fall into a recession if gas flows through NS1 halt completely.

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May's small rise in industrial production in Germany wasn't big enough to change Capital Economics's view that output in the sector is likely to have declined in the second quarter.

Demand appears to be weakening, it said. Industrial orders fell 7% from February to May and the timelier surveys suggest that conditions in industry as a whole worsened in June, the economic research firm added.

Furthermore, manufacturers' expectations are consistent with steep declines in production, it said. Capital Economics expects German industry to continue to struggle over the rest of the year, with the possibility of further sustained disruption to gas flows from Russia presenting a downside risk.

U.S. Markets:

Stock futures ticked higher with the focus turning to labor market data, which traders will be watching for clues on how rising interest rates and high inflation are impacting hiring.

Data later Thursday are expected to show the number of new applications for U.S. unemployment benefits edged slightly lower in the week ended July 2 to 230,000.

That comes ahead of Friday's jobs report. Economists polled by The Wall Street Journal expect employers to have added 250,000 jobs in June, down from a rate of 390,000 in May.

Recent data on the job market have suggested it is cooling but remains unusually tight.

In premarket trading, GameStop shares jumped 9.8% after the retailer on Wednesday declared a 4-for-1 stock split.

Forex:

Sterling extended its gains after reports that U.K. Prime Minister Boris Johnson will step down following a raft of resignations from his government in an unprecedented revolt over his leadership.

The reports followed a series of scandals under Johnson's leadership that prompted more than 50 members of parliament to resign from his government.

There is no doubt he has failed the public on many occasions, said AvaTrade.

"However, political uncertainty has increased as a large number of political cards will come into play where the new prime minister may try to persuade public by adopting more loose fiscal policy, which could make the Bank of England's job even more difficult [in bringing down inflation],"

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The dollar lost ground after rising strongly in the previous session as investors digest the minutes from the Fed's June meeting.

Many market participants think developments since the Fed's decision last month are so dramatic that the minutes are no longer relevant while recession fears and morose market sentiment could prompt the central bank to lift interest rates 50 basis points at its July 26-27 meeting instead of the 75 bps that is largely priced in, Swissquote said.

Market chatter suggests market pricing has "room to get more dovish rather than more hawkish," which could slow the dollar rally, it said.

Bonds:

Eurozone government bonds fell in early trading, causing yields to rise, but the 1% level for the 10-year Bund yield remains in sight, according to analysts.

"Bunds are still relatively supported despite stabilizing risk sentiment and weaker U.S. Treasurys," Commerzbank said.

Volatility in bond markets is set to remain extremely high, it said, adding that with recession fears remaining in focus, the 10-year Bund yield could test the 1% level before long. The rise in eurozone government bond yields was led by Spain which conducts a bond auction Thursday.

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Eurozone peripheral bond spreads might have turbulent weeks ahead, with the bias tilted towards wider spreads, according to Mizuho.

The accounts of the European Central Bank's June meeting, due for release later on Thursday, might be one of those opportunities where market participants might get a more precise picture of the continuing debate in the ECB about the anti-fragmentation tool, it said. "We believe that there is a decent probability for the market to feel underwhelmed on any proposed tool (or lack of thereof)," Mizuho said.

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The green premium, known as "greenium," in German Bunds has been under pressure for the past three months, perhaps driven by supply, Citi said. Germany's green government bond supply has been the highest among the eurozone's 11 largest issuers in the year to date, it said.

However, Italy's April 2045 green BTP and France's June 2039 green OAT have seen the best performance with no supply in these bonds year to date, according to Citi. Greenium on eurozone government bonds currently ranges between two and 12 basis points, it said.

Eurozone green government bond issuance totaled EUR25 billion in 1H, lower than expected, though it should pick up with EUR35 billion of issuance in 2H, according to Citi's strategists

Commodities:

Oil prices wavered along the flatline, with the hawkish Fed minutes not helping the macro mood, according to Peak Trading Research.

Fitch said oil is likely to remain elevated as supply-side risks mount, revising its 2022 average Brent price forecast to $105/bbl from $100/bbl previously.

"Russian exports will come under increasing pressure over the second half of the year, as the EU approaches its partial import ban on Russian crude oil, effective December 5," Fitch said.

Also, OPEC+ continues to fall far short of its production targets, and rising political instability in Libya has triggered renewed production outages, it said.

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Spot gold was slightly firmer early Thursday but UOB said the precious metal may break below support at $1,720/oz, as its weekly downward momentum on the technical charts remains strong.

The precious metal has fallen this week and dipped beneath the December 2021 low of $1,753/oz on Wednesday.

A break below $1,720/oz would shift the market's focus to the major, critical support zone of $1,676/oz-$1,684/oz, UOB said, noting that these levels were tested a few times in March and August of last year.

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Base metals rose as Asian buyers look to secure materials despite rising Covid-19 cases in Shanghai and macroeconomic concerns in the U.S. and Europe.

"Onshore [traders] do not seem to be bearish with various brokers even recommending a buy," Marex said.

"Despite all the negative news such as Shanghai Covid-19 cases doubling, mass testing in place, and various other cities and provinces also reporting fresh cases, the market doesn't seem to be perturbed."

DOW JONES NEWSPLUS


EMEA HEADLINES

U.K.'s Boris Johnson to Resign After Scandals Grow Too Great to Handle

LONDON-Boris Johnson will resign as British prime minister later Thursday, officials said, after a full scale mutiny in his party. Mr. Johnson will remain in office until his replacement is found, these people said, a process that could take several months. It caps an astonishing fall from grace for a politician who until recently looked poised to dominate U.K. politics for years.

Following a string of scandals, two senior ministers and a wave of more-junior members of government quit over the past week, saying they no longer had confidence in the British leader. Mr. Johnson attempted to cling to power amid frenetic plotting by rebels to unseat him and a push by a group of cabinet members to have him resign. Until recently he had spoken of his intention to stay in office until the 2030s. But as his authority withered, and with the growing threat that the party would change its internal rules to hold a vote to oust him, he agreed to step aside.


Shell Says Fuel-Refining Margins Could Add $1 Billion to Quarterly Earnings

LONDON-Shell PLC said it expects strong second-quarter profit from higher fuel-refining margins that could add more than $1 billion to earnings, while forecasts for sustained high energy prices boosted the value of its oil and gas holdings.

The London-based oil major said Thursday that it expects the outlook for energy prices will allow the company to reverse between $3.5 billion to $4.5 billion in impairments it took early in the pandemic, when sagging demand had a big impact on energy-price forecasts. Demand has since come roaring back amid a resurgence in travel and other activities curtailed by Covid-19.


Telecom Italia Outlines Plan to Separate Fixed Network Infrastructure Assets From Services

Telecom Italia SpA on Thursday outlined the details of a plan to separate its fixed-network infrastructure assets from services as it aims to improve its financial position.

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07-07-22 0546ET

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