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European Midday Briefing: Shares Drift Lower on Recession Fears

08/17/2022 | 05:47am EDT

MARKET WRAPS

Stocks:

European stocks fell on Wednesday as investors weighed surging inflation in the U.K. and positioned ahead of the release of the latest FOMC meeting minutes.

London's FTSE 100 edged into negative territory after data showed the U.K.'s annual rate of inflation moved into double digits in July and is set to rise even higher by the end of the year.

Read more here.

Economists at JPMorgan see increasing signs that global inflation is set to ease, with prices of food and many commodities down from recent peaks. However, they expect that disinflation to be evident first in the U.S., with Europe set to lag behind despite some recent easing in the prices of goods leaving factory gates.

"Europe, however, faces ongoing pressure from surging natural gas prices that have more than doubled over the past three months," JPMorgan wrote in a note to clients.

"We expect the combined drag of a squeeze on purchasing power and depressed sentiment to tip the region into recession this year."

Economic Insight:

Inflation expectations are relatively firmly anchored in the eurozone, Helaba said.

The five-year/five-year forward--a measure of longer-term market-based inflation expectations--for the eurozone has been hovering just above 2% since the beginning of July.

"The topic of inflation seems to have receded somewhat into the background currently," Helaba said.

U.S. Markets:

Stock futures fell in premarket trading and while more earnings reports from retailers such as Target and Lowe's are scheduled for Wednesday, the focus for investors will be on the Fed meeting minutes.

Recent signs of cooling inflation at both the consumer and wholesale levels have led investors to bet on a less aggressive Fed.

"Investors will be looking for any clues in the minutes report that suggest the Fed may slow its pace of rate hikes now that the inflation data are starting to decelerate," said AlphasFuture.

Forex:

The dollar could rise if the Fed's latest meeting minutes push back against market expectations for the central bank to pivot towards interest-rate cuts next year, ING said.

Rhetoric from Fed officials since the July meeting suggest this is likely to be the case, particularly since the Fed funds future price the policy rate being cut from 3.6% to 3.2% in the second half of 2023, ING said.

"A further rejection of this market pricing should help the dollar" and could help the DXY Dollar Index rise to around 107.00, ING said.

Sterling and U.K. Inflation:

Sterling stayed higher on the day after data showed U.K. inflation accelerated by more than expected in July.

Inflation rose to a four-decade high of 10.1% in July from 9.4% in June, exceeding the 9.8% expected by analysts in a WSJ survey.

"Inflation printing above forecasts adds to the mounting pressure on the Bank of England to tighten monetary policy and continue to raise interest rates," Silicon Valley said.

"Expect sterling to remain volatile in response as markets grapple with a cost of living crisis, a fall in real wages, rampant price growth and a bleak outlook for economic activity."

Ebury said the inflation data has both positive and negative implications for sterling.

Higher inflation should trigger a more aggressive policy response from the BOE, which is a "bullish signal" for sterling, Ebury said.

"On the other hand, however, higher prices present a clear downside risk to economic activity, and raises the possibility of a potentially prolonged U.K. recession, which is clearly bearish for GBP."

Read: Pound Won't Necessarily Rise if BOE Steps Up Inflation Battle

Read: Surging UK Inflation Increases Recession Risk

Bonds:

The 1% mark for the 10-year German Bund yield is expected to remain a support level, Commerzbank said, as it sticks to its constructive outright stance.

Commerzbank said the market remains in summer trading mode, characterized by larger swings in shaky liquidity.

---

10-year gilt yields rose after the latest U.K. annual inflation print.

"Every upwards inflation surprise tightens the bind the BOE finds itself in, with mounting inflation pressure combined with growing recessionary headwinds," abrdn said.

It expects the BOE will deliver another 0.5% interest rate increase at its next meeting.

With monetary policy having to tighten even in the face of bad economic news, investors continue to have little in the way of a safety net from central banks, which is likely to keep markets volatile, abrdn said.

Mizuho said it was looking to fade rallies in gilts, with further increases in year-on-year inflation to come in the coming months.

"The U.K. faces eye-watering YoY inflation rates until at least Q1 2023," Mizuho said.

The uncertainty of forecasting of Ofgem [Office of Gas and Electricity Markets] energy price cap rises, and the feed-through into CPI, will maintain hawkish pressure on the BOE, it said.

Mizuho's year-end target for the 10-year gilt yield is 2.3%.

Energy:

Oil prices ticked higher by midmorning in Europe, recovering after dropping to their lowest level in six months, as data showed that U.S. crude and gasoline inventories shrank.

However, Brent remained close to its lowest level since just before Russia's invasion of Ukraine.

Data from the API on Tuesday showed U.S. crude stocks fell by 400,000 barrels last week while gasoline stocks slumped by 4.5 million barrels. Demand for gasoline in the U.S. had been sluggish despite peak driving season. API's data could suggest delayed demand is kicking in. The Department of Energy's inventory stats are due later Wednesday.

Metals:

Base metals were mixed, "chopping sideways with weak supply meeting weak demand," Marex said, referring to earlier trading in Asia.

Zinc was down 1% after shooting higher Tuesday following Nyrstar's announcement that it will be moving its Dutch zinc operations into "care and maintenance." Marex said zinc inventories were "close to record lows" at 75,000 ton.

It added that aggregate demand for base metals "has been dipping and coupled with poor PMI and global inflation as a gauge, it has been impacting sentiment for commodities and base metals consumption in general."

DOW JONES NEWSPLUS


EMEA HEADLINES

U.K. Inflation Tops 10%, Underlining Gloomy Outlook for Europe

The U.K.'s annual rate of inflation moved into double digits in July and is set to rise even higher by the end of the year, heaping greater pressure on stretched household budgets and threatening a lengthy economic contraction.

That pickup in inflation has been replicated in other parts of Europe, even as consumer prices have started to slow in the U.S. That is because energy prices have continued to accelerate across Europe as Russia withholds supplies of natural gas, with the continent facing a possible crunch this winter.


GSK Says First US Plaintiff to Drop Zantac Case

GSK PLC said late Tuesday that the plaintiff's counsel in the first of the U.S. lawsuits over discontinued heartburn drug Zantac plans to file a notice of voluntary dismissal.

The pharmaceutical giant said that it didn't settle Joseph Bayer's claim and hasn't made any payment for the dismissal.


Uniper Posts Massive 1H Loss as It Anticipates Further Russian Gas Hit

Uniper SE on Wednesday reported a much-widened loss for the first half of 2022 amid lower shipments of Russian gas and said its full-year earnings should be negative.

The German utility company reported a net loss of 12.35 billion euros ($12.56 billion), compared with a EUR20 million loss a year earlier.


Cineworld Anticipates Significant Share Dilution After Weak Admissions

Cineworld Group PLC said Wednesday that it is in funding talks that will likely result in a significant dilution for existing shareholders, as recent admissions have been below expectations.

The FTSE 250 cinema operator said it is in discussions with stakeholders and is evaluating strategic options for additional liquidity and a potential restructure of its balance sheet through a comprehensive deleveraging transaction. Steps to ensure balance sheet strength and flexibility are being taken, including significant operational and financial initiatives to manage costs and enhance liquidity, it said.


Carlsberg 1H Revenue Beat Expectations as Volumes Rebounded

Carlsberg AS on Wednesday posted a forecast-beating rise in first-half revenue after seeing strong growth in most markets.

The Copenhagen-based brewer said it achieved strong growth in western Europe and Asia, partly offset by higher commodity prices and energy costs.


Persimmon 1H Pretax Profit Fell; Backs 2022 Legal-Completions Target

Persimmon PLC said Wednesday that pretax profit and revenue fell in the first half of 2022, and that it anticipates delivery volume to increase in the second half as the company rebuilds its outlet position.

The U.K. house builder said that pretax profit was 439.7 million pounds ($531.9 million), compared with GBP480.1 million a year earlier.


Heat Wave Intensifies Energy Crisis in Europe

Natural-gas prices in Europe closed at a new record Tuesday, with hot summer weather boosting fuel demand and Russia throttling back supplies.

Europe has contended since June with drastically lower imports of gas from Russia, until recently its biggest supplier by far. Moscow cut flows through the Nord Stream pipeline by 80% to punish Germany and others for supporting Ukraine. Fearing President Vladimir Putin will order a full cutoff, the European Union has embarked on a plan to conserve gas now to burn it over the winter.


Germany to Keep Last Three Nuclear-Power Plants Running in Policy U-Turn

BERLIN-Germany plans to postpone the closure of the country's last three nuclear power plants as it braces for a possible shortage of energy this winter after Russia throttled gas supplies to the country, said German government officials.

(MORE TO FOLLOW) Dow Jones Newswires

08-17-22 0546ET

Stocks mentioned in the article
ChangeLast1st jan.
ABRDN PLC 4.25% 143.55 Delayed Quote.-42.84%
AUSTRALIAN DOLLAR / BRITISH POUND (AUD/GBP) -1.33% 0.56581 Delayed Quote.7.46%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -0.16% 0.649 Delayed Quote.-11.58%
BRITISH POUND / US DOLLAR (GBP/USD) 1.17% 1.14733 Delayed Quote.-17.70%
CANADIAN DOLLAR / BRITISH POUND (CAD/GBP) -0.30% 0.645303 Delayed Quote.11.36%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.87% 0.74014 Delayed Quote.-8.29%
CARLSBERG A/S 3.73% 923 Delayed Quote.-21.22%
CINEWORLD GROUP PLC 1.85% 2.75 Delayed Quote.-91.56%
COMMERZBANK AG 4.80% 7.646 Delayed Quote.9.07%
DOW JONES FXCM DOLLAR INDEX -0.40% 13297.3 Real-time Quote.9.75%
EURO / BRITISH POUND (EUR/GBP) 0.44% 0.87089 Delayed Quote.4.65%
EURO / US DOLLAR (EUR/USD) 1.61% 0.99924 Delayed Quote.-13.52%
FTSE 100 2.57% 7086.46 Delayed Quote.-6.44%
FTSE MID 250 INDEX 3.11% 17822.15 Delayed Quote.-26.39%
GSK PLC 0.67% 1328.4 Delayed Quote.-19.71%
INDIAN RUPEE / BRITISH POUND (INR/GBP) -0.93% 0.010738 Delayed Quote.10.79%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.09% 0.012281 Delayed Quote.-8.63%
LONDON BRENT OIL 3.23% 91.56 Delayed Quote.12.85%
LOWE'S COMPANIES, INC. 2.03% 197.91 Delayed Quote.-27.34%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.21% 0.57326 Delayed Quote.-17.80%
PERSIMMON PLC 2.08% 1303.5 Delayed Quote.-55.29%
S&P GSCI NATURAL GAS INDEX 5.87% 320.723 Real-time Quote.74.53%
UNIPER SE 1.69% 3.98 Delayed Quote.-90.64%
US DOLLAR / BRITISH POUND (USD/GBP) -1.20% 0.871726 Delayed Quote.21.50%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) 0.87% 58.525 Delayed Quote.-19.64%
WTI 3.61% 86.294 Delayed Quote.10.63%
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