MARKET WRAPS

Stocks:

European stocks extended losses on Monday after Jerome Powell said the Federal Reserve "must keep at it" until it wins the battle against rising inflation.

What that means, Powell said, is that the Fed will keep moving aggressively to raise interest rates until it returns inflation to its target of 2%.

Cliff Hodge, chief investment officer at Cornerstone Wealth, said the Fed's stance "drastically reduces the chance of a soft landing and the bull case for new highs this year." Hodge also said it raises the odds of recession next year.

"Investors are coming to terms with the idea that the Fed is serious about curbing inflation, even as recent data suggest inflation is starting to decline," said Rod von Lipsey, managing director at UBS Private Wealth Management.

He added that economic data justifies a rate hike of 50 or 75 basis points at the Fed's meeting next month, "with the potential for additional 25 or 50-basis-point rate hikes at the November and December meetings to stay ahead of inflationary trends."

Stocks to Watch:

A pilot strike at Lufthansa would be costly for the carrier, Stifel analysts said.

German pilot union Vereinigung Cockpit said last week that it could strike anytime after negotiations with the company weren't successful. Both sides have expressed a willingness to talk.

One full strike day would translate to an EBIT hit of EUR30 million-EUR35 million, Stifel said, basing this on an earlier comment by management. This translates to roughly 3%-4% of the EUR988 million EBIT Stifel expects Lufthansa to post for the year.

"The last large pilot strike back in 2017 resulted in 17 strike days and roughly a EUR500 [million] EBIT impact," Stifel said.

Economic Insight:

The U.K. economy is expected to fall into a recession starting in the fourth quarter, with real GDP contracting by around 1% through the second quarter of 2023, Goldman Sachs said.

The incoming recession is set to be relatively mild given that fiscal support will likely offset the impact of high energy prices, households are likely to spend some of their savings, and the labor market will likely retain its strong momentum, Goldman added.

However, it said there are risks toward a more severe and protracted recession should gas prices remain elevated for longer.

U.S. Markets:

Stock futures and Treasurys fell to start the week, as investors remained unsettled by the Fed's resolve to keep fighting inflation even if it causes some economic pain.

"The market kind of got ahead of itself over the last three, four weeks or so...in terms of pricing in a possible Fed pivot to a more dovish stance," said Clara Cheong, a global market strategist at J.P. Morgan Asset Management.

Forex:

The DXY Dollar Index hit a two-decade high in European trading, after Jerome Powell's speech set the Fed apart from other central banks, which are also raising rates but face bigger risks to their economies, Swissquote said.

"Powell sent the dollar rallying, and the dollar bulls now eye the 110 level [in the DXY], on the back of a solid divergence between the decidedly hawkish Fed, and more hawkish, but increasingly worried, other central banks," Swissquote said.

The euro was slightly lower but UniCredit Research said traders might be cautious about pushing the currency too low ahead of next Thursday's European Central Bank meeting.

It pointed to a Reuters report that cited sources saying some ECB policymakers want to discuss a 75 basis-point rate increase on September 8. ECB board member Isabel Schnabel also said at the weekend that central banks need to act "with determination" to fight soaring inflation despite risks facing economic growth.

"Investors are tending to be cautious about dragging the common currency down a lot ahead of the ECB meeting," UniCredit said.

Bonds:

Eurozone government bond yields jumped as central banks reiterated their fight against inflation with further interest rate rises.

"The bearish bond repricing is likely to extend as investors returning from their holidays need to catch up with the hawkish central banks attitudes, with other asset classes also under pressure," Commerzbank said.

Markets' hawkish repricing of European Central Bank interest rate rises and of eurozone government bonds is likely to extend "with the 75bp rate hike genie out of the bottle and the QT debate coming closer," Commerzbank said.

Aegon Asset Management said yields are set to stay on a rising path after Jerome Powell reiterated the hawkish stance the Fed was taking toward the current high levels of inflation, .

"In short, the speech was hawkish and we would expect yields of government debt to continue to rise," Aegon said.

Candriam said central banks are set to continue raising interest rates, which prompts it to err on the side of caution.

"In our view it's clear central banks have not finished in their fight against inflation."

Candriam is short duration, defensive on Italian BTPs and is also defensive on credit spreads, expecting the next interest-rate rises to weigh on those spreads.

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Investors should consider buying the Netherlands' new January 2054-dated government bond, or DSL, when it is launched in late September, NatWest Markets said.

It sees the fair value of the new ultralong Dutch bond 40.7 basis points above the yield of Germany's 0% August 2052 Bund.

The main reasons for buying the new Dutch ultralong debt are attractive absolute yield compared with recent history, added convexity as protection against a more-aggressive rates cycle and pricing of Dutch bonds versus other eurozone government bonds in relation to Dutch fundamentals, NatWest said.

Energy:

Oil futures posted gains of more than 1% on expectations of tighter supply.

Libya and Congo last week joined Saudi Arabia to support the view that supply curbs may be needed to stabilize the oil market, ANZ said.

"Sentiment was further supported following news that Kazakhstan exports of crude may be impacted for months."

OANDA said investors will likely keep a close eye on the growing political pressure in Europe, with expectations the Czech Republic will call for an extraordinary meeting of ministers to combat rising energy prices.

"The pressure is on for decisive action and that could lead to emergency measures that might cap the move higher with energy prices."

Metals:

Gold futures weakened further as investors continued to digest Powell's comments.

Near-term investor appetite for the precious metal may be pressured, as Powell's hawkish speech has helped push the dollar higher.

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Copper prices were flat after last week's gains on China's announcement on infrastructure stimulus.

Power shortages in Sichuan have highlighted the need for better connectivity within the national grid amid a drought that has hindered hydro generation, ANZ said.

"This will see stronger demand for metals such as copper and aluminum despite the property-sector headwinds that are weighing on their use in construction."

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08-29-22 0502ET