MARKET WRAPS

Stocks:

European stocks were mostly lower on Tuesday following some mixed corporate updates and as investors focused on the Federal Reserve's next likely increase to its target interest rate.

UBS shares slid after the bank reported a small increase in second-quarter earnings, but the results fell short of analysts' expectations. Unilever rose after it said it expects underlying sales growth for the full year to exceed previous guidance, driven by higher prices, although volumes are forecast to be under pressure.

Gains for Unilever and the oil majors helped lift London's FTSE 100 moderately higher. BP and Shell were among the biggest risers as fresh uncertainty about European gas supplies from Russia helped boost Brent crude.

Read: Natural-Gas Prices Build on Winter Supply Shortage Fears

Retailer stocks across Europe suffered losses, however, following the profit warning from Walmart on Monday.

Economic Insight:

The steadily worsening energy crisis in Europe has inhibited the eurozone's economic recovery from the pandemic shock, said Moody's.

Its baseline forecast is for real GDP to grow 2.2% in 2022, followed by 0.9% in 2023, down from its May forecasts of 2.5% and 2.3%, respectively.

The inflation rate hit a record 8.6% in June from a year earlier, and Moody's expects inflation to remain elevated this year. There are substantial risks to Moody's forecasts in the event of a complete shutoff of gas flows from Russia to Europe.

"Such an energy supply shock that would be severely disruptive and inflationary," Moody's warned.

Read: Eurozone Recession Seems Likely, 0.2% GDP Contraction Expected in 2023

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Goldman Sachs expects eurozone core inflation to pick up again in September as the German nine-euro public transport ticket ends.

The bank expects core inflation to peak at 4.1% year-on-year in September and headline inflation to peak at 10.3% the same month. In December, Goldman Sachs expects core inflation to ease to 3.8% and headline inflation at 10.0%.

Among the drivers of inflation, Goldman Sachs cites elevated pass-through from wholesale to retail energy prices, wage growth, weakness of the euro, the re-intensification of bottlenecks and food price inflation. Taken together, Goldman Sachs forecasts eurozone core inflation to be 3.5% in 2022 and 3% in 2023.

Eurozone headline inflation is seen at 8.4% in 2022 and 5.1% in 2023.

Read: Gas Supply Remains the Achilles' Heel of the German Economy

U.S. Markets:

Stock futures edged lower as investors analyzed recent earnings reports and awaited results from blue-chip firms including technology companies and consumer brands.

This week is the busiest of the second-quarter earnings season, with 169 companies reporting, amounting to nearly half of the S&P 500's market cap, according to Credit Suisse. Investors will be keeping a close eye on how companies assess the current economic backdrop and if they are cutting back on business investment.

Cutting back on investing in new ventures or operations "tells you that maybe they're worried about the cash they have available and they're not willing to take that longer term view," said Georgina Taylor, a multiasset fund manager at Invesco.

In premarket trading, shares of Walmart fell 9.3% after the country's largest retailer warned that higher prices for food and fuel were causing consumers to pull back. Target shares also fell 4.8% premarket. The firm noted excess inventories would lead to declining profits going forward in a warning issued in early June.

A wave of fresh economic data is due. The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas, will show how home prices fared in May amid rising mortgage rates.

The Conference Board's index of consumer confidence, which measures American attitudes toward jobs and the economy, is expected to have declined in July.

In bond markets, the yield on the benchmark 10-year Treasury note ticked down to 2.785% from 2.819% Monday.

Forex:

The prospect of a 75 basis-point rate rise by the Fed on Wednesday should shield the dollar from any weakness in U.S. data releases, said ING.

Tuesday's data include the Richmond Fed manufacturing index, new home sales, and the Conference Board consumer confidence index, which are "all likely to have fallen further," ING said.

"Despite the relevance of the consumer spending and housing narrative in the recession discussion in the U.S., the vicinity of a near-certain 75bp hike by the Fed should limit the impact of the dollar of any data releases today."

Read Barrons.com: The Surging Dollar Means Trouble, and Bargains, in Emerging Markets

Bonds:

There is more downside to Bund yields despite all the negative economic news that markets have priced in since last week, said ING.

"It is only a matter of time before the market realises how limited the European Central Bank's room to hike is, with the penny likely to drop in and around the September meeting, in our view."

German Bund yields holding on to last week's gains confirm the market's recessionary mood, ING said.

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This week's Italian government bond auctions might provide an early test of demand for BTPs ahead as Italy is heading into general elections on Sept. 25, said Citi.

While Italy's treasury canceled some bond auctions in August due to large cash buffer, as it usually does, Citi said it sees limited scope of further cancellations, given that the treasury's cash balance tends to peak around August.

"Further, there might be upside risk to supply from a slowing economy, given the key contributors to higher-than-previously-expected Treasury cash balances have been strong growth and high tax revenues."

The bond auctions are on Tuesday and Thursday this week.

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The recent fall in 10-year developed-market bond yields mainly reflects a view among investors that weaker economic growth and some easing in commodity prices mean less monetary tightening will be necessary to bring inflation under control, said Capital Economics.

"Indeed, the fall in yields has coincided with a generalized drop in expectations for interest rates," it said.

Specifically, in the eurozone, the European Central Bank's muddled message about the conditions under which it would intervene to contain peripheral spreads may have also raised speculation that a further surge in those spreads may limit ECB rate hikes.

Energy:

Crude futures held solid gains in Europe and with Russia's reduced gas flows it's looking increasingly likely the continent will face a gas-supply shortage, and potentially gas rationing this winter, which could see extra demand for oil as a fuel source.

Metals:

Metals moved higher in early European trading as the weaker dollar helped support commodities.

"A 75 basis-point Fed hike is fully priced with a growing consensus of a weaker dollar post-FOMC as the Fed could moderate its hiking path in line with falling inflation expectations," something which should support gold and other metals, said SPI Asset Management.

Goldman Sachs said the iron ore market is likely to shift to a substantial surplus in the second half, reflecting extended property-related China demand weakness and a sharp deceleration in ex-China steel demand.

The market is presently absorbing steel production reductions in China, Europe and Japan, mill destocking and resale of contracted volumes, leading to a material reduction in spot physical liquidity, Goldman said.

Given more organic end-demand headwinds than a year ago and limited supply adjustments so far, this surplus swing is unlikely to be as short-lived as last year's. Goldman Sachs now forecasts benchmark 62% iron-ore contract to average $85/ton in the second half, versus $100/ton projected previously.

DOW JONES NEWSPLUS


EMEA HEADLINES

UBS Gets Boost From Rising Interest Rates

UBS Group AG said rising interest rates helped offset a slump in fees for managing money for rich clients, lifting its quarterly profit.

Switzerland's biggest bank by assets reported a $2.1 billion net profit, less than the $2.4 billion analysts expected, but up from $2 billion in the second quarter of 2021.


Unilever Raises 2022 Sales Guidance on Robust Pricing Despite Volume Drop

Unilever PLC said Tuesday that it expects underlying sales growth for the full year to exceed previous guidance, driven by higher prices, although volumes are forecast to be under pressure.

The Anglo-Dutch retailer--which owns consumer brands such as Ben & Jerry's ice cream, Dove soap and Cif and Domestos cleaning products--said it currently sees underlying sales growth ahead of the previously guided range of 4.5% to 6.5%.


Remy Cointreau 1Q Sales Rose; Backs Outlook for 2022-23

Remy Cointreau SA said Tuesday that sales rose in the first quarter of its fiscal year with a positive performance across brands, and confirmed guidance for 2022-23.

The French drinks group reported sales of 409.9 million euros ($418.8 million) in the three months to June 30 from EUR293.1 million the year earlier. On an organic basis, sales rose 27% on year.


easyJet 3Q Costs Rose Amid Capacity Increase, Cancellations, Labor Issues -- Update

easyJet PLC said Tuesday that headline costs for the third quarter rose, driven by higher levels of capacity flown as well as challenges such as labor shortages and cancellations.

The low-cost carrier said group headline costs for the quarter rose to 1.87 billion pounds ($2.25 billion) from GBP531 million in the year-prior period, with GBP133 million in disruption costs.


Shell to Proceed With Jackdaw Natural-Gas Project as U.K., Europe Seek New Supply

Shell PLC said Monday that it is moving forward with its Jackdaw natural-gas development in the North Sea, saying the project-which has been opposed by environmental groups-could produce more than 6% of expected U.K. North Sea gas by mid-decade.

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07-26-22 0530ET