European stocks lost further ground on Tuesday, reflecting a global pullback amid heightened tensions between the U.S. and China over U.S. House Speaker Nancy Pelosi's planned visit to Taiwan.
Investors are worried that Mrs. Pelosi's trip could worsen an already strained U.S.-China relationship, and are taking a cautious stance, said Jason Hsu, chief investment officer at asset-management company Rayliant Global Advisors. The market, however, "is not pricing in a China invasion of Taiwan," he added.
Corporate earnings were mixed. BP was the biggest riser on London's FTSE 100 index as the group became the latest oil giant to report its best quarter in years amid soaring energy prices. BP saw adjusted profit surge to $8.5 billion in the prior quarter, up from $2.8 billion in the year prior and well ahead of analysts' expectations.
Meanwhile, Spanish wind-turbine maker Siemens Gamesa Renewable Energy reported a widened net loss for the third quarter of its fiscal year and cut its full-year guidance, citing increased costs and supply-chain issues.
The Barclays global manufacturing confidence indicator fell to a two-year low, adding to evidence of an approaching global manufacturing recession, Barclays said. The demand-driven global manufacturing slowdown was exacerbated by tightening of activity restrictions in China, the U.K. bank said.
In July, global manufacturing output contracted sharply as the China-led June rebound reverted in just one month, it said. On the bright side, the global demand slowdown, supply-chain normalization and some de-escalation of geopolitical tensions helped to ease input cost price pressures, although price pressures remained elevated, Barclays said.
"In an environment of tight supply conditions, including tight labour markets, a more substantial demand slowdown could be required to tame inflation."
U.S. stock futures retreated Tuesday as investors are cautious ahead of Mrs. Pelosi's planned visit to Taiwan.
The trip comes against an already fragile backdrop for markets. The U.S. economy is struggling with the twin threats of soaring inflation and rapidly rising interest rates-part of the Federal Reserve's stated goal to fight rising prices even if it knocks economic growth.
Stocks have rebounded in recent weeks on hopes that the worst of inflation and rate rises could be over but investors aren't ready to call a bottom in the market yet.
"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.
Government bond yields fell as investors sought assets considered safe havens ahead of Mrs. Pelosi's Taiwan trip.
Pinterest shares jumped 19% ahead of the opening bell after the social-media company reported earnings in line with forecasts and its new chief executive said he was going to focus on profitability. Avis Budget rose 3.8% after the car-rental company reported earnings that beat expectations.
Cowen rose 4.8% after The Wall Street Journal reported that Toronto-Dominion Bank is close to buying the investment bank for more than $1 billion.
The euro may struggle to benefit if the dollar depreciates on potential weaker-than-expected data in the second half of 2022 that could fuel U.S. recession fears, Commerzbank said. The U.S. is unlikely to avoid a recession as a result of the Fed's rapid interest-rate rise cycle but the eurozone also faces a recession due to energy shortages, the bank said.
"Therefore, even in case that the best days for the dollar might be over soon, that does not mean the euro will see better times," Commerzbank said. EUR/USD could trade in a range of 1.00-1.04 until it becomes clearer how Europe's gas situation will develop, it said.
Sterling would fall if the Bank of England raises interest rates 50 basis points on Thursday but signals that it will act less aggressively going forward due to concerns about weaker economic growth, Commerzbank said.. A reduction in the speed and the peak of the rate-rise cycle would probably hit sterling hard, particularly given high inflation, the bank said.
"GBP/USD might then have another go at the 1.20-mark," it said. Sterling should remain stable against the euro, however, after weaker eurozone purchasing managers' index data and it is unclear to what extent the European Central Bank will raise rates after September, Commerzbank said.
The DXY dollar index rose Tuesday as heightened tensions between the U.S. and China over Mrs. Pelosi's mooted Taiwan visit boost safe-haven currencies.
"Should this mark a material deterioration in U.S.-China relationships, expect some shockwaves to be felt across the FX market," ING said.
The dollar, the yen and franc should be the main beneficiaries, while the Chinese yuan and China-sensitive and risk-sensitive currencies, including the Australian dollar and New Zealand dollar could weaken, the Dutch bank said.
Sell-side analysts' sentiment toward the dollar has reached the weakest level in at least a decade, RBC Capital Markets said.
Consensus forecasts imply a steep decline in the dollar and losses are expected to be broadly-based, with falls ranging from 2% to 8% against the euro, Japanese yen, sterling, Australian dollar, Canadian dollar and Swedish krona, RBC said.
"Notably, consensus has turned from neutral to bearish USD/JPY over the last couple of months and, as is often the case (and often wrong), analysts are most bullish on SEK." There doesn't appear to be one dominant reason for negative USD-sentiment, it said. RBC said, however, that it maintains a mildly-positive dollar bias.
Bunds look set for a strong session, driving yields lower, analysts at ING said. They cite safe-haven demand stemming from "rising geopolitical tensions in Asia," Nancy Pelosi planning to visit Taiwan despite warnings from China. This is giving bonds "a helping hand," they said.
Meanwhile, expectations are growing that the pace of interest-rate rises will have to slow. Data on U.S. job openings due 14:00 GMT will likely continue to show a tight labor market, but any further decline could point to a cooling as U.S. interest-rate increases are "bearing fruit," it said.
Oil prices moved lower on Tuesday. "Soft Chinese PMI data, fully recovered Libyan oil production, indications of resumed Iranian nuclear talks, and increased US/China tension with the potential Pelosi visit to Taiwan have pushed oil prices lower," DNB Markets said.
All eyes will be on the OPEC meeting set for Wednesday, which will likely dictate prices for the rest of the week, DNB said.
Metals markets recorded losses on Tuesday, with Asian markets unsettled ahead of Nancy Pelosi's planned visit to Taiwan.
"The media is just unsightly with continued aggravation in the world of politics as Pelosi looks determined to head for Taiwan and onshore equities all being down," Marex said.
Some defense firms rallied but most metals firms were downbeat over the visit, it said. Weak manufacturing data in China and the U.S. on Monday also added to the negativity.
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