MARKET WRAPS

Stocks:

European stocks lost further ground on Wednesday as uncertainty over the trajectory of Federal Reserve policy continued to hobble traders' risk appetite.

Stocks have swiftly retreated as investors feared that their optimism that the Fed would slow its pace of rate hikes was misplaced.

"With investors for the most part sitting on their hands ahead of the imminent Jackson Hole symposium, markets failed to make much progress," Richard Hunter at Interactive Investor said.

Stocks to Watch:

Luxury-goods players may need to keep an eye on economic developments in the U.S., where consumer spending looks to be slowing, although high-end consumption seems to be more resilient, Equita Sim said.

Two major U.S. department stores, Macy's and Nordstrom, this week cut financial guidance for the year, citing risks of a steeper downturn and slowdown in consumer spending.

The country accounts for around 20% of luxury sales, and has contributed strongly in recent quarters, the Italian investment bank said.

"We see high-end demand continuing to hold up better than mid- to low-end demand," Equita Sim said, noting the outperformance of Macy's and Nordstrom's higher-end banners.

Economic Insight:

Eurozone inflation hit 8.9% in July and is in for a tough second half of the year, ING said. Supply shocks continue to plague the eurozone economy, causing inflation to show few signs of abating in the short run and therefore ING said eurozone inflation is still far from its peak.

The high point will be hard to determine as energy prices are currently unpredictable and still have a dominant effect on headline inflation, as well as core inflation, economists at ING said.

A peak above 9% headline year-on-year inflation is logical at this point, but a jump to above 10% is clearly not unimaginable given the high market gas prices, ING said.

Market Insight:

Choppy trading in rates markets around current levels wouldn't surprise Mizuho. Wednesday is the last session before the Fed's annual economic symposium in Jackson Hole, Wyo. Mizuho said market participants may also want to square up their positions ahead of risk events on Thursday-Friday.

Investors are selling eurozone government bonds, with the 10-year German Bund and French OAT yields both trading almost four basis points higher, according to Tradeweb.

U.S. Markets:

U.S. stock futures wavered ahead of economic data and earnings from major technology companies. Futures tied to the S&P 500 oscillated between small gains and losses, pointing to the broad-market index holding on to its recent declines.

Stocks have come under pressure in recent days from a series of data releases that showed contractions in the manufacturing and services sectors. Fed officials have also signaled that interest rates are likely to continue increasing to fight inflation. The central bank begins its annual economic policy symposium in Jackson Hole on Thursday and Fed Chairman Jerome Powell is set to speak on Friday.

"Growth is falling quite precipitously everywhere. We've had a pretty big signal of weakening economic conditions," said Fahad Kamal, chief investment officer of Kleinwort Hambros. "But I think we'll see Powell stick to his hawkish tone, he has to keep talking tough on inflation. That means more volatility for markets and more questions about the depth of the recession."

Investors are awaiting data on durable and capital goods orders for July at 8:30 a.m. ET for more insight into the health of the economy. Tech giants Salesforce and Nvidia are scheduled to report earnings after markets close.

The yield on the benchmark 10-year Treasury note edged down slightly on Tuesday, reversing direction after a three-day climb. The yield curve continues to be inverted, flashing a recessionary signal, with the two-year yield at 3.301%.

Meanwhile, the saga of meme-stock favorite Bed Bath & Beyond took another twist after The Wall Street Journal reported the struggling retailer had lined up a financing source to shore up its liquidity.

Forex:

The dollar recovered on Wednesday from the previous day's falls after U.S. purchasing managers' surveys showed a bigger-than-expected drop in services activity as investors again focus on U.S. rate-increase prospects.

The dollar "has been grinding steadily higher overnight and DXY has now regained around 2/3 of the losses seen on the weaker services PMI data yesterday," RBC Capital Markets said.

Attention is shifting to Fed Chairman Jerome Powell's speech set for Friday at the annual Jackson Hole, Wyo., symposium, the Canadian bank said.

Minneapolis Fed President Neel Kashkari on Tuesday warned of "the risk of unanchoring inflation expectations," and and most analysts expect that Powell will reiterate that further rate increase are needed.

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The failure of sterling to benefit from markets pricing in additional monetary policy tightening by the Bank of England is a worrying signal for the currency, Validus Risk Management said.

Markets raised their U.K. interest-rate expectations after higher-than-expected inflation data last Wednesday and stronger-than-forecast retail sales figures on Friday but sterling still fell, a market risk advisory firm said.

"A breakdown in U.K. rates / currency performance is more akin to what we might expect to see in emerging markets," Validus said. "Even with nominal rates set to go higher, significantly higher inflation means that real rates are still heading lower."

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Better-than-expected eurozone purchasing managers' index data and worse-than-expected U.S. PMI data on Tuesday are not a reason to turn optimistic about the euro versus the dollar, Commerzbank said.

The data are unlikely to change the policy approach of the Federal Reserve and European Central Bank, the bank said. Recent Fed rhetoric showed it will take action against inflation at any cost while the ECB remains hesitant, it said.

Meanwhile, the threat of a eurozone gas crisis is imminent, Commerzbank said. "I stick to my view that the risks for the euro are at the lower end, a few data publications will not change that."

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The Swiss National Bank may struggle to contain the Swiss franc's appreciation through foreign-exchange interventions, Commerzbank said.

"The increased uncertainty on the market, recession fears for the eurozone economy and high inflation levels combined with a hesitant European Central Bank would make possible SNB interventions seem more like a leaning against the wind," the bank said.

Any interventions may limit the appreciation speed of the safe-haven franc but not prevent appreciation altogether, Commerzbank said.

Bonds:

Within developed-market rates, "it is fair to say that no bond is in favour at the moment," ING said.

The Dutch bank notes that there has been a broad-based rise in government-bond yields recently, accompanied by a "toxic" rise in both implied volatility and market inflation expectations.

"The former suggest an eroding of government bonds' safe-haven status, the latter show the return to persistent inflation concerns," ING said.

A rise in inflation swaps even as markets are pricing a higher path for central-bank interest rates is a worrying sign and suggests that "even more aggressive hikes will fail to get inflation under control," the bank said.

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The scenario of an inverse German yield curve still seems far away, but an increasing flattening of the curve is becoming apparent because of rising inflation expectations, Metzler said. The short end of the German yield curve, in particular, has recently come under greater pressure again, the bank said.

With inflation potentially climbing above 10% in the autumn, according to the forecasts of chief economists of many investment banks, the European Central Bank is unlikely to deviate from its restrictive course in the short term, Metzler said.

"Against this backdrop, pressure is likely to remain at the short end and lead to a further flattening of the yield curve," it said.

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A yield around 3.30% on Norway's 1.75% March 2025 government bond might attract investors to Wednesday's auction along with anticipated supply scarcity in the two- to three-year maturity segment in the remainder of the year, Danske Bank said.

"We have the view that the market is pricing too aggressive monetary-policy tightening from Norges Bank," it said ahead of Norges Bank's NOK2 billion tap. After Wednesday's auction, Norway will have raised EUR42 billion out of the NOK60 billion-NOK65 billion 2022 issuance target, Danske Bank said.

A planned 20-year bond syndication in 2H leaves just NOK5 billion-NOK15 billion at regular auctions in the remainder of the year, it said.

Energy:

Oil prices rose further following a nearly 4% surge in the prior session on worries about a possible production cut from OPEC+.

Both varieties had jumped slightly less than 4% on Tuesday after Saudi Arabia, the de facto leader of OPEC, said the cartel was ready to cut output to correct a decline in oil prices and keep prices supported.

The kingdom's energy minister said the market was suffering from "extreme volatility" partly because of low liquidity. Most analysts said oil prices have fallen because of recession worries.

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European natural gas prices were stable after hitting their highest ever level earlier this week. Gazprom's announcement that it would suspend all flows through the Nord Stream pipeline sent prices surging.

But despite recent curtailments, Germany is managing to fill its gas reserves, Commerzbank said, adding that EU-wide gas stocks are 77% full.

"Germany is clearly managing to replenish its gas stocks even without any significant gas supplies from Russia. This points to noticeably weaker demand, as additional gas from other sources such as Norway is only available to a limited extent, and like U.S. LNG has to be bought in at extremely high prices," the bank said.

Metals:

Weak economic data continued to weigh on base metals, demand for which is heavily correlated with strong economic growth.

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08-24-22 0711ET