MARKET WRAPS

Watch For:

PPI for June; Weekly Jobless Claims; Canada Manufacturing Survey for May; earnings from JPMorgan Chase, Morgan Stanley

Opening Call:

Stock futures fell on Thursday as the prospect of the Federal Reserve responding aggressively to 40-year high inflation left traders wary at the start of the U.S. corporate earnings season.

Traders were pricing in a 75% probability that Jerome Powell and colleagues will raise interest rates by 100 basis points in less than two weeks time as they try to crush inflation that has jumped above 9% to a 41-year high.

Investors continued to fret that higher borrowing costs will slow the economy and crimp corporate profits. To that end, attention turns to the second-quarter earnings season, which begins in earnest on Thursday, with results from the big U.S. banks, JPMorgan Chase and Morgan Stanley.

Analysts do not think that the results would yet show signs of customer stress, but the market would remain wary of the sector given the pessimistic economic outlook for later in the year.

"While [bank] stocks appear discounted at 8 to 9x 2023 P/E vs. 11 to 13x historical average, investors [are] worried about downside risks to 2023 EPS from slower growth, higher credit costs and declining margins," said strategists at BofA Securities.

"Absent a macro shift [inflation outlook, Ukraine war] we don't expect results to change the cautious investor attitude towards the group."

For the wider market, observers estimate a second-quarter earnings growth rate of 4.3%, which would be the lowest for the S&P 500 since the fourth quarter of 2020, according to FactSet.

However, given the market's recent retreat--the S&P 500 has lost 20.2% so far in 2022--any such advance in corporate profits would leave stocks relatively fairly valued.

"The forward 12-month P/E ratio for the S&P 500 is 16.3. This P/E ratio is below the 5-year average [18.6] and below the 10-year average [17.0], " Butters added.

In Europe, Italian indexes led losses on reports of political turmoil in Prime Minister Mario Draghi's coalition government. Italy's FTSE MIB fell 2.2%, while the pan-continental Stoxx Europe 600 declined 0.8%.

In Asia, stock markets were mixed, with light losses for some benchmarks.

Stocks to Watch:

Intel has told clients that it will raise prices for most of its microprocessors and peripheral chip products later this year, Nikkei reported.

Raising product prices is necessary for the company due to rising production and materials costs, the Nikkei report said, citing three industry executives.

Percentage increases haven't been finalized as they would depend on the type of chip, and are likely to range from single-digit increases to over 10% and 20% in some cases, according to one of the executives.

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Slowing global economic growth is a clear headwind for most commodities, but this isn't necessarily the case for coal, especially in the very near term, said Jefferies.

It said thermal-coal prices will stay strong this summer due to seasonal demand and potentially worsening supply issues. Thermal coal is burnt to generate electricity and can replace gas-fired power stations when gas prices are too high, such as now.

"Glencore and Peabody are well positioned with thermal coal exposure, and Arch Resources remains our top pick of the U.S. coal miners due to its clean balance sheet and substantial capital return program," Jefferies added.

Forex:

Option-related activity around the key psychological level of parity is likely to mean EUR/USD will continue to hover close to that level before making an inevitable decisive break lower, said ING.

"Another attempt at breaking below 1.0000 appears likely over the coming sessions, and this time we could see a more decisive move lower," ING said, citing prospects of more aggressive U.S. interest-rate rises and concerns over gas supply from Russia to Europe.

Read: Hong Kong Monetary Authority Sells U.S. Dollars to Defend Currency Peg

Bonds:

Credit Suisse keeps a neutral stance on developed-market investment-grade and high-yield credit, expecting spreads to widen and realized default rates to rise further as financial conditions tighten.

In the U.S., Credit Suisse favors investment grade over low-quality high yield, given tightening financial conditions and lending standards, while in Europe, it remains cautious on corporate and financial bonds.

It said that within overall credit, emerging-market hard-currency corporate credit remains preferred with attractive risk-reward potential.

Energy:

Oil prices weakened in Europe, with Brent back below $100 a barrel, pressured by demand concerns due to fears of a global economic slowdown.

"As the demand destruction narrative builds against the backdrop of incoming supply [from the UAE and Saudi Arabia], it will undoubtedly put the oil market's invincible bullish thesis to the stress test," said SPI Asset Management.

Metals:

Base metals and gold were sharply lower in early European trading as worries continued to mount over rising inflation and whether the Fed's efforts to control prices will work.

Investors will be looking to today's PPI, with Peak Trading Research noting that "PPI Producer Wholesale inflation usually plays second-fiddle to CPI data, but all inflation data points matter today. Investors are fatigued...hopefully, yesterday's CPI print was the peak, especially given the recent drop in commodity prices."


TODAY'S TOP HEADLINES


Brookfield, DigitalBridge to Buy Stake in Deutsche Telekom's Tower Business for $17.60 Bln

A consortium of Brookfield Infrastructure Partners LP and DigitalBridge Group Inc. agreed to buy a stake in Deutsche Telekom AG's tower business for 17.5 billion euros ($17.60 billion) including debt, raising their bet on a telecommunications sector that has seen a flurry of deal making in recent years.

Germany's Deutsche Telekom on Thursday said it had agreed to sell the consortium a 51% stake in GD Towers, its tower business in Germany and Austria, after a yearlong effort to sell part of the business. GD Towers operates more than 40,000 sites across Germany and Austria, and will hand the consortium exposure to some 800 employees.


United Airlines Pilots to Delay Contract Vote

United Airlines Holdings Inc. and its pilots union will reopen contract negotiations, after pilots objected to elements of a tentative agreement the airline and the union struck last month.

United's pilots were set to wrap up voting Friday on a deal that would have included pay raises of more than 14.5% within 18 months. But United agreed to resume discussions after pilots raised concerns about aspects of the deal, the Air Line Pilots Association's United chapter told members in a message Wednesday.


Tesla Supplier Panasonic Plans $4 Billion EV Battery Factory in Kansas

Tesla Inc.'s main battery supplier in the U.S., Panasonic Holdings Corp., said it would build a $4 billion electric-vehicle battery factory in De Soto, Kan., the latest move in the EV industry's race to ramp up capacity.

The new plant comes in tandem with Tesla's plans to boost U.S. production, including at a factory in Austin, Texas, that started delivering vehicles in April.


Crypto Crash Drags Lender Celsius Network Into Bankruptcy

Cryptocurrency lender Celsius Network LLC filed for bankruptcy protection Wednesday, a month after halting withdrawals in the wake of a collapse in digital currency prices that stretched the platform's business model past the breaking point.

The chapter 11 filing in New York follows weeks of market speculation about Celsius, which built itself into one of the biggest cryptocurrency lenders on a pitch that it was less risky than a bank, and with better returns for its customers. But it overextended itself offering lofty yields to crypto depositors and making large loans backed by little collateral, leaving itself little cushion in the event of a market downturn.


Ericsson 2Q Weighed On by Lower Licensing Revenue and Higher Costs

Ericsson AB on Thursday posted a second-quarter net profit that missed expectations, but said it continued to see strong 5G sales momentum in North America and Europe.

The Swedish telecommunications-equipment company reported net profit attributable to shareholders of 4.5 billion Swedish kronor ($426.3 million), compared with SEK3.68 billion a year earlier, as sales rose 14% to SEK62.47 billion.


TSMC Posts Record-High Second-Quarter Net Profit

Taiwan Semiconductor Manufacturing Co. said Thursday that its second-quarter net profit rose 76% from a year earlier to a new record high thanks to greater revenue and sharply higher margin.

The world's largest contract chip maker said that net profit for the quarter ended June 30 rose to a record 237.03 billion Taiwan dollars (US$7.95 billion) from NT$134.36 billion a year earlier. That beat the estimate of NT$220.91 billion taken from a poll of analysts by S&P Global Market Intelligence.


Chinese Property Developers Slide Amid Mounting Home-Buyer Discontent

Shares of Chinese property developers declined sharply Thursday morning in Hong Kong following reports that home buyers across the country have refused to pay mortgages at unfinished development projects, which could aggravate companies' liquidity woes.

Among the worst-performing stocks, Longfor Group Holdings Ltd. fell 7.8% and China Vanke Co. slid 7.1%. Country Garden Holdings Co. was last down 1.9%, extending losses so far this week to 20%.


Fed's Mester: CPI Data Terrible, But Not Ready to Call for 100-Basis-Point Rate Increase

Federal Reserve Bank of Cleveland President Loretta Mester said inflation data released earlier Wednesday was terrible, but she wasn't yet ready to commit to further accelerating central bank interest rate rises to deal with the problem.

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07-14-22 0537ET