MARKET WRAPS
Watch For:
ISM Report on Business Services PMI for August; Canada Official International Reserves Monetary Reserves (USD).
Opening Call:
Stock futures moved higher Tuesday as investors returned from the long Labor Day weekend.
Investor attention will likely return to familiar themes this week: Inflation at a multi-decade high and the prospect that central banks will continue to combat it with much tighter financial conditions and in the process raise the risk of recession.
A spike in energy prices in Europe and action over a slowdown in China--the second-largest economy --add a global lens to a week that will also see news from the Federal Reserve.
"U.S. markets might have been closed for the Labor Day holiday, but there was plenty of action in Europe as markets finally reacted to the closure of the Nord Stream gas pipeline on Friday evening," said Jim Reid, a strategist at Deutsche Bank.
"Asian equity markets are trading higher this morning following yesterday's announcement by Chinese officials that they will speed up stimulus efforts in the third quarter to boost the economy as evidence points to a further loss of momentum for an economy marred by pandemic related losses and a property slump."
Markets will be watching the Fed's release of its Beige Book report on economic conditions on Wednesday, and Fed Chairman Jerome Powell's speech and the European Central Bank's interest-rate decision on Thursday.
Overseas, London's FTSE 100 rose as Liz Truss was set to take over from Boris Johnson as British prime minister.
European equities were up broadly, with the pan-regional Stoxx 600 climbing after a selloff Monday, driven by acute fears of an energy crisis after the Russian shutdown of the Nord Stream 1 natural-gas pipeline.
The Shanghai Composite jumped in Asian trade afrer Chinese authorities said fiscal stimulus would be accelerated in the current quarter.
Forex:
The dollar should hold onto its gains for the rest of the year and a further 5% rally can't be ruled out, ING said.
The currency is buoyed by a "hawkish" Fed, which seems happy to take interest rates near 4%, as well as the U.S.'s energy independence, ING said.
The dollar also appears the "pre-eminent" safe haven currency, ING said.
Some are making references to the 1985 Plaza Accord, a G5 agreement to reverse the strength of the dollar, but the Fed would need to start easing monetary policy for that to be effective, it said.
"And such a U-turn seems highly unlikely this year."
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As developments around the energy crisis continue to dominate the scene in forex markets, they represent a drag primarily for EUR/USD, UniCredit Research said.
This is due to the eurozone's greater dependency on gas and oil, the Italian bank said.
"Investors continue to appear prudent about dragging EUR-USD much lower despite the overall economic picture becoming gloomier," UniCredit Research said.
They see markets becoming increasingly accustomed to the idea that the pair might trade below parity.
Energy:
Oil prices edged lower, reversing some of Monday's gains after a modest supply cut from OPEC+.
While the cut was unexpected, it is being seen as a largely symbolic move by analysts. The amount is small compared to the amounts the cartel has raised output by in recent months.
"The cut is more symbolic and is likely to have little impact on market balances as it is only a fraction of the headline number," UBS said.
"Many alliance members produce below their cap and this move will not affect their output."
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European natural gas price dropped, reversing some of Monday's steep climbs after Russia said flows through the Nord Stream pipeline wouldn't resume.
Strong inventory builds ahead of winter are easing the worst fears of supply shortages but analysts warned there will still be pain for lots of energy-intensive sectors.
"Company and government actions to mitigate effects of potential gas shut-off have eased but not erased, risks to credit quality," Moody's said.
European utilities, chemical, automotive, and manufacturing firms will be among the most exposed to higher gas prices.
Metals:
Metals prices moved up in early trading, helped by news of more stimulus efforts in China and a weakening dollar.
"The dollar was slightly weaker which gave commodities some breathing space to inch higher," Marex said.
The dollar fell slightly to 109.38 Monday and is currently flat, but the rising greenback has helped taper dollar-denominated commodities such as metals this year.
China is also aiming to speed up stimulus efforts in the third quarter--something which is also helping to add further impetus to base markets, Marex added.
TODAY'S TOP HEADLINES
Volkswagen to List Porsche in One of Biggest IPOs in Years
BERLIN-Volkswagen AG said Monday that it would list its iconic sports car maker Porsche AG in one of the biggest initial public offerings in years and a crucial test of investors' confidence as high inflation and the war in Ukraine put a damper on the global economy.
The offering could value Porsche at as much as 85 billion euros ($84 billion), according to analyst estimates, injecting fresh cash into VW's coffers that executives say will help the company bankroll its transition to electric vehicles and self-driving cars.
Lufthansa Confirms Negotiation With Pilot Union After Strike Call
Deutsche Lufthansa AG will continue negotiations with its pilot union to avert a strike that would cause massive disruptions to flights, the German airline said Tuesday.
The pilot union, Vereinigung Cockpit, called for a strike for Sept. 7 and 8, plus another one until Sept. 9 for Lufthansa Cargo, after it said that the airline didn't submit a new offer in response to demands.
Rio Tinto Enters Binding Agreement to Acquire Turquoise Hill
SYDNEY--Rio Tinto PLC said it has entered a binding agreement with Turquoise Hill Resources Ltd. to acquire the remaining shares in the Mongolia-focused copper miner that it doesn't already own.
Rio Tinto said Turquoise Hill's independent directors had unanimously recommended its cash offer of 43.00 Canadian dollars (US$32.72) per share for all shares outstanding. It previously offered C$40.00 per share.
SK Hynix to Invest $10.95 Billion in New Chip Plant
SK Hynix Inc. said Tuesday it will invest 15 trillion won ($10.95 billion) over the next five years to build a new chip plant, as it looks to position itself for the next upturn in the semiconductor industry.
The South Korean memory chip maker said it expects the construction of the new plant, known as M15X and located in a city south of Seoul called Cheongju, will be completed in early 2025.
Windfall Taxes Are the Latest Hit on Europe's Banks
European banks have started to reap higher profits from rising interest rates-and governments are already starting to clamp down on them.
In Spain, the government has laid out plans to tax lenders on their rising income and use the money to alleviate higher living costs for the population. Hungary has imposed a similar measure, and the Czech Republic, where inflation is above 17%, is also considering such a move. In Poland, where mortgages carry variable rates that are quickly rising, the government placed a moratorium on repayments to help borrowers.
Junk-Loan Defaults Worry Wall Street Investors
Financial pain is spreading in the junk-loan market, showing how interest-rate increases are hurting debt-laden companies and worrying investors that a credit crunch looms as the economy slows.
Defaults on so-called leveraged loans hit $6 billion in August, the highest monthly total since October 2020, when pandemic shutdowns hobbled the U.S. economy, according to Fitch Ratings. The figure represents a fraction of the sprawling loan market, which doubled over the past decade to about $1.5 trillion. But more defaults are coming, analysts say.
Investors Are Pouring Into U.S. Stocks to Avoid Greater Turbulence Overseas
Investors around the world are piling into U.S. stocks, even as they brace for the prospect of a rocky autumn, because they say there's nowhere better to shelter from the turbulence in global markets.
Skyrocketing inflation, worries about a potential recession, Russia's invasion of Ukraine, rising energy prices and new Covid-19 outbreaks have rattled everything from stocks to bonds to commodity prices this year.
RBA Delivers Another Big Rate Increase, Warns of More to Come
SYDNEY--The Reserve Bank of Australia delivered a fourth consecutive 50-basis-point rise in official interest rates to combat inflation while warning that further increases remain in the pipe.
The RBA raised the official cash rate to 2.35% from 1.85% after a policy meeting earlier Tuesday. Since May, it has announced 225 basis points of increases, the fastest pace of policy tightening in nearly 30 years.
A 75-Basis-Point ECB Interest Rate Rise in Sept Is the Right Size at Right Time, BNY Mellon IM Says
A 75-basis-point interest rate rise by the European Central Bank on Thursday will be the appropriate size and timing if the ECB wants to benefit from the window of opportunity to lower core inflation, Lale Akoner, senior market strategist at BNY Mellon Investment Management, told Dow Jones Newswires in an interview.
"The [eurozone] August core inflation data at an all-time high of 4.3% actually stamps an interest rate hike of 75bps this week," she said.
Ukraine Warns of Risks to Nuclear Plant Ahead of U.N. Inspectors' Report
KHARKIV, Ukraine-Ukrainian President Volodymyr Zelensky warned that the Zaporizhzhia nuclear plant was again in jeopardy after shelling disconnected it from the grid ahead of the release of a report by United Nations inspectors.
(MORE TO FOLLOW) Dow Jones Newswires
09-06-22 0618ET
