MARKET WRAPS
Watch For:
EU Industrial Production, flash estimate GDP, flash estimate employment; U.K. producer prices, CPI, house price index; trading updates from Admiral Group, Aviva
Opening Call:
Shares may open lower in Europe on Wednesday amid cautious sentiment following strong U.S. retail sales data. In Asia, stock benchmarks were lower; Treasury yields fell; the dollar weakened slightly; oil retreated while gold gained.
Equities:
European stocks futures are indicated lower early Wednesday as investors parse downbeat news on China's economy on the one hand and rosier views about the strength of the American consumer on the other.
The U.S. retail sales data on Tuesday led some traders to rejigger their forecasts for interest-rate cuts next year. The fear is that hot retail sales could mean higher Fed interest rates for longer.
Quincy Krosby, LPL Financial's chief global strategist, said the latest retail sales report adds to those concerns.
"It's not great news when you want the Fed to finish," Krosby said, of its rate hikes. It's also another phase in the "open tug of war" between the bears and bulls right now, she added.
Futures traders still see another quarter-point hike as unlikely this year, but they now predict fewer cuts in 2024 than they did a month ago, according to FactSet data.
Minneapolis Federal Reserve President Neel Kashkari said inflation is still too high. "The question on my mind is, have we done enough to actually get inflation all the way back down to our 2% target. Or do we have to do more," he said.
Meanwhile, data released earlier this morning showed that new home prices in China's major 70 cities fell in July, shrugging off Beijing's attempt to reverse the prolonged real-estate slump.
This followed data released Tuesday that showed China's retail and home sales were increasing at a milder pace. The country's central bank lowered two key lending rates, surprising the market and signaling that its economy needs another boost.
China looms large, said David Sekera, chief U.S. market strategist at Morningstar. China's surprise interest rate cut is "raising fears that Chinese real estate valuations and economy may be in more trouble than feared," he said.
Russia's central bank also jacked up its key interest rate at an emergency meeting to stem a sharp selloff in the ruble and rising inflation.
Some investors say U.S. stock valuations are growing increasingly unattractive after the big rally this year.
"You're pushing some pretty sporty valuations on a pretty significant section of the marketplace," said Erik Ristuben, chief investment strategist at Russell Investments.
"There's a point at which better-than-expected doesn't mean good value for the future."
Forex:
The dollar edged lower in Asia but could strengthen amid risk-off sentiment driven by losses across regional equity markets.
The FOMC meeting's minutes due later in the global day could underpin the greenback, DBS Group Research said.
Given the resilient U.S. consumer is supporting the country's economy, the Fed is inclined to keep the door open for another Fed rate increase at one of the remaining three meetings of the year, it added.
Danske Bank Research said the strong U.S. retail sales data could lift the dollar, dragging EUR/USD down further.
Meanwhile, growth prospects in the eurozone and China look to be deteriorating and this pattern is expected to continue weighing on EUR/USD, it added.
Bonds:
Treasury yields retreated after finishing at their highest levels in about 10 months on Tuesday following a stronger-than-expected retail sales report pointed to continued U.S. economic strength.
"The 0.7% m/m jump in retail sales in July suggests that tighter monetary policy is still having remarkably little impact on real economic activity, but that isn't necessarily a problem for the Fed when the evidence continues to suggest that inflationary pressures are fading rapidly," said Capital Economics.
With the full impact of the Fed's tightening still feeding through and employment growth already slowing fairly sharply, "we still think a renewed slump in GDP growth over the second half of the year is much more likely than an acceleration. But as long as core inflation continues to fall rapidly, resilient growth won't in itself be enough to prompt further rate hikes from the Fed," it said.
Markets have priced in an 88.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.50% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November was seen at 33.4%, up from 28% a week ago.
Energy:
Oil futures edged lower in Asia amid mixed signals.
Concerns that China's ailing economy would likely weigh on demand seemed to be offset by signs of tightness in the physical market, ANZ Research analysts said.
Crude inventories at the Cushing hub in Oklahoma are expected to decline to their lowest level since April, and Asian refineries are snapping up available U.S. cargoes of oil, the analysts said.
"The oil market might remain tight, but most of the headlines are turning bearish for the demand side. Oil's pullback might need to continue a while longer before buyers emerge," Oanda said.
Metals:
Gold was slightly higher early Wednesday supported by lower Treasury yields which increase the appeal of the non-interest-bearing precious metal.
However, gold might be stuck in the "house of pain" a little while longer if the bond market selloff doesn't abate, Oanda said.
The high yield on 30-year Treasurys was making the precious metal less attractive even as China's property-market woes rattle markets, Oanda added.
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Copper prices edged higher, recovering from overnight losses after China's weak July industrial output data damped market sentiment for the metal, which is used widely in the manufacturing sector and building construction.
Ongoing weakness in industrial activity led Beijing to cut key policy rates to shore up confidence, but ANZ analysts said they "remain skeptical that it will be enough to boost growth."
A recent rebound in inventories was also weighing on sentiment.
TODAY'S TOP HEADLINES
Fed's Kashkari says he's not ready to say Fed's done with rate hikes
Minneapolis Federal Reserve President Neel Kashkari said Tuesday that he is not ready to declare victory in the battle over high inflation.
"Inflation is coming down. We have made progress and good progress. I feel good about that. It's still too high," Kashkari said, during a discussion during the APi Group's Global Controllers Conference.
Vital Natural Gas Is Being Stashed in Caverns Beneath War-Torn Ukraine
A daredevil trade is in vogue among commodity merchants: Stashing natural gas in caverns beneath the surface of war-torn Ukraine.
The wager could reap hundreds of millions of dollars collectively for traders such as Trafigura Group, Vitol and Gunvor Group, people familiar with the matter said. Others looking to cash in include oil-and-gas giants such as Shell and utilities such as Switzerland's Axpo.
Russia's Central Bank Can't Stop Ruble Trouble
Russia's currency crisis might not follow the classic emerging-market template: Rather than a sharp depreciation stemmed by painful interest-rate rises, we are more likely to see a slow but inexorable decline.
The Bank of Russia raised borrowing costs from 8.5% to 12% Tuesday in an attempt to stop a slide in the ruble. A day earlier, $1 briefly bought as much as 102 rubles, prompting rate setters to call an emergency meeting. The exchange rate depreciated again Tuesday after the expectation of an interest-rate increase triggered only a fleeting recovery.
U.S. in Talks to Develop Ukraine Grain Export Routes
ISTANBUL-The U.S. is in talks with Turkey, Ukraine and Kyiv's neighbors to increase the use of alternative export routes for Ukrainian grain, officials said, after Russia pulled out of an agreement that guaranteed the safety of food shipments across the Black Sea.
The U.S.-backed plan involves increasing capacity for Ukraine to export four million tons of grain a month via the Danube River by October. Much of the grain would be sent down the river and via the Black Sea to nearby ports in Romania and shipped onward to other destinations. Though slower and more expensive, the route would work as an alternative to a Black Sea shipping corridor established last year under an agreement with Russia, Turkey and the United Nations.
Brutal Summer Heat Tests Ability of Energy Exporters to Keep Their Citizens Cool
CAIRO-Energy-rich countries across the Middle East and North Africa are struggling to keep power flowing to their own citizens during intense summer heat, with Egypt the latest to impose rolling blackouts.
The outages here have prompted concerns that Cairo's domestic gas supply is running low.
Estée Lauder's Big Bet on China Is Looking Not So Pretty
Estée Lauder's longtime chief, Fabrizio Freda, is under pressure to show he can turn around the beauty giant's key China and U.S. businesses.
Shares of the company have slumped by about a third so far this year, hitting their lowest levels in more than three years. Estée Lauder has missed out on a stock market rally that has lifted the S&P 500 index by about 16% since the start of the year.
U.S. Steel Takeover Talk Rattles Manufacturers
A takeover of United States Steel could create a new industry leader-and draw pushback from antitrust authorities and steel buyers.
The pursuit by Cleveland-Cliffs of one of the nation's biggest steelmakers, made public in recent days, could ratchet up market concentration in steel used to make auto fenders, food cans and batteries for electric vehicles. Cleveland-Cliffs and industrial conglomerate Esmark have both made offers for U.S. Steel that would value the company at more than $7 billion.
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08-16-23 0015ET
