MARKET WRAPS
Watch For:
EU Harmonised CPI; EU Foreign trade; trading updates from Compagnie Financiere Richemont, Swedbank, Autoliv, Burberry, GroupHomeserve.
Opening Call:
Stocks to rise at open after U.S. stocks ended mixed. Dollar strengthens. Treasurys retreat. Oil falls and gold edges lower.
Equities:
European stocks are set to open higher Friday after the Federal Reserve's chief said recent inflation was uncomfortably above the levels that the central bank seeks and sounded somewhat less confident about the economic outlook than earlier in the year.
The major U.S. indexes are hovering near all-time highs on signs of the economy rebounding and stronger-than-expected corporate earnings. But some money managers say stocks may struggle to grind higher in the coming weeks because an uptick in Covid-19 infections could threaten the global reopening.
Concerns over how long higher inflation will linger and its impact on future earnings, as well as worry that the Federal Reserve may reduce its level of support, are also weighing on sentiment.
"Markets were priced for perfection, and now that we have the uncertainty over Fed pullback on policy, it is resulting in this pause," said Derek Halpenny, head of research for global markets in the European region at MUFG Bank. "The positive risk sentiment has definitely faded."
Federal Reserve Chairman Jerome Powell, testifying before the Senate Banking Committee on Thursday, said inflation will likely remain elevated in the coming months before moderating.
"We would be prepared to adjust the stance of monetary policy as appropriate if we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal," Mr. Powell said.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said that while he views some of the short-term price pressures as transitory, there are some longer-term pressures building that might be harder to reverse. Despite that, volatility in the market remains low, reflecting either confidence or complacency in the Fed.
"Market is largely taking the Fed at its word," Mr. Zaccarelli said. "The people really believe that the Fed is not going to raise rates anytime soon, and if they do raise rates, they won't raise them that high."
On Wednesday, Mr. Powell told lawmakers that the central bank wouldn't be in a hurry to start paring monthly asset purchases and that the economy "is still a ways off" from the Fed's goals.
In corporate news, Siemens Gamesa's profit warning raises investors concerns over the extent of not fully hedged or covered steel costs, Citi said.
According to analysts at the bank, some of the near-term impact is expected to be temporary, but the hit from raw materials on 2022-23 will be in focus.
"The company still has quite substantial unhedged steel exposure," Citi said, adding that around 40% of steel purchases for next year are still uncovered, while 2023 isn't covered at all. The Spanish wind-turbine maker late Wednesday warned of a possible loss in the full fiscal year following a sharp increase in raw material prices and higher-than-expected costs related to its 5.X onshore turbine platform.
Rio Tinto's 2Q operational report disappointed, sending shares 1.1% lower. The miner's "production numbers were weak nearly across the board, " said RBC Capital Markets, which reckons it "will likely take some time to restore investor confidence in the operations with many uncertainties still overhanging the business."
Still, Rio Tinto might benefit indirectly from its output weakness. Lower iron-ore production could provide a boost to market sentiment, "although the weak industry shipments in 2Q are one of the reasons why iron ore is at circa $220/ton already," RBC said.
Rio Tinto's 2021 Pilbara iron-ore shipments could miss the miner's projected range entirely, Jefferies reckons, even after the miner predicted full-year exports at the low end of its 325-340 million ton guidance.
"We believe something below the bottom end of the range is more likely as a very strong 2H would be needed to hit the targeted range after 1H shipments were just 154 million tons," Jefferies said.
Rio Tinto did caveat its revised guidance by saying it remains subject to Covid-19 disruptions, risks around the incorporation of replacement mines and its management of cultural heritage issues.
Forex:
The U.S. dollar strengthened 0.2% against the euro and weakens 0.2% against the yen. The WSJ Dollar Index gains 0.2%, drifting higher in the afternoon following this morning's pandemic-low jobless claims and Fed Chairman Powell's testimony before Congress.
Cambridge Global Payments' Hector DeMarco attributes the decline in jobless benefits to the 12 states that cut emergency unemployment aid programs, and notes the Fed believes the economy still needs monetary support.
"But July's payrolls could change some minds: Because the June jobs report did not reflect the actual impact of lost benefits--although it may have included some workers who were anticipating losing extra compensation--the data to be released on August 6 could show whether enhanced unemployment payments have been keeping jobseekers at bay," DeMarco said.
Turkey's central bank is likely to cut interest rates later this year when inflation eases, weakening the lira, Commerzbank said.
Turkey's central bank might take advantage of base-effects which cause a lower annual inflation rate in late 2021, and begin a modest rate easing cycle, Commerzbank currency analyst Tatha Ghose said.
"Any such rate cut attempt will kick-start another lira sell-off, which will ultimately derail the effort." The central bank on Wednesday left its benchmark one-week repo rate at 19% despite pressure from Turkey President Recep Tayyip Erdogan to cut rates.
Danske Bank raised its 12-month forecast for the Swiss franc after recent gains but still expects the currency to weaken on higher U.S. real bond yields adjusted for inflation.
It now expects EUR/CHF to trade at 1.11 in 12 months compared with its previous forecast of 1.13, after the pair's recent decline following a sharp fall in U.S. real yields.
"We still see a case for higher U.S. real rates, in step with the Federal Reserve turning more hawkish, which should lift EUR/CHF," Danske Bank analyst Mikael Milhoj said.
Bonds:
As investors try to foresee the long-term impact of price increases, inflation-indexed Treasurys, or TIPS, remain in high demand, driving yields deeper into negative territory. Tradeweb said the five-year TIPS yield has fallen to -1.786% from -1.507%, and the 10-year slid to -1.024% from -0.769%.
"In addition to reflecting concerns about inflation, falling real yields may indicate risk-off concerns," Tradeweb said.
Its data show that breakeven rates, often seen as a gauge of inflation expectations, are also declining, with the five-year rate around 2.55% and the 10-year at 2.32%, both down from the middle of May.
Energy:
Oil fell slightly in early Asian trade as investors expect additional crude from OPEC to hit the market, ANZ said.
"Following news earlier this week that Saudi Arabia and UAE had ironed out differences on the new supply agreement, bullish investors liquidated their positions," it said. That "appears to have opened a can of worms, with Iraq suggesting its deserves a higher [production] quota as well."
Metals:
Gold nudged lower in Asia as a rise in Treasury yields boosts the appeal of U.S. fixed-income assets. TD Securities said there remains a notable lack of impetus from investors to buy gold, although Fed Chair Powell's slight pushback against market pricing of rate increases has strengthened the precious metal's allure.
It may take a more convincing shift in economic data to reinvigorate speculative appetite for the precious metal, the brokerage said.
Copper was steady in morning Asian trade, supported by hopes for commodities demand that were spurred by Chinese economic data on Thursday.
Sequential growth in China's industrial production accelerated in June, CBA said. Based on its sequential analysis of the country's industrial output from October to June, major downstream sectors have improved more substantially than upstream sectors, CBA added, noting that production of micro-computers, mobile phones and integrated circuits rose sharply last month.
The three-month LME copper contract was little changed at $9,488.00 a metric ton.
TODAY'S TOP HEADLINES
BOJ to Offer Banks Zero-Rate Loans to Help Firms Tackle Climate Change
The Bank of Japan said Friday that it will provide zero-rate loans to commercial banks to help companies finance projects to mitigate climate change.
The BOJ's move adds to the global debate over whether central banks should broaden their mandate beyond their traditional goal of price stability. Japan's central bank said climate change needs to be addressed because of its significant economic and financial impact.
Fed's Powell Concedes Anxiety About Higher Inflation but Resists Policy Shift
Federal Reserve Chairman Jerome Powell said recent inflation was uncomfortably above the levels the central bank seeks, concluding two days of testimony in which he sounded somewhat less confident about the economic outlook-and the Fed's policy path-than earlier this year.
More broad-based price pressures or a weak rebound in the workforce could lead the Fed to conclude it needs to reverse the easy money policies it deployed during the pandemic more rapidly than officials expected a few months ago.
AMC, GameStop Swing as Meme Stocks Run Out of Air
AMC Entertainment Holdings Inc. and GameStop Corp. swung wildly on Thursday, extending a bout of volatility that has delivered deep cuts to small investors this week.
(MORE TO FOLLOW) Dow Jones Newswires
07-16-21 0020ET
