MARKET WRAPS
Stocks:
European stocks posted gains Monday on a slew of positve corporate earnings.
HSBC and Pearson were the biggest risers in London after posting well-received interim results. HSBC said it plans to revert to paying quarterly dividends from the start of 2023 after reporting a 62% rise in second-quarter profit from a year earlier.
Sector peers including Barclays, Standard Chartered and NatWest also rallied, boosted by expectations the Bank of England will raise interest rates more aggressively at Thursday's meeting.
Upbeat signals from earnings and expectations have boosted stocks, suggesting that the Federal Reserve may not need to raise interest rates as aggressively as investors originally thought.
That said, bearish investors aren't buying into hopes that July's rapid advance for stocks heralds the start of a new bull market.
If anything, they say the worst might be yet to come as inflation remains high, the Federal Reserve plans more interest-rate increases and stocks trade at valuations that still don't look cheap.
Stocks to Watch:
STMicroelectronics had a better-than-expected second quarter and order strength should feed into growing sales next year for the European chip maker, Citi said. "We share investor concerns about STMicroelectronics' outlook into next year, but are now willing to recognize the persistent order strength," the bank said. STMicroelectronics could post sales of $16.9 billion in 2023, 8% above prior consensus, according to Citi.
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Capgemini appears poised for further organic revenue growth in 2022 and through 2023, Citi said, rating the French consulting and technology group as its top pick among European technology companies. After a virtual meeting with CEO Aiman Ezzat, Citi noted the company's stellar execution, improved outlook and confident overall tone, and raises its target price to EUR220 from EUR205. Citi raises its 2023 organic year-on-year growth forecast to 4.5%, up from 4%.
Economic Insight:
The BOE is expected to increase interest rates by 50 basis points on Thursday, stepping up its monetary-policy tightening cycle as inflation remains at elevated levels, Berenberg said. The BOE looks ready to accept output and employment losses in order to achieve its primary target of price stability, the German bank said. "While such an approach will help to strengthen the BOE's inflation-fighting credibility, a faster pace of tightening will amplify downside risks to the near-term outlook for real GDP," Berenberg said. The BOE is also expected to downgrade its economic-growth projection for 2022 and 2023, it said.
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Citi expects Liz Truss to be the U.K.'s next prime minister after she attracted a string of high-profile endorsements. This would mean a net fiscal boost of GBP40 billion over the coming 12 months, according to the bank. Citi expects the boost to add 0.8% to GDP by the end of 2023, and 0.4 percentage points to core inflation by 2024. Inflationary risks are to the upside and Truss's fiscal package would lead to at least a further 50 basis points in policy tightening over the coming six months, Citi said.
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Capital Economics expects the eurozone labor market to remain tight even as the economy heads into recession. The European Commission's indicator of companies' hiring expectations is still consistent with employment growth of more than 1% year-on-year, the economic-research firm says Pay growth accelerated at the start of the year and given the tightness of the labor market, CE expects it to pick up further as workers facing record inflation push for bigger wage increases. "That will add to the cost pressures facing companies, which in turn is likely to keep consumer price inflation strong next."
U.S. Markets:
U.S. stock futures fell on Monday after Wall Street finished its best month since 2020. Investors remain cautious about decades-high inflation, the possibility of a recession and the war in Ukraine.
Investors this week will parse the next round of earnings reports from companies including Caterpillar Inc., PayPal Holdings Inc., Starbucks Corp. and CVS Health Corp. for clues about the market's trajectory. They also will scrutinize the latest jobs report to gauge how employment is holding up as the economy shows signs of weakness.
Forex:
Sterling gained ground Monday as investors bet on the Bank of England raising interest rates more aggressively at its next meeting later in the week. "The BOE's decision on Thursday will be a big event with our U.K. economists and consensus expecting a 50 basis points [interest rate rise], which will take the Bank Rate to 1.75% and become the largest single increase since 1995," Deutsche Bank said. That will likely be accompanied by economic forecasts that support the case for further rate rises, it said.
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Sterling could weaken against the Swiss franc even though the BOE is expected to raise interest rates more decisively on Thursday, RBC Capital Markets said. "Markets are skewed toward a 50bp hike (47bp priced) and although this is the most likely outcome, risk-reward favors positioning for a majority vote for 25bp," the Canadian bank said. Even if the BOE lifts rates by 50bp, the meeting minutes may not support expectations for 100bp of further rate rises by early 2023, RBC said. Meanwhile, Swiss inflation data for July on Wednesday could be higher than expected, supporting the franc, the bank said.
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The DXY dollar index fell in early European trading. Weak real economic data from China isn't a good sign for the dollar because falling demand from the Asian giant means there will be a decline in demand for energy globally, according to Commerzbank. "Everything that currently endangers the prospect of high energy prices and thus high U.S. terms of trade is bad for the U.S. dollar," the bank said. "Thus, also the risk of a U.S. recession."
Bonds:
German Bund yields should fall further as recession fears grow and help reestablish the negative correlation between government bonds and risky assets, ING said. "The performance in core government bonds since the onset of the summer has been significant, and we expect it to continue," the Dutch bank said.
Yield curves in the eurozone and U.K. are pricing in 50 basis points more in interest-rate rises than ING expects. Meanwhile, interest in buying recession hedges and receding inflation expectations could see 10-year yields drop to levels not seen since the first quarter, ING said.
Energy:
Oil prices fell Monday amid uncertainty over the outcome of the OPEC+ meeting this week. The group will reportedly consider keeping oil production unchanged for September despite calls from the U.S. for more supply, but a modest increase in output is also expected to be discussed, Phillip Securities Research team said.
The meeting also technically marks the end of the production alliance between Saudi Arabia-led OPEC and Russia, but analysts expect the OPEC+ alliance to continue. The Saudi energy minister and Russian deputy prime minister met Friday to discuss continued "opportunities for cooperation, " the Saudi Ministry of Energy said.
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European natural gas ticked higher, with worries over winter supplies supporting prices. Efforts to build stocks ahead of winter "could be insufficient and the EU is now planning for widespread demand rationing, " Bank of America said. EU inventories are close to the 5-year average but big variations exist between countries, presenting a test of EU solidarity if the situation doesn't improve by winter, the bank said.
Metals:
Metals markets were mixed as worries over the health of the global economy continue to mount. Demand for metals remains uncertain, with data from China showing the country's manufacturing output rose at a slower pace in July.
That said, supply issues are still present with Europe's energy crisis likely to curtail zinc and aluminum output. "Stockpiles [of aluminum] plunged to a 31 year low of 295,325 tons last week, which equates to approximately 1.5 days of consumption," ANZ Research said.
DOW JONES NEWSPLUS
EMEA HEADLINES
Russia Pummels Ukraine's Mykolaiv, Killing Top Businessman
KYIV, Ukraine-Russia unleashed some of the worst barrages of the war on Ukraine's southern port city of Mykolaiv on Sunday, killing among others the owner of one of the nation's leading agricultural companies, as Moscow reported a drone attack on the headquarters of its Black Sea Fleet.
Mykolaiv, a strategic city that Russia tried but failed to seize in the first weeks of the war, has been repeatedly targeted by Russian Smerch and Uragan missiles and long-range artillery in recent weeks, with a strike using cluster munitions on Friday killing nine people at a busy bus stop.
Ukraine Grain Shipment Departs for First Time Since Russian Invasion
Ukraine dispatched its first grain shipment since the start of Russia's invasion on Monday, under a deal aimed at easing global food shortages.
The ship departed the Odessa port carrying 26,000 metric tons of corn headed for Tripoli, Lebanon, according to Ukrainian officials and the Turkish government, which helped broker the deal. The Sierra Leone-flagged bulk carrier, the Razoni, is expected to arrive in Istanbul on Tuesday, and then continue on its course following inspections.
HSBC Pledges to Restore Pre-Covid Dividends as Profit Jumps
Global banking giant HSBC Holdings PLC said it would resume paying full dividends to investors as early as next year and warned that its top shareholder's push to split up the company would jeopardize profit and growth.
Profit at the London-based lender rose 62% in the second quarter from a year earlier to $5.5 billion, the company said Monday. The bank said it received a boost from rising interest rates worldwide, which have increased the money the bank earns on loans to businesses and consumers.
Eurozone Manufacturing Downturn Worsens in July, PMI Falls Below 50
(MORE TO FOLLOW) Dow Jones Newswires
08-01-22 0718ET
