Eurozone Long Term Interest Rates; OECD Composite Leading Indicators; U.K. BRC-KPMG Retail Sales Monitor; Eurogroup meeting of eurozone finance ministers; Janet Yellen visits Brussels; update from Galp Energia
European shares are likely to stutter to start the week, as investors cautiously await a stream of U.S. earnings. In Asia, most major benchmarks climbed following fresh Wall Street records, the dollar was slightly firmer, Treasury yields were unchanged and commodities wavered.
European stocks are poised for modest declines on Monday at the start of a busy week that includes U.S. inflation data, testimony by Jerome Powell and the start of earnings season on Wall Street.
Major U.S. stock benchmarks booked a third straight week of gains to end Friday at all-time highs, staging a recovery from the previous session that was marked by doubts about global economic growth in the pandemic. However, some investors and strategists caution that the upswing for stocks belies concerns that are running beneath the surface.
“I believe the market has been, and continues to be, confused,” Randy Frederick, vice president of trading and derivatives with the Schwab Center for Financial Research, told MarketWatch.
“It can’t seem to decide if it wants bad economic news which means more easy money, but also potentially more inflation; or if it wants good economic news which means Fed tapering sooner rather than later, but also potentially flatter markets, tighter credit and weaker earnings.”
Mr. Frederick said he expects this battle to continue until earnings season picks up and provides a needed distraction.
Stocks to Watch: Volkswagen’s supervisory board should meet to discuss an early extension of CEO Herbert Diess’s contract until 2025, said Stifel, citing press reports about the potential meeting. It added that such a development would be seen as a positive for the car maker.
“We believe that Diess is important to the Volkswagen investment case and an extension should be taken positively by the market. This would also imply that the new chairwoman of the works council, Daniela Cavallo, is supportive of the Diess strategy and that a conflict situation as in 2020 might be less likely for the time being.”
Diess requested an early extension in 2020 but it was blocked by unions, “especially by the then works council chairman Bernd Osterloh,” the bank said.
The dollar was a touch firmer with the yen also in demand, as risk-on sentiment faded in Asia on worries about the slowdown in China’s economy.
DailyFX.com said the PBOC’s reserves requirement cut surprised markets in both its magnitude and scope, underscoring slowing growth momentum in the world’s second-largest economy.
Elsewhere, Unicredit said the Turkish lira may enjoy a brief rally if the country’s central bank leaves interest rates on hold at its next policy meeting but it’s still likely to weaken over the medium term.
“High inflation at home may allow Turkey’s central bank to delay the start of its easing cycle despite political pressure to start cutting rates by this summer,” said UniCredit forex strategist Roberto Mialich.
However, high inflation means Turkey’s real inflation-adjusted interest rates will continue to erode and move into negative territory, assuming the central bank doesn’t raise interest rates again, he said. Turkey announces its next policy decision on July 14.
U.S. government bonds barely moved in Asia trade, with the 10-year yield stuck around Friday’s level of 1.354%.
Treasury yields ended on a high note on Friday, snapping a four-day losing streak and rebounding from multimonth lows. The recent yield decline is seen as a sign investors are shunning riskier assets, but some analysts warned that bond buyers could be underestimating future inflation.
Barclays Capital has some ideas how much money might pour into the Federal Reserve’s reverse-repo facility over coming months, estimating daily inflows of between $1.2 trillion and $1.3 trillion over the summer. While these are big numbers, the reverse repo facility’s existence should help keep money markets calm.
The reverse repos “will act as a liquidity resource that prevents asset fire sales of the type that overwhelmed banks and dealers in March 2020,” said Barclays, adding “we expect little volatility in secured funding rates on account of the [reverse repos.] Instead, anticipated bill supply reductions are likely to push more cash into the [reverse repos] and pin rates to near the interest rate floor ahead of the Fed’s expected taper this November.”
Fears about the impact of the new Delta variant of the coronavirus on economic growth have prompted investors to pour cash into bond funds, said fund tracker EPFR.
“EPFR-tracked Bond Funds jumped to a 22-week high in early July as investors, already digesting mixed economic data from the U.S. and China, wrestled with the implications for global growth of the worldwide surge in Covid-19 infections driven by the Delta variant,” it said.
Overall, investors channelled $18.3 billion into all Bond Funds the first week of July, while Equity Funds absorbed a net $6.8 billion.
Crude futures were little changed in Asia, stalling after Friday’s sharp gains.
Prices settled around 2% higher in New York, continuing a bounce that began on Thursday after a sharp fall in U.S. crude and gasoline inventories, but were unable to fully erase a weekly loss as a spat between key OPEC members remained unresolved and worries mounted over the spread of the delta variant of the coronavirus that may slow energy demand in some countries.
“Uncertainty has enveloped the market in the wake of OPEC’s stalemate over future production increases and a lack of unity in the group presents a real risk over the medium term,” said ANZ.
Gold edged lower in a subdued Asian session so far. Worries that Covid-19 variants may endanger the global economic recovery spurred safe-haven demand for the precious metal at the close of last week, but price gains were limited as global bond yields rose, said Phillip Futures.
Copper fell too, with the three-month LME contract down 0.3%. The WHO has urged caution on the pace of reopening economies, with infections spreading in many regions.
Meantime, Credit Suisse said despite China’s repeated attempts to curb steel production, the bank continues to believe this year’s output will exceed 2020 levels and production elsewhere will recover as well.
Expectations that the global market will remain reasonably tight has prompted Credit Suisse to upgrade its iron-ore price forecasts by 20% for this year and in 2022, to $179/ton and $144/ton, respectively. “However, we maintain a downward price trajectory as record-high iron ore price incentivizes more supply, especially from China, which could lead to more pricing pressure in the medium to long term,” it said.
TODAY’S TOP HEADLINES
Earnings Kick Off With Sky-High Forecasts, Record Stock Market
Wall Street is heading into earnings season this week with high expectations after strong profits fueled a stock market rally in the first half of the year.
Money managers will be watching whether companies will again trounce Wall Street’s forecasts for earnings. The S&P 500 has gained 16% this year and notched 38 record closes, most recently on Friday.
President Biden’s Executive Order Opens New Front in Battle With Big Tech
WASHINGTON-President Biden’s sweeping new competition order targets big tech companies in ways that could fundamentally alter how they do business.
But it will fall to government agencies to carry out the order, and they could take years to put its ideas into action. The Federal Trade Commission that already has Big Tech companies in its sights is likely to become a particular battleground.
China Central Bank Official Expects Growth to Slow to 5.0%-6.0% in Fourth Quarter
China’s economic growth likely slowed to about 8.0% in the second quarter from a year earlier, and could ease to 5.0% in the last quarter of 2021, said Wang Yiming, a member of the People’s Bank of China’s monetary policy committee.
In an interview with state media, Mr. Wang said China’s economy could slow to slightly above 6.0% in the third quarter and between 5.0% and 6.0% in the fourth quarter.
Higher Inflation Is Here to Stay for Years, Economists Forecast
Americans should brace themselves for several years of higher inflation than they’ve seen in decades, according to economists who expect the robust post-pandemic economic recovery to fuel brisk price increases for a while.
Economists surveyed this month by The Wall Street Journal raised their forecasts of how high inflation would go and for how long, compared with their previous expectations in April.
Global Tax Deal Heads Down Perilous Path in Congress
WASHINGTON-A complex international corporate tax deal that took years to hammer out soon faces one of its toughest tests: the U.S. Congress.
The Group of 20 major economies backed the plan this weekend in Venice, Italy, following the earlier endorsement from a broader 130-country group. The plan, aimed at limiting corporate tax avoidance, would revamp longstanding international rules and is crucial to President Biden’s plans to raise corporate taxes.
Another Big Stock-Market Rotation Is Under Way, and Tech Is on Top Again
Shares of big technology companies have been flying past the rest of the market.
After languishing for months, the group has staged a resurgence with several tech behemoths hitting records in recent sessions.
Global Tax Deal Marks Big Advance for Cooperation, but Tougher Tasks Lie Ahead
VENICE-Finance chiefs from the Group of 20 leading economies on Saturday endorsed an overhaul of the rules for taxing international companies, a landmark achievement of global cooperation after years of tensions.
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July 12, 2021 00:24 ET (04:24 GMT)
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