The Friday selloff sparked by a huge op-ex expiration which saw up to a third of market gamma rolling off, has accelerated on Monday morning with the narrative goalseeking today's rout to concerns that the covid resurgence and elevated inflation will weigh on global demand. At 730 a.m. ET, Dow E-minis were down 357 points, or 1.02%, S&P 500 e-minis were down 48 points, or 1.12%, and Nasdaq 100 e-minis were down 91 points, or 0.63%. The rally in Treasuries continued, sending 10-year yields tumbling below 1.23%. The dollar strengthened, oil dropped and gold and bitcoin was also lower.
"The peak of economic growth rates is behind us and growth worries are back. The good news is that even if the peak of some economic indicators is behind us, equities should continue to perform positively in the medium term in a positive economic environment,” Berenberg strategists said in a note. “However, high valuations, COVID-19 fears, low trading volumes over the summer and high investor equity allocations argue against significantly rising markets for the time being.”
In a flashback to 2020, traders are once again freaking out about Covid as New cases surged 70% last week compared with the prior seven days to an average of 30,000 new infections a day, fueled by the Delta variant. Deaths rose 26% week-over-week to an average of 250 lives lost a day, mostly in unvaccinated patients.
The resurgence of Covid is stoking a risk-off mood as investors consider whether new lockdown restrictions will sap the economic rebound and reverse an equity rally that had driven stocks to record highs, according to BBG. Plunging Treasury yields are a signal of cracks in the global recovery, putting the onus back on monetary and fiscal authorities to support ailing economies even as inflation remains elevated.
“Even if today’s declines are more of a market correction, bull traders will need significant macro hints to drive stock prices higher and back to their record levels,” said Pierre Veyret, a technical analyst at ActivTrades
Shares of travel companies, which took a hammering last year during lockdowns but have climbed recently on reopening hopes, led declines before the opening bell. Airline operators and cruiseliners including Southwest, Delta, United, American, Royal Caribbean and Norwegian dropped between 2.0% and 3.6%. The rate-sensitive big banks all shed about 2% each, tracking a fall in the benchmark 10-year Treasury yield to mid-February lows. Johnson & Johnson slipped 0.8% after Reuters reported that the drugmaker is exploring a plan to offload liabilities from widespread baby powder litigation into a newly created business that would then seek bankruptcy protection. U.S.-listed shares of Alibaba Holding, Baidu and ridesharing app Didi Global declined more than 2% on renewed fears of anti-monopoly action against major technology firms. Other notable premarket movers include:
- Five9 (FIVN) shares rise 7.6% in premarket trading after the cloud software firm agreed to a $14.7 billion takeover bid from video-conferencing group Zoom Video Communications (ZM), which fell 3%.
- Pershing Square Tontine (PSTH) falls as much as 2.8% after Bill Ackman reshaped his Universal Music deal to purchase a stake with his hedge fund rather than his blank-check company.
- Red Cat Holdings (RCAT) slumps 36% in premarket trading after pricing 13.3m common shares at $4.50 each in a public offering.
- Retail-trader favorites were mixed in premarket trading, with Exela Technologies (XELA) rising 6.1%, while AMC Entertainment (AMC) slides 3.8%. Creatd’s 28% surge leading the gainers and AMC Entertainment among the biggest decliners. Creatd shares have seen volatile trading in recent weeks as it gained traction on some sub-Reddits as a possible short-squeeze candidate. Has 16% short-interest as a percentage of float: S3 Partners data.Other meme stocks rising in premarket: Geo Group +7.7%, Orbsat +5.3%, Exela +4%, Jaguar Health +3.8%, SGOCO +2.2%, Marin Software +3.1% as of 7:01 a.m. in New York. Among the names that are falling: AMC Entertainment -3.3%, Virgin Galactic -5.1%, ContextLogic -2.9%, Corsair Gaming -2.7%, Workhorse -2% and Verb Technology -2.1%
Economists at Bank of America have downgraded their forecasts for U.S. economic growth to 6.5% this year, from 7% previously, but maintained their 5.5% forecast for next year.
"As for inflation, the bad news is it’s likely to remain elevated near term," they said in a note, pointing to their latest read from their proprietary inflation meter which remains high. "The good news is...we are likely near the peak, at least for the next few months, as base effects are less favourable and shortage pressures rotate away from goods towards services."
The Stoxx Europe 600 index retreated for a fourth straight session, the longest streak of losses since October. The index dropped 2% with energy, automakers, banks among biggest decliners amid concerns to profit and economic recovery from the spike in Covid-19 cases as all market sectors slid deeply into the red. Energy companies dropped as crude oil declined after OPEC+ struck a deal to increase output. Italy's FTSE MIB fell more than 3%, hitting the lowest since May 13 and underperforming other European indexes, with broad declines across sub-sectors and a drag from utilities and Telecom Italia. Utilities including Enel, Italgas down; Italgas cut to sell at Citi following first consultation document from Italian regulators on allowed returns for 2022-27. Here are some of the biggest European movers today:
- Sumo Group shares surge as much as 45% to a record after Tencent agreed to buy the U.K. games developer.
- Carmat jumps as much as 18% after saying an implant of its artificial heart was performed for the first time in a commercial setting.
- Argenx rises as much as 3% after KBC upgrades the stock to buy from hold and raises its PT, saying the drug maker’s FcRn inhibitor efgartigimod is a “multi-blockbuster in the making.”
- Ubisoft drops as much as 4.8% after a decision to delay the release of two games will leave FY22 revenue heavily weighted to 2H, Jefferies (hold) writes in a note.
- Barco plunges as much as 15% after the Belgian projector maker reported 1H results that disappointed investors. KBC downgraded its rating to hold from accumulate.
- Ence Energia falls as much as 15% after a Spanish court canceled the extension of land concession for a plant in Galicia.
- Vivendi drops as much as 1.5% after billionaire Bill Ackman decided to buy a stake in Universal Music Group with his hedge fund Pershing Square Holdings, rather than through his blank-check company Pershing Square Tontine Holdings.
The bloodbath started earlier in the session, when Asian stocks plunged heading for their worst decline in a month amid a selloff in Chinese technology names and concerns over rising coronavirus cases in various countries across the region. Japan's Nikkei dropped 1.3% as did Australia's benchmark share index. South Korea's KOSPI was 1% lower while New Zealand's shares were off 0.4%.
Alibaba and Tencent were the biggest drags on the MSCI Asia Pacific Index, which slid as much as 1.4%. The Hang Seng Index was among the region’s worst performers, with a subgauge of tech shares losing as much as 2.7%. The Asian stock benchmark managed a gain last week following a sharp two-week decline sparked by China’s moves to probe some of the country’s biggest companies and regulate overseas IPOs. The S&P 500 fell Friday as U.S. consumer sentiment unexpectedly dropped to a five-month low in early July, and as President Joe Biden warned U.S. firms about the risks of doing business in Hong Kong.
“After a weak finish on Friday by Wall Street, Asia has opened in risk aversion mode,” Jeffrey Halley, senior market analyst at Oanda Asia Pacific, said by email. “The main driver has been the fading growth outlook as delta variant Covid-19 cases rise, especially in Asia where much of the region is locked in a bitter battle with the virus.” READ: Delta Engulfs Southeast Asia With Fastest-Growing Deaths Vietnam’s equity benchmark plunged more than 4.5%, on track for its worst loss since Jan. 28, as stricter virus curbs were enacted. Key gauges slid by more than 1% in the Philippines, Japan, Thailand and India. Singapore shares fell as new coronavirus cases reached the highest in about 11 months. “In the shorter-term, the concern is the risk of peak growth, i.e. a demand shock triggered by a potential upward spiral of Covid-19 infection cases,” said Kelvin Wong, an analyst at CMC Markets (Singapore) Pte. “Over the medium-term to longer-term, inflation concerns are likely to come to the forefront for oil-importing countries such as India.”
Japanese equities declined to start a holiday-shortened week, following U.S. peers lower amid concerns that inflation may derail the global economic recovery. Electronics and auto makers were the biggest drags on the Topix index, which fell 1.3%, with all but one industry group in the red. Fanuc and Tokyo Electron were the largest contributors to a 1.3% loss in the Nikkei 225, which closed at the lowest level since May 13. Energy and materials shares led the S&P 500 lower on Friday, four days after the benchmark U.S. equity index closed at another record high. Treasury yields dropped for a third-straight week. “There are investors who are now starting to be wary of a sharp pullback in stocks, particularly following the continued record-breaking streak of gains in U.S. equities,” said Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Institute. “Because there are only three trading days this week in Japan, the market may be dominated by sellers who are in a hurry to adjust their positions.” The Japanese market will be closed Thursday and Friday leading into the start of the Tokyo Olympics. Two South African footballers tested positive for Covid-19 at the Olympic Village over the weekend, the first cases reported among athletes at the housing complex. Terminal users can read more in our markets live blog.
In rates, Treasuries surged early U.S. session with the curve flatter and 10-year yields lowest since February after breaching 200-DMA. Treasury yields lower by ~8bps across long-end of the curve, 10- year by nearly 7bp at 1.2286%, lowest since Feb. 16; bunds, gilts lag by 2.2bp and 1.1bp. 10Y TSY yields tumbled to 1.841%, the lowest since Feb 1.
Risk-off mindset was formed by additional lockdown measures aimed at limiting virus spread lifted most government debt markets, beginning with Aussie bonds during Asia session, while equity markets fell.
In FX, the pound slumped to a three-month low and the FTSE 100 tumbled 1.9% after the U.K. lifted remaining virus curbs in England even as virus cases increased the most in the world, signaling the challenge nations face to fully reopen their economies. Australia’s dollar dropped to a seven-month low after state governments tightened and extended lockdown measures to contain the latest outbreak. The yen strengthened versus all of its Group-of-10 peers. Investors are seeking protection in currency options; data from the Depository Trust & Clearing Corporation show that volumes are running 10% higher than recent averages overall, with demand for Aussie and yuan exposure running at almost double the averages while the pound is almost at triple.
Oil extended losses, with WTI crude futures tumbling 2.3% to below $70/barrel after yesterday's OPEC+ deal which many saw as bullish but not CTAs which this morning are engaged in wholesale liquidation. Gold, a perceived safe haven asset, was also down sliding to just above $1,800. On Sunday OPEC and its allies struck a deal that allows for monthly supply hikes of 400k b/d, putting the group back in control of the crude market. Oil refiners in Asia stayed on the sidelines awaiting price cuts after the OPEC+ deal.
Next on investors' radar is June quarter corporate earnings with Netflix, Philip Morris, Coca Cola and Intel Corp among companies expected to report this week. Bank of America analysts forecast an 11% earnings beat, which they say would help refuel investor confidence in broader economic recovery and drive a rotation back into so called "value" stocks, which currently trade below what they are actually worth.
- S&P 500 futures down 0.11% to 4,270
- STOXX Europe 600 down 1.60% to 447.46
- MXAP down 1.3% to 202.20
- MXAPJ down 1.4% to 675.40
- Nikkei down 1.3% to 27,652.74
- Topix down 1.3% to 1,907.13
- Hang Seng Index down 1.8% to 27,489.78
- Shanghai Composite little changed at 3,539.12
- Sensex down 1.0% to 52,589.33
- Australia S&P/ASX 200 down 0.8% to 7,285.98
- Kospi down 1.0% to 3,244.04
- Brent Futures down 2.4% to $71.83/bbl
- Gold spot down 0.4% to $1,804.91
- U.S. Dollar Index up 0.27% to 92.94
- German 10Y yield fell -2.1 bps to -0.374%
- Euro down 0.3% to $1.1776
Top Overnight News from Bloomberg
- Boris Johnson’s plan to get the U.K. back to normal is at risk of being derailed amid a public outcry over his attempt to dodge pandemic isolation rules, as Covid-19 cases soar the most in the world
- OPEC and its allies struck a deal to inject more oil into the recovering global economy, overcoming an internal split that threatened the cartel’s control of the crude market
- The Covid vaccine may be losing its efficacy in older people, researchers in Israel have warned, according to The Times newspaper
Quick look at global markets courtesy of Newsquawk
Asia-Pac stocks and US equity futures began the week on the back foot, following last Friday's losses on Wall Street as global sentiment remained dampened by US-China tensions and recent mixed data releases. The ASX 200 (-0.9%) was dragged lower by broad weakness across its industries with the declines led by the commodity-related sectors, including energy after OPEC+ reached an agreement on output over the weekend. Sentiment was also subdued by the ongoing COVID-19 outbreak that has forced an extension of the lockdown in Australia's Victoria State - with many including the largest domestic bank CBA, anticipating the ongoing restrictions to severely impact the Australian economy, while Altium shares were the worst hit after reports it rejected an increased offer from Autodesk and with the latter planning to walk away, although Altium later denied that it had received any further offer. The Nikkei 225 (-1.3%) was pressured by haven flows into the JPY, and with virus fears also in focus after the first COVID-19 cases were confirmed from the Olympic athletes' village just days before the start of the Tokyo 2020 games. The Hang Seng (-1.9%) and Shanghai Comp. (U/C) were also negative amid US-China frictions after the Biden Administration issued Hong Kong-related sanctions and highlighted the growing risks related to China's democracy crackdown in Hong Kong despite threats by China to retaliate to such action, while the losses were exacerbated by tech underperformance amid lingering concerns of tighter regulations by Beijing. Finally, 10yr JGBs were marginally higher amid the safe-haven flows and as they tracked recent upside in T-notes which briefly broke above the 134.00 level, while the BoJ had also announced to buy JPY 75bln of corporate bonds from July 26th with 3yr-5yr maturities.
Top Asian News
- Evergrande Resumes Downward Spiral as Investors Prep for Crisis
- China Signals End to $2 Trillion U.S. Listings Juggernaut
- Bukalapak Is Said Poised to Raise $1.5 Billion in Landmark IPO
- Toyota Pulls Olympics TV Ads, CEO to Skip Opening Ceremony
Major bourses in Europe have extended the decline seen at the cash open (Euro Stoxx 50 -2.1%), as the region coattails on the negative APAC lead. US equity futures also trade lower across the board but to a lesser extent than their peers over the pond, with the RTY (-1.7%) the underperformer vs the ES (-0.8%), NQ (-0.4%), and YM (-1.0%) – in fitting with the anti-cyclical bias being experienced in Europe. The soured sentiments come against the backdrop of a heated US-Sino rhetoric, a worsening COVID picture, alongside increasing hawkish noises from some central banks – ahead of the ECB this week and the Fed meeting in the next. However, it is worth mentioning that the COVID situation in Australia (with Victoria State extending its lockdown) has prompted a couple of prominent RBA watches to discuss the potential for the RBA to pull back on its recent tapering announcement. Back to trade, Europe mostly sees broad-based losses among bourses, but the FTSE MIB (-2.6%) underperforms amid hefty losses in banks in a low-yield environment, whilst the SMI (-1.0%) is cushioned by its heavyweight pharma sector. Sectors are all in the red and, as mentioned above, portray a clear anti-cyclical bias. Defensives reside at the top of the bunch, with Healthcare, Food & Beverages and Telecoms seeing less pronounced downside than cyclical peers. Travel & Leisure is the worst performer at the time of writing, with the UK's move of imposing travel restrictions from France for double-dosed individuals surfacing questions about vaccinated travel in the future. Oil & Gas meanwhile succumb to the slide in oil prices amid the soured risk tone and following the OPEC+ confab. In terms of individual movers, Vivendi (-1.3%) trades softer after Pershing Square's (PSTH) board has unanimously decided not to move forward with the Universal Music Group transaction, has agreed to assume the Vivendi indemnity agreement and the UMG transaction costs. Subsequently, Bill Ackman has decided that his investment funds will replace the Pershing Square interest in this transaction, contingent on approval of US regulators; equity interest acquired will now be 5-10% vs prev. 10%. Meanwhile, Ocado (-3.4%) is hit as it will be unable to fulfil some online orders for several days following a fire at its largest warehouse caused by a malfunctioning robot.
Top European News
- Travel, Leisure Stocks Drop on ‘Freedom Day’ as Variants Spread
- German Floods Shake Up Campaign as Climate Change Hits Home
- Tencent Agrees to Buy British Game Maker Sumo Group
- Designer Zegna to Go Public in SPAC Deal Worth $3.2 Billion
In FX, risk aversion and a much more pronounced reversal in oil prices on the back of OPEC+ striking a pact have given the Buck a fresh boost to clear more technical and psychological levels that were tested, but held last week, with the index now probing 93.000 having eclipsed its post-FOMC peak at 92.844 and a late March high, at 92.964 along the way. However, the DXY could yet be thwarted by outperformance in the Yen as a safer-haven and/or further bull-flattening in Treasury yields that has nudged the 10 year benchmark down through 1.25%, although the correlation between the Greenback and rates along with the curve has broken down of late. Ahead, NAHB’s housing market survey is the sole scheduled US release as Fed officials observe their usual pre-FOMC purdah.
- CAD - A double-whammy for the Loonie as crude craters and sentiment sours more broadly, as noted above. Indeed, WTI is now sub-Usd 69.50/brl and Usd/Cad is inching closer to 1.2800 after scaling a twin top from early March at 1.2737 and 1.2750 to expose 1.2783 from February 8.
- AUD/NZD - No surprise that the so called high beta Aussie and Kiwi are reeling in risk-off conditions, with the former also taking heed of the deteriorating pandemic situation that has prompted lockdown to be extended in the state of Victoria and restrictions in Sydney ramped up. Aud/Usd is now hovering above 0.7350 precariously, as Aud/Nzd sits a similar paltry distance off 1.0550 and Nzd/Usd unwinds more post-RBNZ strength towards 0.6960. Note, RBA minutes are due overnight, but unlikely to provide the Aussie with much comfort amidst growing calls that the economic recovery will be hampered by the aforementioned extension and intensification of lockdowns.
- EUR/GBP/CHF - All unable to withstand the Dollar’s advances, with the Euro succumbing to some stop sales on the break below a former double bottom (1.1772) and Cable only a few pips away from the 200 DMA (bang on 1.3700 today) at one stage, while the Franc has fallen beneath 0.9200, but is keeping pace in Eur/Chf cross terms either side of 1.0850 unlike the Pound that is also weaker vs the single currency in wake of a speech from BoE’s Haskel that was not as hawkish as Ramsden and Saunders last week.
In commodities, WTI and Brent front-month futures are pressured amid the sour risk sentiment and in the aftermath of the impromptu weekend OPEC+ meeting. To recap, ministers met on Sunday and ironed out an agreement that sees total group production increase by 400k BPD on a monthly basis from August (subject to market conditions), with the pact also extended to the end of 2022 from April 2022. For the extended period (from May 2022), baselines have been revised higher for the UAE (3.5mln vs prev. 3.168mln), Iraq (4.803mln vs prev. 4.653mln), Kuwait (2.959mln vs prev. 2.809mln), Saudi and Russia (both to 11.5mln vs prev. 11mln). Russian Deputy PM Novak stated that Russia would raise its oil output on a monthly basis by 100k BPD beginning in August and expects to return to pre-crisis levels of production in May next year. Desks have framed the deal as a short-term negative (i.e., supply hikes from August and baseline revisions for more members than expected) but supportive in the long term as producers remain in unison, taking out uncertainty and quashing the risk of a price war. Further, the supply/demand balance remains in favour of a near-term deficit amid summer demand. That being said, COVID developments remain in focus, with Australia's Victoria state extending its lockdown and the UK imposing travel restrictions from France for double-dosed individuals. Sources via Energy Intel note that OPEC+ producers "see the potential for a significant dip in oil demand in the first half of next year, and sources say it is likely they will take a pause from monthly increases this December." In-fitting with this outlook, analysts at PVM, expect 2022 demand growth to outpace the OPEC+ supply expansion, but demand in H1 is seen as sluggish before a significant improvement in H2 2022. Meanwhile, Goldman Sachs sees the weekend OPEC+ accord as "supportive to our constructive oil price view." The bank adds, "while the baselines were raised more than expected, the production path instead implies 1H22 output 0.65 mb/d below our prior expectations (with a threat of a price war now removed)." UBS expects Brent to reach USD 80/bbl before levelling off to USD 75/bbl on higher OPEC+ production. WTI and Brent Sept' futures have dipped below USD 70/bbl and USD 72/bbl, respectively, from highs of USD 71.40/bbl and USD 73.34/bbl. Elsewhere, spot gold and silver are lackluster as the rampant Dollar pressures the complex, although losses are somewhat cushioned by haven properties alongside yields. Spot gold trades just north of USD 1,800/oz (vs high 1,828.50/oz), whilst spot silver found near-term support at USD 25.30/oz (vs high 26.65/oz). LME copper is losing further ground under USD 9,500/t with the risk aversion and stronger Buck weighing on prices and with China's NDRC noting that they will continue to release metals reserves in batches including copper, aluminium and zinc. Furthermore, there were reports that China is intending to add advanced coal production capacity of as much as 110mln/TPY in H2-2021, with the State Planner later adding that they have plans to build coal inventory of at least 7-days consumptions by July 24th.
US Event Calendar
- 10am: July NAHB Housing Market Index, est. 82, prior 81
DB's Jim Reid concludes the overnight wrap
It’s difficult to have a conversation with anyone here in the U.K. without a debate as to whether the U.K. is correct to lift all legal covid restrictions today with cases surging through the population. Those for suggest that with all the vulnerable groups fully vaccinated and every adult having been offered at least one jab then we have to start learning to live with the virus and the summer is the best place to start. To delay would only postpone cases and risks the peak occurring in winter when the health service is usually more stretched. Mental health considerations also come into the equation as does the still relatively low death rate. Those against will suggest that fully reopening now after the recent surge in cases could soon lead to high hospitalisations and genuinely risk pressurising the health service. They would also argue that new variants could emerge with such a wide prevalence of cases and could also create huge numbers of long covid cases and more deaths than should occur. Anyway, the world will be watching the U.K. experiment with huge interest. It could show a pathway back towards normality or it could be a warning to even heavily vaccinated countries that covid will be a problem for a decent length of time still. Ahead of this symbolic day U.K. new cases dipped below 50k yesterday after two days above. The weekly growth rate is still strong though. Breaking down the numbers the big growth area over this period has been males aged 15-40. It’s the first time in the pandemic that there’s been a notable gender split. It strongly hints at the impact of millions of football fans watching the Euro football final at various venues around the country. It’s possible that this impact will now fade but with nightclubs etc now open it’ll be interesting to see the public behavioural impact with there being so many cases in the country. The world will watch the U.K. with great interest.
Looking more global now, this isn’t likely to be a blockbuster week in terms of major events but there will be enough going on to pique our interest levels ahead of the holiday season. The Fed is now in a blackout period so it’ll be deadly quiet on that front. Elsewhere the ECB (Thursday) have their first meeting post the new policy framework announcement alongside three other G20 central bank policy meetings. The main data highlights are the global flash PMIs (Friday) and German PPI tomorrow. We also have lots of data on the US housing market (NAHB today, housing starts/permits tomorrow and existing home sales on Thursday) which will be closely watched for signs of thawing of the high demand as prices soar and also for any clues to what the Fed will think ahead of any MBS taper discussion. In politics Wednesday could bring a vote on the bipartisan infrastructure bill but we’ve learnt not to hold our breath on this one. Elsewhere US earnings season hits one of the peak weeks and finally the delayed Olympics begins on Friday in Tokyo.
We’ll expand on a few of the above after looking at Asia. A quick refresh of our screens shows that sentiment is continuing to be weighed down by concerns surrounding the spread of the delta variant and inflation risks. The Nikkei ( -1.46%), Hang Seng (-1.59% ), Shanghai Comp (-0.31%) and Kospi (-0.92%) are all trading lower. Futures on the S&P 500 (-0.34%) and Stoxx 50 (-0.61%) are also trading weak. Meanwhile, yields on 10y USTs have slipped by further -1.2bps to trade at 1.280%. In FX, the Japanese yen is up +0.14% against the greenback.
In other weekend news, US Treasury Secretary Janet Yellen expressed doubts, in a New York Times interview, about last year’s trade deal that the Trump administration did with China. She said that “My own personal view is that tariffs were not put in place on China in a way that was very thoughtful,” and added that, “the type of deal that the prior administration negotiated really didn’t address in many ways the fundamental problems we have with China.” The statement comes as the fate of the trade deal hangs in balance with the current Biden administration yet to decide whether to keep the deal, scrap it, or seek to replace it with something new.
Oil prices are down c. -1% this morning after OPEC+ came to a agreement on supply increases after Saudi Arabia and UAE in particular bridged their differences with the UAE allowed to boost output more than originally anticipated (but less than they asked for) whilst production cuts for several other countries planned from May 2022 will be done from a higher base.
Turning to the latest on the Pandemic, Singapore reported cases at an 11-month high yesterday while Thailand reported 11,784 new infections, the highest single-day increase since the pandemic began. In Australia, Sydney has paused work at construction sites as it tries to bring the current outbreak under control. The list of athletes and support staff infected with the virus is also increasing at the Tokyo Olympics with the number now standing at 55.
Looking through the week ahead events in more detail now and let’s start with the ECB. Following the earlier-than-expected conclusion of the Strategy Review by the ECB, our economists expect some changes to forward guidance and communications around the new average inflation targeting unveiled earlier this month. So an interesting first event in a brave new world / same old world (delete according to your view) for the ECB after their review. See our economists’ preview here. There will also be rate decisions from Indonesia, South Africa, and Russia. Only Russia (Friday) is expected to adjust their monetary policy, with the median Bloomberg estimate expecting a 75bp increase to 6.25% as inflation continues to run above target.
The global flash PMIs on Friday will be a focal point as economists and strategists will debate whether the rate of growth has peaked. Recent PMI data has signalled that the US economy may have seen growth peak back in March, whereas the PMI data in Europe continues to rise, having hit 15-year highs just last month. However there are signs that Europe may struggle to push on further with delta where it is.
Earnings season will continue in earnest in the US and Europe, with investors likely to be paying attention to any comments on pricing pressures. Among the highlights include IBM today before UBS, Netflix, Phillip Morris, and United Airlines tomorrow. Then on Wednesday we’ll hear from Johnson & Johnson, ASML Holdings, Coca-Cola, Verizon, Novartis, SAP, and Daimler. Thursday sees reports from Roche Holdings, Intel, AT&T, Dahner, Unilever, Blackstone, Twitter, Biogen, and Newmont. Finally on Friday, we’ll hear from Honeywell, Nextera Energy, American Express, Kimberly-Clark, Schlumberger, and Southwest Airlines.
The day by day week ahead guide is at the end as usual.
Back to last week now and risk markets took a step back as the largest US inflation reading in nearly 13 years (30 years for the core) weighed on investors as they wait to see what messages corporates convey during earnings calls over the next few weeks. Fed Chair Powell confirmed that the FOMC would talk about tapering bond purchases at the upcoming meeting, and expectations for rate increases in 2022 have continued to increase. Overall the S&P 500 fell -0.97% (-0.75% Friday) in a broad based selloff that saw cyclicals sectors – like banks (-2.56%) – and growth sectors – like semiconductors (-4.06%) – fall back sharply. It was only the second losing week for the broad index since the last week of May. Tech experienced larger losses as the NASDAQ declined -1.87% (-0.80% Friday), however the real laggard were small caps with the Russell 2000 decreasing -5.12% (-1.24% Friday) – the third consecutive weekly loss for the index and worst weekly performance since October. European equities traded similarly as the STOXX 600 ended the week -0.64% lower, with bourses such as the IBEX (-3.08%), FTSE 100 (-1.60%), CAC (-1.06%) and FTSE MIB (-1.03%) all underperforming.
Higher CPI prints than expected in the US and the UK brought forward the timing of potential rate hikes, with 2yr yields in both countries increasing +0.9bps and +3.1bps on the week, respectively. Overall, longer dated sovereign bonds gained with yields lower both in the US and Europe, which caused yield curves to continue flattening. US 10yr yields ended the week -6.9bps lower at 1.290%, their 8th weekly decline in the last 9 weeks to leave yields at their lowest level since mid-February. 30yr yields finished the week under 1.92% for the first time in 5 months even as weak demand for an auction mid-week saw yields briefly spike higher before reversing into the weekend. 10yr bund yields reacted similarly, declining -6.0bps on the week. 10yr OATs (-6.9bps) and BTPs (-5.6bps) traded somewhat in-line with bunds, while gilts (-2.9bps) marginally outperformed.
In terms of data from Friday, US retail sales surprised to the upside with a +0.6% increase (-0.3% expected), with ex-auto and gas at +1.1% (vs +0.5 expected) but this was partly offset by a downward revision to the May reading, which has left markets little changed ahead of the U. Michigan reading 90 minutes later. There we saw the preliminary July reading disappoint at 80.8 (vs. 86.5) with both current conditions (84.5 vs 91.0 exp) and expectations (78.4 vs 85.0 exp) both coming in notably lower than predicted. This may be partly due to increasing inflation expectations with 1-yr inflation expectations increasing to 4.8% from 4.2% and long term inflation picking up 0.1pp to 2.9%. In Europe, the final June reading of CPI showed prices rose +1.9%, unchanged from the initial reading.