This Week In Markets: 18th - 22nd July 2022

Okay, very good morning. It is Monday the 18th of July. Hope you had a great weekend, and if you're in London, stay safe— 40-degree heat inbound. But having a look at markets, not so frazzled by the hot temperatures, and actually we're up to a fairly positive start. We can see here EURUSD and cable in the top left. This is the NASDAQ 100 futures in the US having moved higher overnight in Asia and through the European morning. They're DAX index, also European indices following suit. So a bit of like reprieve from what we had from a number of different anxieties hanging over markets last week, really triggered by that acceleration of the expectations around what the Fed might do, that meeting obviously looming. And this came after that red-hot US CPI reading and the Bank of Canada going for a big 100 basis point rate hike, the largest since the late '90s. So let me get you up to speed on why what is happening in markets is happening this morning. And then more importantly, an outlook for the week ahead. We've got some key things coming out of Europe from data, from the flash PMIs coming out at the end of the week, but more importantly, the ECB meeting on Thursday. We've also got updates we're expecting over whether or not Mario Draghi, the Prime Minister of Italy, will be allowed to resign. And then moving over to the UK, jobs data, retail sales, and of course UK CPI. And we're also looking for the two final candidates to come out of the voting rounds in the UK for the leadership context for the, for the Prime Minister. So plenty to go at, and I haven't even gone into earnings yet. So let me start from the top and talk a little bit about why markets have reacted like they have done in a little bit more of a positive fashion to get things underway to start the week. And that's because the expectations over a 100 basis point rate hike have been pared back fairly significantly If we actually look at the FedWatch CME futures, we can see now that there's a 71.5% probability of a 75 basis point rate hike. And that same proportionate probability was sitting at the 100 mark just around 2 sessions or so ago. Now, the rationale really there that's underpinning that pullback in those expectations is the fact that 2 members who are typically quite hawkish on the FOMC have come out at the end of last week, Chris Waller James Bullard, and they've hinted they favor 75 basis points. So being quite explicit there has kind of taken that 100 option somewhat off the table. The other thing important from the overnight session was, although several large Chinese cities including Shanghai are on alert due to a new cluster of a new variant of COVID-19 outbreak, the main thing here is about, well, what does the government do in order to counteract and offset what was that particularly slow growth number we had at the end of last week, which was at the slowest growth rate at 0.4% in Q2 since the onset really of the pandemic. And what's happened overnight is this: the Chinese central bank have come out, their governor has pledged stronger support to the economy. Economy still facing certain downward pressures. And so just the commitment to keep doing more as China in their kind of interventionist ways always do, in combination then with slight softening in the expectations around the Fed hike aggressiveness, has what's been the main catalyst to buoy markets earlier this morning. Otherwise, a quick run-through of some of the other things to be aware of. For one, the euro has benefited this morning, but as a byproduct really of the dollar paring back more than anything. From a directional perspective, although we're well off the, the parity level, most surveyed analysts still expect that not just parity, that we continue to move lower in the euro against the US dollar. And actually here, just 16% of respondents in the latest Pulse survey carried out by Bloomberg said that Europe will likely manage to dodge an economic downturn over the next 6 months, and 69%, as you can see here, are betting that the single currency will slide to 0.9 rather than claw back to 1.1 if given the choice. Obviously, there's, there's a number of reasons why this is happening. The Russia, uh, threatens to escalate the energy crisis, which further risks then fueling what already is record-high inflation in the eurozone. You've got Italian political uncertainty or adding, compounding this negative bias at the moment. And in fact, that scheduled maintenance period for that very key Nord Stream 1 critical pipeline of gas supplies from Russia to Germany, that period also ends— guess what— on the day of the ECB meeting this week on Thursday. And so certainly plenty to keep your eye on. Otherwise, sticking with Europe, obviously we've got the ECB meeting happening later on this week on Thursday. They will almost certainly hike interest rates because that's very much what we've been led to believe and how markets are positioned. It's already been flagged a 25 basis point rate, rate rise to contain what is record high inflation that currently residing at 8.6%. A little bit of a guess of keeping an eye on whether they go 25 or 50, but most of the market's sitting on the former. Here's just a quick look at a couple of different graphics, if you like, looking at the different periods that we've had in this kind of cycle of being led by Trichet, Draghi, and at the moment by Christine Lagarde, and this real big breakout that we've had, and also largely a byproduct of the unprecedented and aggressiveness of the stimulus that was enacted on the onset of COVID in itself. This then, as I said, Italian bond yield spreads are particularly sensitive at the moment. The ECB is set to announce a new anti-fragmentation tool in response to a surge in bond yields that have hit some of the most indebted countries. Policymakers are weighing up whether they should announce the size and duration of a new bond buying scheme, according to sources at the end of, of last week. And then, yeah, inflation, obviously, as we know, really much higher and to the point of where other central banks would have already have reacted, obviously in the Bank of England several times and likewise now with the Fed. But the ECB looking to just get things underway. And investors will want to know whether a larger ECB rate hike in September, which is something they flagged last month as a possibility, is still on the cards, especially as growth has continued to deteriorate in recent weeks on growing fears about gas supply disruptions to mainland Europe. And we've seen that impacting particularly the likes of Germany, who are ultra-sensitive to that given their high dependency on gas from that region. The other things then we're looking out for away from ECB meeting is eurozone data. We do get the flash PMIs. It's probably going to take a bit of a backseat though because these come on Friday and that's the day after the ECB meeting, which will probably dominate proceedings for those European-related assets. The accompanying commentary from S&P Global, who, who puts together the data pack for the PMIs, will be heavily scrutinized for indications as to whether the ZEW believes conditions have seen a marked month-on-month deterioration. So we saw that in that soft forward-looking data in ZEW. Is that going to also be a mirror image of what we see here and kind of confirming that pattern of more negative outlooks for the euro area going forward? And then, as I said, we've got Mario Draghi. So Italy very much back in the spotlight. He'll address lawmakers on Wednesday and he'll declare his intention to either give his coalition another try or quit the government. So far, he's still determined to resign. He's being restricted by the president at the moment. This is according to people familiar with the matter, as reported by Bloomberg this morning. Then moving over to the UK. Yeah, there's lots of other things coming out of the UK, but the real feature piece, I guess, for the week will be CPI. Consumer prices are seen rising 0.7% month to month in June. And that will mean then matching the pace in May, and the annual rate is seen ticking up to 9.3% from 9.1%, as you can see here. Rising fuel prices expected to underpin the headline measure. Airline fares are also likely to register upside in the month, both on the back of rising fuel costs and demand conditions amid labor shortages at the moment. So I wouldn't say that comes as a particular surprise. A 9.3% reading I don't think really changes the game a great deal. We are expecting UK CPI to break the boundaries of double-digit percentage figures in the coming months quite easily. The other things though, UK jobs data comes out on Tuesday. You've got retail sales and the UK flash PMI data on Friday. We're also expecting the Tory leadership race, as I mentioned, to be whittled down to the final two candidates, Rishi Sunak, Penny Mordaunt, seen as the most likely two to go off into that runoff and the face-to-face. For the prime ministerial position. And then a quick look at earnings. This is just a look overall at how we performed last week. And this is really looking at US bank stocks. Last week, JPMorgan, the largest US bank, their net interest income, so NII, rose 19% in the second quarter due to a combination of high interest rates and loan growth. Shares of Citigroup, as you probably would have saw at the end of last week on Friday, they actually moved up 11%. They're the real outlier here on this graphic. And so that, that was marking for Citi the biggest intraday jump since November 2020. So although there's a bit of a mix here, the, the more purist investment banks probably feeling the brunt a little bit of the slowdown in the likes of IPOs and deal-making and so forth. But this idea then that rising interest rates and more to come is helping net interest income, general margins, and that's helping, uh, be more beneficial for the more kind of diversified bank stocks. So the likes of Citi, we do have the likes of Bank of America coming out a bit later on this morning, as well as Goldman Sachs reporting ahead of the opening bell on Monday. Talking of earnings, a few that I'm keeping my eye on, there are 73 S&P 500 companies reporting this week, 7 of the Dow 30 components. Probably the ones that are most interest for lots of different reasons are banks aside, Netflix comes out after market on Tuesday. They're expected to lose 2 million paid subscribers in the second quarter of 2022 because of stiff competition, unfavorable impact of account sharing changes that they've made, a weak economy amid multi-decade high inflation. Consumers, of course, been tightening their belts more recently, and that's likely to impact these kind of add-on services that we we see with the likes of Disney+, Spotify, and many others. Then on Wednesday aftermarket, you get the likes of Tesla. And for them, although particularly important, they generally see for such a large company quite a large magnitude of fluctuation on earnings. They might have already front-run the bad news. You remember earlier this month they reported a quarter-on-quarter fall in deliveries, a proxy for sales, leading some analysts to already cut their expectations for the EV maker's quarter. So we'll see how they fare. And on the back of that, of course, we do have Twitter also reporting their earnings on Friday. And no doubt then, combination of this all means that Elon Musk, I'm sure, will be active on his Twitter account towards the end of the week, particularly on those Twitter numbers when they come out. Further ammunition, I'm sure, for him to, to stoke the fire. What is this ongoing lawsuit between the two parties at the moment? And then Snap is another one, not particularly big company, but one I think that's quite interesting from an advertising perspective to just get a bit of a view about where people's general sentiment is on the macroeconomic climate. Remember, their CEO said those exact phrases, macro kind of headwinds, really it's going to weigh on them going forward. And their shares reacted to the tune of 30% lower last earnings season. And a lot of these kind of pure blood advertisers who generate their main income revenue in that way are probably going to have a pretty tough time going forward with the expected recession looming at this present point in time. So that is it. If you would like to like and subscribe to the video and the channel on YouTube, that would be very much appreciated. Don't forget, you can follow me on, on Twitter, my handle below here. There's a full note for everything I've just covered. Otherwise, have yourself a fantastic week ahead and take care.