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THE WEEK THAT'S AHEAD (1109 GMT)
Anyone hoping for a quiet summer in markets, look away now.
After hectic stock sector rotations from tech-to-travel and
back again, a renewed COVID-19 upsurge, bond market rallies and
the 'will they, won't they' second-guessing of central banks'
intentions, there may be little respite next week.
Main focus probably is on the ECB meeting which suddenly
became interesting after a strategy review unveiled on July 8
set a new 2% inflation target. We should find out on July 22 if
the bank can give itself room for manoeuvre by extending and
boosting bond purchases.
China, meanwhile, eased policy recently and could do more on
July 20 by cutting its loan prime rate.
The Q2 earnings torrent continues, with U.S. tech firms
Netflix, Intel and Twitter due to report, while European results
kick off in earnest with expectations for earnings to have
surged 110% year-on-year, according to Refinitiv I/B/E/S.
Watch out for what guidance companies both side of the
Atlantic offer, to gauge if this is indeed as good as it gets
for the earnings rebound.
Finally July 19 when Britain drops all its COVID-19 linked
curbs, has been dubbed Freedom Day. But with daily infections
approaching 50,000 a day, the freedom might well be shortlived.
GRAPHIC-Take Five: ECB, earnings galore and 'Freedom Day
(Sujata Rao)
*****
BEWARE OF THE H2 NARRATIVE (1001 GMT)
The recovery narrative was straightforward in the first half
of 2021, with governments and central banks in a ‘whatever it
takes' mode to avoid the adverse economic impact of the pandemic
and a massive vaccine programme underway.
But, as global head of forex research at Deutsche Bank
George Saravelos puts it, “we should be very cautious in
projecting the H1 macro story to H2, and it is precisely this
caution that the market has been pricing in recent weeks.”
He says bottlenecks have caused significant “demand
destruction,” consumer spending is not as booming as expected,
the Delta variant tells us that vaccine might not be the
panacea, while China cycle is not like in 2008-10 as the country
risks to shift to a monetary easing mode.
Saravelos also flags reasons for caution around the
reflation trade, which is all about how the excess savings from
fiscal policy will be spent.
According to Deutsche Bank, the r* -- natural or neutral
interest rate, which is the rate that supports total
employment/maximum output without boosting inflation – is the
main reason why bond yields continue to stay at low levels
despite Fed's tapering time is approaching.
“Empirical evidence shows that pandemics historically lead
to huge increases in the precautionary savings motive,
equivalent to r* declines of 150-200 bps,” he argues.
(Stefano Rebaudo)
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STRONG EARNINGS AND LEISURE STOCKS LIFT EUROPE (0843 GMT)
European shares are on the rise supported by a batch of
strong earning results and by a surge in travel and leisure
stocks as the U.S. is reviewing its European travel ban.
The pan European index is up 0.1%, with the travel
and leisure index leading the pack jumping more than 1%.
Biden said the U.S. expects to say in the next few days when
it can lift restrictions that ban most non-U.S. citizens from
travelling to the country from much of Europe after German
Chancellor Angela Merkel raised the issue.
Among earnings, shares in Sinch jumped 9% after
the Swedish cloud computing services provider reported Q2
figures higher than a year before.
Swedbank and Cartier maker Richemont also
made some gains after results.
Not all was good news though, with Sweden's Ericsson
sliding 9.4% after it reported second-quarter core
earnings below market estimates, hit by a decline in sales in
mainland China.
Shares at Burberry are down 4.4% even if reported
its like-for-like sales had risen above pre-pandemic levels.
Burberry's full year guidance "left unchanged suggests that
management think the improvement can’t be sustained. There was
also no clarity on how the CEO search was going and whether
creative designer Riccardo Tisci will remain with the business",
says Michael Hewson, Chief Market Analyst at CMC Markets.
(Joice Alves)
*****
WHAT IF TRANSITORY IS NOT SO TRANSITORY AFTER ALL? (0712
GMT)
The U.S. Federal Reserve is sticking with the mantra that
inflation is transitory and there's no rush to tighten policy
but some others are feeling uneasy.
On Thursday, Michael Saunders became the second Bank of
England rate setter in two days to signal it may be time to
consider reining in stimulus as inflation ramps up. Earlier this
week central banks in Canada and New Zealand took steps towards
unwinding post-crisis stimulus.
No surprise then that two-year gilt yields shot up 6 basis
points after Thursday's BoE comments in the biggest one-day jump
since February. In contrast, U.S. bond yields continue to be
pinned down by Fed chief Jerome Powell's dovish rhetoric.
But another run of strong data could test the Fed's resolve
too; figures due later this session are expected to see U.S.
June retail sales rose in June after declining in May.
In the meantime, equity markets are struggling to hold their
nerve in the face of a continued surge in coronavirus infections
globally.
Japan's benchmark Nikkei share average fell below the
psychologically key 28,000 mark and MSCI's Asia stock index,
excluding Japan, was last down 0.3%.
European and U.S. stock futures were mixed.
The dollar was headed for its best weekly gain in about a
month, supported by investors' drift toward safety.
Oil prices were a touch weaker, staying under pressure
after a compromise deal between leading OPEC producers and a
surprisingly poor weekly reading on U.S. fuel demand.
Key developments that should provide more direction to markets
on Friday:
- BOJ cuts growth forecast, unveils climate scheme plan
- Ericsson Q2 earnings below market estimates;
Burberry reports "excellent start" to its new year, with
full-price sales accelerating; Puma raises 2021 outlook
nASN001G8Y]
- German car registrations
- U.S. bond sales data
- Federal Reserve events: New York Fed President John Williams
speaks
- U.S. earnings: State Street, Honeywell, General Electric
- European earnings: Sandvik, Adtech, Husquarna, Handelsbanken,
Swedbank, Richemont trading statement,
-Fitch to review Greek rating
(Dhara Ranasinghe)
*****
EUROPEAN BOURSES SET FOR WORST WEEK IN ONE MONTH AMID
VOLATILITY (0635 GMT)
European futures are flat to 0.1% higher this morning,
signalling that bourses could stage an attempt to cut some of
yesterday's losses. Yet the pan European index at this point is
set for its worst week in one month after a volatile couple of
days.
The STOXX 600 index had managed to touch fresh all
time high earlier this week but things got a bit tricky and the
overall direction has been lately more uncertain.
Fears that the increasing number of Delta COVID-19 cases
across the world might slow down the recovery, and concerns
rising inflation could lead central banks to tapering their
generous programmes are keeping investors on their toes.
(Joice Alves)
*****
