July 12, 2022

“Energy supply uncertainty and high inflation are scattering fears of recession across Europe – the euro is now trading at its lowest in over 20 years against the dollar.”

Sam Cornford, Partner – Head of Trading

Main Headlines

Investor concerns that the US economy is overheating are giving way to recession jitters as analysts fret the Federal Reserve could stifle growth with its rapid tightening of monetary policy. Markets are pricing in an aggressive path for Fed rate rises in the coming months while also signalling expectations that the central bank will then change course next year and begin cutting rates. Economic reports released over the past two weeks have heightened the sense of uncertainty. Key surveys on the US services and manufacturing sectors from the Institute for Supply Management showed corporate America is cutting back on hiring. Weekly figures on unemployment claims have also pointed to slowing momentum.

Rishi Sunak will attempt to fend off fierce attacks from his rivals for the Conservative leadership, insisting at an official campaign launch that he would cut taxes only when he has “gripped inflation.” The former chancellor will repeat his commitment to fiscal discipline, warning his leadership rivals, some of whom want immediate big tax cuts, that voters deserved “honesty and responsibility.” Many Tory MPs are convinced Sunak will make the final shortlist of two names, after MPs have completed a breakneck process to whittle down a field of 11 candidates vying to be Britain’s next Prime Minister. But he could face a rival promising a small state and lower taxes, such as foreign secretary Liz Truss, a message which could resonate with the Tory activists who will decide the winner.

GBP

Sterling is weaker than most major currencies in the early morning trade. Britain’s leading role in providing weapons to Ukraine in its fight against Russia’s invasion will endure, whoever replaces Boris Johnson as prime minister, the country’s ambassador to NATO has said, amid concerns in Kyiv that a successor could fail to match his focus on the war. Meanwhile, Business leaders have warned prospective Conservative party leaders against making headlines over cuts to corporation tax without a longer-term plan for growth and support for investment in the UK. Nadhim Zahawi, the UK chancellor, and a contender to be the next prime minister, has said he will abolish next year’s planned increase in corporation tax if he wins the Tory leadership contest.

EUR

Euro is stronger against sterling and weaker against the dollar this morning. EU leaders are bracing for a gas supply crunch that could freeze whole sectors of the bloc’s economy as fears grow that a major pipeline ferrying Russian gas to Europe will be shut down for good. The scenario of rich European countries having to ration their energy usage loomed closer on Monday as the flow of natural gas to Europe via the Nord Stream pipeline fell to zero. According to the latest figures released by Eurostat, the EU’s population declined in 2021 for the second year in a row, in part due to the lingering effects of the Covid-19 pandemic. The EU executive has announced it will write to its former vice-president Neelie Kroes “for clarification” following revelations that she secretly helped Uber lobby the Dutch Prime Minister.

USD

The dollar is well bid against most major currencies overnight.  Iran is planning to supply Russia with hundreds of weapons-capable drones for use in Ukraine. Jake Sullivan, the White House national security adviser, said the information received by the US supported views that Russia’s heavy bombardments in Ukraine, which have led it to consolidate gains in the country’s east in recent weeks, were “coming at a cost to the sustainment of its own weapons.” US commerce secretary Gina Raimondo conceded that removing US tariffs on Chinese goods would not ease inflation in a “very significant way,” underscoring the White House’s struggle to devise an effective plan to fight price rises. Alex Lasry, the 34-year-old son of Wall Street billionaire Marc Lasry, has vowed to spend big in his bid to unseat controversial Republican Ron Johnson as Senator from Wisconsin.

Markets

Stocks and US equity futures fell Tuesday as the dollar and sovereign bonds rose, a pattern highlighting pervasive unease about the economic outlook amid high inflation and China’s struggles with Covid. An Asian share index was dragged lower by the technology sector as well as weakness in Japan, Hong Kong, and China. S&P 500, Nasdaq 100 and European contracts shed over 0.5% after a Wall Street slide yesterday. Much is riding on upcoming company profit filings and this week’s US inflation data. A brief equity rebound from this year’s rout is already fizzling ahead of the reports. Risk appetite may struggle to digest a darkening earnings outlook alongside stubborn price pressures that point to more monetary tightening.

Main Economic Data/Central Banks/Government (All Times CET)

10:30 a.m.: Spain sells bills
11:00 a.m.: Germany July ZEW survey
11:00 a.m.: UK sells bonds; Italy sells bills
11:30 a.m.: Germany sells bonds
12:00 p.m.: Portugal June CPI
12:15 p.m.: ECB’s Villeroy speaks
2:00 p.m.: Hungary central bank rate decision
7:00 p.m.: BOE’s Bailey speaks
OPEC’s monthly oil market report

Corporate Events

Earnings include PepsiCo, AngioDynamics
Amazon kicks off its Prime Day

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