July 19, 2022

“Concerns around rising interest rates, lack of profits, and untested business models have wiped out almost half a trillion dollars from the valuation of financial technology companies, indicating investors are pricing in concerns of a potential US recession.”

Tim Hallinan – Trading Director

Main Headlines

Chuck Schumer, the Democratic leader in the Senate, will call a vote on a long-awaited $52 billion package of subsidies to US chipmakers as soon as Tuesday as he tries to put pressure on other members of Congress to back it. Democratic aides have told the Financial Times that Schumer is planning the push to approve funding for the Creating Helpful Incentives to Produce Semiconductors (Chips) Act after deciding to drop a range of other measures designed to confront China’s growing technological power. A draft being circulated in Congress on Monday also included elements of a separate bill, known as the Fabs Act, which offers tax credits to build chipmaking plants, and $1.5 billion for funding 5G networks. Senior members of Congress hope this will give the US chipmaking industry the impetus to push ahead with hundreds of billions of dollars of investment in manufacturing over the next few years. But some are also braced for a fight over the exact funding terms as Congress tries to limit how much can go to companies with big investments in China.

Boris Johnson has easily survived a vote of no confidence in the House of Commons, but the prime minister used a swansong debate to claim “the deep state” was plotting with Labour to reverse Brexit. Tory MPs who mobilised this month to oust Johnson on Monday night rallied behind his caretaker government, defeating Labour in a confidence vote by 349 votes to 238, a majority of 111. Having successfully removed Johnson as Tory leader, Conservative MPs were in no mood to grant Labour a victory over the outgoing prime minister in what is likely to be his final set-piece Commons debate. Johnson launched a defiant valedictory defence of his record as UK prime minister, claiming he “got the big calls right” and had led “one of the most dynamic governments of modern times”. The prime minister said he had delivered Brexit, rolled out a successful Covid-19 vaccine programme, tackled climate change and “successfully managed the economy”.

GBP

Sterling is well bid against most major currencies overnight. Nadhim Zahawi, the new chancellor, will on Tuesday commit to bringing down inflation and rule out borrowing for tax cuts, in a sign that he will continue with the fiscal policies of his predecessor Rishi Sunak. In his first speech since being appointed, Zahawi will also endorse Sunak’s plan for a radical overhaul of post-Brexit financial regulation to ensure Britain remains “one of the most dynamic financial centres in the world”. Zahawi was swiftly drafted in to replace Sunak, following his resignation, but the new chancellor will insist in his Mansion House speech in the City of London that tackling inflation remains a core priority for the government. The UK government’s plan for reaching net zero emissions was unlawful because it provided insufficient detail for how the target would be met, a judge ruled in a high-profile climate case on Monday.

EUR

The euro is stronger against the dollar and weaker against sterling this morning. Ukraine’s farmers will plant up to two-thirds less wheat later this year if the country’s main export route is still blocked, prolonging the global food crisis, its agriculture minister predicted. Mykola Solskyi said farmers faced a financial crisis if the Russian blockade of the Black Sea was not lifted. Many would lack the cash to pay for seed, fertiliser, herbicide, and fuel for winter wheat and would grow rapeseed instead, which is not used in cereal or bread production but commands a higher price and has a lower yield, meaning there would be less to transport. Russia’s former president Dmitry Medvedev said on Tuesday that Russia will prevail in Ukraine and will set the terms for a future peace deal with Kyiv. “Russia will achieve all its goals. There will be peace – on our terms,” Medvedev, now deputy chairman of Russia’s Security Council, said in a post on Telegram.

USD

The dollar is weaker than most major currencies in the early morning trade. Almost half a trillion dollars has been wiped from the valuation of once high-flying financial technology companies that took advantage of the boom in initial public offerings earlier in the pandemic. Concerns about rising interest rates, lack of profits and untested business models as the economy heads towards a potential recession have put them at the sharp end of this year’s sell-off. Petrol prices at the pump in the US are easing back from the highs reached earlier this summer as the looming threat of recession chills commodity markets. In the country, the world’s biggest consumer of petrol, average prices at the pump have fallen 10% to around $4.52 from record levels of more than $5 a gallon in mid-June. Prices are also dipping from their peaks in European countries, although the falls have so far been shallower.

Markets

US stocks turned sharply lower after Apple Inc.’s plans to slow hiring added to investor worries that the Federal Reserve’s campaign against inflation will drop the economy into a recession. The S&P 500 extended losses in the last hour of trading, after coughing up a gain that had surpassed 1%. Tech and health-care shares led the drop, with Apple sliding more than 2% in its worst day in almost three weeks. The iPhone maker plans to slow hiring and spending growth next year in some divisions to cope with a potential economic downturn, people with knowledge of the matter said. The news follows a similar move by Alphabet Inc. last week. Netflix Inc. will kick off second-quarter earnings for major tech and communication companies when it reports Tuesday evening. Profit growth for the sector is expected to slow sharply. Earlier, Goldman Sachs Group Inc. reported better-than-expected results, sending its shares higher.

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

8:00 a.m.: Swiss June trade
8:00 a.m.: UK June jobless claims; May ILO unemployment rate
9:00 a.m.: Austria June CPI
9:00 a.m.: Turkey June home sales
11:00 a.m.: Euro-area June CPI
11:30 a.m.: Germany to sell bonds
4:00 p.m.: ECB’s Makhlouf speaks
5:00 p.m.: BOE’s Bailey speaks

Corporate Events

Earnings include Novartis, Netflix, J&J, Lockheed, Atlas Copco, Volvo, Assa Abloy, Telenor, Swedbank

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