July 27, 2022

“Ahead of the Federal Reserve’s interest rate announcement today, forex markets are in a holding pattern – a 75 bps rate hike is expected, for a second consecutive meeting, but insistence from the US Treasury that the US is not in recession may spur a lower rate hike.”

Tim Hallinan – Trading Director

Main Headlines

Joe Biden and Xi Jinping will hold a telephone call on Thursday, according to a US official, as tensions escalate over the planned visit to Taiwan by Nancy Pelosi, the Speaker of the House of Representatives. The planned call would be only the fifth conversation between the two leaders since Biden became US president 18 months ago. Biden and the Chinese president had been expected to discuss many contentious issues, from military challenges to technology competition. But those plans have been complicated by Pelosi’s intended visit to Taiwan in August. Beijing has privately issued harsh warnings suggesting a possible military response if Pelosi proceeds with the trip. The White House is extremely concerned that her visit could spark a crisis across the Taiwan Strait. Biden has sent top officials, including national security adviser Jake Sullivan, to explain the risks. But that has been complicated by the fact that Congress is independent, and he has no formal power to block her visit.

Former chancellor Rishi Sunak unveiled plans to temporarily scrap value added tax on household energy bills if elected prime minister. Sunak’s move followed an opinion poll that showed Conservative activists believed Truss outperformed her rival in a televised leadership debate on Monday that took the contest to new levels of acrimony. Tory members will vote for either Truss or Sunak to succeed Boris Johnson as party leader and prime minister, with the result due on September 5. Sunak had previously as chancellor rejected calls for the scrapping of the 5% VAT rate on domestic fuel amid the cost-of-living crisis. In February Sunak told MPs that removing VAT on domestic fuel bills “would disproportionately benefit wealthier households”. Sunak also feared that a “temporary” VAT cut — which would cost more than £4 billion — could become permanent. Sunak has warned that Truss’s tax plans, which include reversing a national insurance increase he oversaw as chancellor, would be inflationary.

GBP

Sterling is well bid against most major currencies overnight. British employers are their most pessimistic about hiring and investment since the depths of the coronavirus pandemic crisis due to surging inflation and an acute shortage of workers to fill jobs, a survey showed on Wednesday. The Recruitment & Employment Confederation’s measure of confidence in hiring and making investment fell to -13 in the three months to June, the lowest since the same period in 2020 and down from -7 in the three months to May. Shoppers at a supermarket chain in southern England are being tracked by facial recognition cameras, prompting a legal complaint by a privacy rights group. Big Brother Watch said Southern Co-operative’s use of biometric scans in 35 stores across Portsmouth, Bournemouth, Bristol, Brighton and Hove, Chichester, Southampton, and London was “Orwellian in the extreme” and urged Britain’s Information Commissioner’s Office to investigate whether it breaches data protection legislation.

EUR

The euro is stronger against the dollar and weaker against sterling this morning. Hungary’s economic downturn has forced Viktor Orbán to make compromises with Brussels and the financial markets that were seen as unthinkable before Russia’s war in Ukraine. Soaring inflation, a gaping fiscal shortfall, a plunge in the forint and a huge sell-off in Hungarian assets have conspired to force the prime minister, once seen as Brussels’ enfant terrible, to bend to the EU as he tries to unblock €15 billion worth of pandemic recovery funds, pledged to Budapest but withheld on rule of law concerns. The $2.17 billion Hunutlu power plant is the largest foreign direct investment in Turkey by China, billed by its developers and Turkish officials as part of Beijing’s Belt and Road Initiative that is building political and economic influence across Eurasia, the Middle East and Africa. But it has been fiercely opposed by climate change campaigners and ecologists who argue that it will damage wildlife and pump carcinogens into the air.

USD

The dollar is weaker than most major currencies in the early morning trade. A prominent Republican lawmaker has accused China of establishing a network of informants within the Federal Reserve intended to give Beijing access to sensitive US economic data. Ohio senator Rob Portman published a report on Tuesday alleging that China has for more than a decade targeted economists working for the US central bank to access insider information, using offers of lucrative contracts with Chinese talent programmes and in one case forcibly detaining a Fed employee during a trip to Shanghai. The accusations come as US officials have raised concerns about the growing threat of Chinese espionage and infiltration against western groups, including companies, universities, and hospitals. US Treasury Secretary Janet Yellen highlighted a proposed price cap on Russian oil on a phone call with British Finance Minister Nadhim Zahawi on Tuesday, a move to reduce the impact of the war in Ukraine on global energy prices.

Markets

Stocks and US equity futures rallied Wednesday as a batch of resilient company earnings helped alleviate some of the wider caution in markets ahead of a pivotal Federal Reserve monetary-policy meeting. Contracts on the tech-heavy Nasdaq 100 were up about 1.7%, while major technology and internet stocks advanced in premarket trading after reassuring reports from Alphabet Inc., Microsoft Corp. and Texas Instruments Inc. European stocks also rose, with the banking sector gaining even as Credit Suisse Group AG posted a larger-than-expected loss and Deutsche Bank AG warned on costs. The mood remains edgy ahead of a much-anticipated Fed interest-rate increase – part of a global wave of monetary tightening to quell inflation that’s stoking concerns about a worldwide economic slowdown. Investors are bracing for the busiest reporting day of the season and a slew of macro-economic data on Thursday.

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

8:00 a.m.: Germany August consumer confidence
8:45 a.m.: France July consumer confidence
10:00 a.m.: Euro-Area June M3 money supply
10:00 a.m.: Italy July consumer, manufacturing confidence
4:30 p.m.: EIA US crude oil inventory report
6:00 p.m.: Russia June industrial production, retail sales, unemployment
8:00 p.m.: US Fed rate decision
Bloomberg’s Sustainable Business Summit in Singapore
Salzburg Summit through July 30

Corporate Events

Earnings include Meta, Qualcomm, Lloyds, Boeing, Airbus, GSK, T-Mobile, Spotify, Shopify, Bristol-Myers, Equinor, Rio Tinto, BAT, CME, Mercedes-Benz, Garmin, Carrefour

 

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