July 4, 2022

“Recession concerns returned to the forefront of investors’ minds as the S&P 500 finished the week down over 2% and registered its worst opening six months in over 50 years – falling by around 20% since the start of the year.”

Sam Cornford, Partner – Head of Trading

Main Headlines

As President Joe Biden debates whether to lift Trump-era tariffs on Chinese imports, his cabinet is split over a politically fraught issue that could influence the November congressional midterm elections. When he entered office, Biden suggested that he was in no rush to remove the tariffs that Donald Trump had placed on more than $300 billion of Chinese goods during his trade war with Beijing. Yet as inflation has soared to 8.6%, the White House is debating whether lifting some tariffs would help provide some relief to US consumers. While the desire to curb inflation is acute, officials and experts familiar with the debate say there are deep divisions in the administration, partly reflecting the fraught politics of China trade issues. One camp, which includes Treasury secretary Janet Yellen, argues that removing tariffs would help reduce inflation. But others are concerned that cutting tariffs would reduce leverage in future negotiations with China over what Washington views as unfair Chinese trade practices.

British companies have turned increasingly glum in their outlook, with inflation surging and investment plans looking stagnant, according to the latest business survey that shows momentum rapidly draining from the economy. The British Chambers of Commerce (BCC) said 54% of more than 5,700 companies it surveyed between May 16 and June 9 expected turnover to increase over the next 12 months. This is down from 63% in the previous survey and the lowest share since late 2020, when many businesses were under some form of COVID restrictions. A record 65% of companies said they planned to raise their prices in the next three months. Three quarters of firms said they had no plans to increase investment, and most no longer expected profits to rise. Bank of England Governor Andrew Bailey said last week that the central bank might not need to act “forcefully” to get inflation under control, adding there were signs of an economic slowdown taking hold in Britain.

GBP

Sterling is well bid against most major currencies overnight. Andrew Bailey, the governor of the Bank of England, reportedly opposes plans drawn up by Britain’s Treasury to overrule financial regulators. Bailey has expressed disquiet about a so-called ‘call-in power’ which will be included in the Financial Services and Markets Bill, which is due to be introduced this year. More than one in three UK company directors struck off in the past two months were found to have abused the government’s coronavirus loan schemes or job support programme. The government’s Insolvency Service disqualified at least 36 directors in April and May following allegations they abused Covid-19 support programmes for businesses, with some cases involving evidence of fraud. These disqualifications amounted to about 35% of all directors struck off. At least 126 directors were disqualified in the year to March following similar allegations of misusing Covid support schemes, according to the Insolvency Service. They represented 16% of the total struck off.

EUR

The euro is stronger against the dollar and weaker against sterling this morning. The European Central Bank will this week warn eurozone countries of the dangers of national regulators getting ahead of pending EU cryptocurrency rules, highlighting the difficulties of introducing efficient oversight of the rapidly evolving “wild west” sector. The European Commission last week agreed a sweeping package of standards for the crypto industry. The president of Belarus – Kremlin leader Vladimir Putin’s closest ally – said yesterday that his ex-Soviet state stood fully behind Russia in its military drive in Ukraine as part of its longstanding commitment to a “union state” with Moscow. Germany is discussing security guarantees for Ukraine with its allies in preparation for a time after the war, but these will not be the same as for a member of the transatlantic alliance, German Chancellor Scholz said yesterday.

USD

The dollar is weaker than most major currencies in the early morning trade. The White House and Jeff Bezos have renewed a spat over Joe Biden’s management of high inflation as the Amazon founder criticised the US president for calling on companies to cut prices at filling stations. On Saturday, Biden demanded on Twitter that companies managing gas pumps decrease soaring fuel prices at “a time of war and global peril”. Later that day, Bezos posted in a tweet in response that inflation was “far too important a problem for the White House to keep making statements like this”. Oil and gas companies were the only bright spot in a dismal first half of the year for the US stock market as the energy sector benefits from soaring commodity prices fuelled by the war in Ukraine. The S&P 500 energy sub-index, comprising 21 big oil and gas groups, jumped by almost a third in the first six months of the year, bucking a trend in which the wider market recorded its worst half in more than 50 years.

Markets

US equity-index futures and European bonds fell as investors worried about the twin threats of dwindling economic growth and stubborn inflation. Contracts on the S&P 500 and Nasdaq 100 dropped 0.7% each after the underlying indexes capped their 11th decline in 13 weeks. European stocks rose for the first time in four days as dip-buyers emerged. The dollar was marginally weaker at the start of the US Independence Day holiday. Italian bonds tumbled with investors watching domestic political tensions. World stocks and bonds are in the grip of the worst selloff in at least three decades as increasing chances of a US – or even global – recession is spooking investors. At the same time, sticky inflation has left little room for the Federal Reserve to apply brakes on monetary tightening. This toxic combination presents markets a trading challenge not seen since the late 1970s.

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

8:00 a.m.: Germany May trade
8:30 a.m.: Switzerland June CPI
9:00 a.m.: Turkey June CPI
10:30 a.m.: Euro-Area July Sentix Investor Confidence
11:00 a.m.: Euro-Area July PPI
11:30 a.m.: Germany to sell bills
2:50 p.m.: France to sell bills
3:00 p.m.: Israel base rate
4:00 p.m.: ECB’s Nagel speaks
5:00 p.m.: Denmark June foreign reserves
5:00 p.m.: ECB’s Guindos speaks
ECB presents Climate Action Plan

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