Morning Report

July 5, 2022

“The euro sank to a 20-year low against the US dollar – falling more than 8% so far this year – as investors anticipate an interest-rate hike from the European Central Bank, given the risk of recession in the region.”

Tim Hallinan – Trading Director

Main Headlines

Emerging markets are well positioned to stare down a US recession and may even be able to lure investors their way. That’s the message from money managers including JPMorgan Chase & Co. and Deutsche Bank AG even as fears of a contraction in the world’s largest economy spark a dash into Treasuries and other haven assets. Beyond the short-term turbulence, they say, developing nations will be cushioned by cheap valuations, higher yields, faster growth and above all, a resurgent China. That sounds like a tall order given the current scale of losses in emerging markets. Stocks and bonds have been gripped by the sharpest slump since the 1990s, while currencies are suffering their worst losses on record, beating even the Covid rout of 2020. History shows that mere expectations of US economic trouble spark an early selloff across emerging markets and leave them cheaply valued before contraction actually arrives.

The UK government plans to introduce additional economic, trade and transport sanctions on Belarus over its support for Russia’s invasion of Ukraine. The new package, announced yesterday, will take immediate effect, and will include import and export bans on products worth around £60 million, the foreign office has said. The embargo will block exports of oil refining goods, advanced technology components, such as those used in quantum computing, and luxury goods, including British artwork and designer handbags. It will also bar imports of Belarusian iron and steel into the country, and block more Belarusian firms from issuing debt and securities in London. The latest government measures come after it already raised import tariffs on a range of goods from Belarus by 35% and sanctioned Belarusian president Alexander Lukashenko and senior government officials. The UK along with its Western allies, have been imposing sanctions against Russian elites, banks, and strategic industries since the Kremlin invaded Ukraine in February.


Sterling is stronger against the dollar and weaker against the euro this morning. Boris Johnson has watered down his target for higher defence spending made only four days ago, calling it a prediction and not a firm commitment. The prime minister raised alarm on the Tory benches when he said it is likely the UK will be spending 2.5% of GDP by 2030 and then hinted it will depend on the size of the economy then. Mark Harper, a former Conservative chief whip, told him last week’s announcement had appeared to be really quite solid, but no longer did so after his Commons statement. The head of the UK train drivers’ union has warned of “massive” disruption this summer as his members vote on their first national strike since 1995, with walkouts over pay set to compound Britain’s travel chaos. Two industry executives said if drivers at all companies walked out simultaneously, the network would run less than 10% of normal services, as there are very limited contingency plans to replace striking drivers.


The euro is well bid against most major currencies overnight. Turkish inflation reached almost 80% as analysts warned that the country risks getting trapped in a spiral of rising prices and wages. Consumer prices rose 78.6% year on year in June as President Recep Tayyip Erdogan’s unconventional monetary policy and the war in Ukraine’s disruption to food and energy imports took a heavy toll. It was the biggest annual increase since 1998, though the rate was slightly below analysts’ consensus forecast of 80%. Erdogan, who rejects the widely accepted view among economists that raising interest rates curbs inflation, has ordered the central bank to keep its benchmark borrowing rate far below the level of inflation. Germany’s political and business leaders warned that the country was facing its biggest economic crisis for decades as soaring energy prices and disruptions to trade pushed the country into a monthly trade deficit in goods for the first time in more than 30 years.


The dollar is weaker than most major currencies in the early morning trade. Senior US and Chinese officials discussed US economic sanctions and tariffs today amid reports the Biden administration is close to rolling back some of the trade levies imposed by former President Donald Trump. The lifting of tariffs and sanctions and the fair treatment of Chinese enterprises are areas of concern to China, Vice Premier Liu He told US Treasury Secretary Janet Yellen in a video call this morning, according to a statement from China’s Ministry of Commerce. The two sides discussed economic policy and stabilizing global supply chains, agreeing that it’s significant for the US and China to strengthen communication and coordination in those areas for the benefit of both countries and the rest of the world. Meanwhile, a top Taiwanese official said last week that the biggest benefit from a proposed trade agreement with the United States would be to prop up Taiwan’s economy and democracy in the face of China’s attempts to isolate the country.


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 at least 0.3% 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 erased its losses. Italian bonds tumbled with investors watching domestic political tensions. US markets were closed for Independence Day holiday. 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 are 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.: Russia June S&P Global services PMI
8:45 a.m.: France May industrial production
9:15 a.m.: Spain June S&P Global services PMI
9:45 a.m.: Italy June S&P Global services PMI
9:50 a.m.: France June S&P Global services PMI
9:55 a.m.: Germany June S&P Global services PMI
10:00 a.m.: Euro area June S&P Global services PMI
10:00 a.m.: UK June new car registrations
10:30 a.m.: UK June S&P Global services PMI
11:00 a.m.: UK to sell bonds
11:30 a.m.: BOE financial stability report
11:30 a.m.: Germany sells linkers
2:00 p.m.: Riksbank’s Breman in public Q&A
4:00 p.m.: US May factory orders, durable goods

Corporate Events

Ford posts June sales


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