Morning Report

July 6, 2022

“Spurred by investors’ fears that Europe is leading the world into recession, and given the reliance of Germany, Italy and others on Russian gas, the euro is nearing parity with the dollar.”

Sam Cornford, Partner – Head of Trading

Main Headlines

Joe Biden is facing a dilemma: on the one hand, he is under pressure to help Americans struggling with rising prices and a slowing economy, but on the other, any unilateral measures he might take risk making the inflation problem even worse. The US president travels to Cleveland, Ohio, today as he refocuses his attention on the economy and attempts to regain his political footing. His approval ratings have been stuck at the lowest levels of his presidency for weeks, and voters are widely disappointed by his handling of the economy — whilst the economic picture for the White House has only grown more complicated and difficult in recent weeks. With inflation still stubbornly high, the Federal Reserve has embarked on an aggressive cycle of interest rate increases, fuelling concerns that the economy may be headed for a significant deceleration or even a recession as consumers cut back on spending and businesses reduce investment.

Boris Johnson is clinging to power after chancellor Rishi Sunak and health secretary Sajid Javid dramatically resigned from the UK prime minister’s cabinet within minutes of each other last night. A number of junior government members also quit, with many Tory MPs believing that the ministerial mutiny could signal the beginning of the end for Johnson. But there was relief in Downing Street when a number of other senior figures — including deputy prime minister Dominic Raab, foreign secretary Liz Truss, defence secretary Ben Wallace and levelling-up secretary Michael Gove — indicated that they were staying. Johnson immediately began reshuffling his cabinet. Education secretary Nadhim Zahawi was named the new chancellor. Steve Barclay, a former Treasury minister and currently Johnson’s chief of staff, replaces Javid as health secretary. Many Conservative MPs believe Johnson’s premiership is approaching its end. Damningly, last month more than 40% of MPs expressed no confidence in their leader, and cabinet unity has broken.


Sterling is weaker than most major currencies in the early morning trade. The Bank of England said the global economic outlook has “deteriorated materially” after surging commodity prices pushed up inflation around the world, posing a further downside risk in months ahead. The UK central bank said volatility in the cost of energy and raw materials poses a significant risk of disruption that could amplify economic shocks in the future. Officials will conduct a probe of the “opacity” and “lack of data” in commodity markets and how those links feed vulnerabilities. The UK government is proposing to make sovereign wealth funds pay corporation tax on property and commercial enterprises, in a move some tax experts say could deter foreign investment in Britain. Chris Sanger, tax policy leader at auditor EY, said the government appeared to hope that “the tightening of the fiscal regime to remove some of the benefits to sovereign wealth funds of investing directly will not significantly dampen the UK’s attractiveness”, largely because of the strength of the economy.


The euro is stronger against sterling and weaker against the dollar this morning. During the 25 eurozone rate-setters’ meeting in Amsterdam last month, it was thought that there was plenty of time to finalise the European Central Bank’s plan for avoiding a bond market crisis when they started to raise rates, but they were mistaken. A surge in borrowing costs for weaker southern European countries, in particular Italy, led to a divergence in yields with northern member states — a phenomenon central bankers describe as “fragmentation”. At an emergency meeting, the ECB decided to “accelerate the completion of the design of a new anti-fragmentation instrument” to counter any unwarranted sell-off in a country’s bonds. Russian troops are engaged in heavy fighting and making their way into Ukraine’s Donetsk region after taking control of the last two towns in neighbouring Luhansk, the regional governor of Luhansk said yesterday.


The dollar is well bid against most major currencies overnight and held at a fresh 20-year peak against the euro, whilst also finding multi-month highs against other major peers, as higher gas prices and political uncertainty renewed recession fears and sent investors scrambling to the safe-haven currency. Yesterday however, oil prices took a dive, falling by the most in almost four months, as a broad sell-off in commodities markets reflected fears that an economic downturn will undercut fuel demand. Concerns that global central bank monetary tightening to combat high inflation could trigger a recession, that would damp oil demand, have led to oil prices sliding in the past month. US companies have stopped predicting a repeat of a “Roaring Twenties type of consumer exuberance”, instead cutting financial forecasts, with RH chief executive Gary Friedman attributing it to “multiple macro headwinds”.


US Treasuries rallied as talks of easing tariffs on China imposed by the former administration failed to alleviate recession fears. Commodities from oil to copper remained under pressure as the dollar rose. The S&P 500 eked out a modest gain after falling as much as 2.2%, as easing energy prices and bond yields took pressure off higher-valuation shares. The tech-heavy Nasdaq 100 jumped 1.7%. Treasury yields declined, with the 10-year yield around 2.83%. Data released Tuesday also showed durable goods orders and factory orders rose more than expected in May. Investors continued to fret over a potential US recession and stubborn inflation despite talks of tariff reductions. US and Chinese officials held discussions after reports that Washington is close to rolling back some of the trade levies imposed by the former administration. Reducing tariffs on imported Chinese goods could impact consumer prices in the US, but some suggest that it would do little to cool inflation.

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

8:00 a.m.: Germany May factory orders
8:00 a.m.: Sweden May GDP
9:00 a.m.: Hungary May retail sales, industrial production
9:00 a.m.: Spain May industrial output
9:00 a.m.: ECB’s Rehn speaks
10:10 a.m.: BOE’s Pill speaks
10:30 a.m.: UK June Construction PMI
11:00 a.m.: Euro-Area May retail sales
1:30 p.m.: Riksbank’s Skingsley speaks
3:00 p.m.: BOE’s Cunliffe speaks
8:00 p.m.: FOMC minutes from June meeting
Romania key rate announcement
UN releases global food security report
Sun Valley Conference gets underway


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