MARKET WRAPS

Watch For:

Eurozone, Germany, France, UK, Italy Manufacturing PMI; Eurozone, Italy Provisional CPI; UK Monetary & Financial Statistics, BOE Effective Interest Rates, Money and Credit; updates from Sodexo, Ryanair

Opening Call:

Further steep losses for European stocks are likely on Friday as recession fears continue to dominate financial markets. In Asia, major benchmarks mostly tracked Wall Street lower; bonds continued to rally, the dollar and oil gained; and precious and base metals extended their losses.

Equities:

European shares face further hefty losses on Friday as fears of a global recession grow.

U.S. stock futures also were down after the major indexes on Wall Street closed lower on Thursday, capping the S&P 500's worst first half in more than 50 years.

The same overarching issues, like tenacious inflation, rising interest rates, and battered consumer sentiment, continue to command markets' attention-all amid growing discussion of the likelihood of a recession.

In Asia, sentiment among Japan's large manufacturers deteriorated in the three months to June, reflecting concerns over lockdown in Shanghai and prolonged supply shortages, while a private gauge measuring China's factory activity rebounded to its highest level in a year, pointing in the same direction as the official gauge to reflect an economic recovery from the impact Covid-19 lockdowns.

Economic Insight:

Markets are pricing an 83-basis point cut in the fed-funds rate next year, said Piper Sandler.

"The extent of market-expected rate cuts has been larger than it is today on only two other occasions--December 5 and December 11, 2007, at the onset of the Great Financial Crisis." It added that it doesn't mean a recession as deep is to be expected.

"The reason why the market expects a sharp Fed retracement is because at the end of the year, the federal funds rate is likely to be well above neutral, whereas in 2007 it was actually well below neutral."

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S&P said sharp monetary tightening is slowing global growth, with "inflation, energy security, and geopolitical uncertainty being the chief risks."

Continuing supply-side price pressures in food and energy markets may fuel inflation and the ongoing Russia-Ukraine conflict could further undermine global trade and economic growth.

S&P also said "as economic growth slows and financing conditions become tighter, we see an increased risk that sharply higher interest rates, persistent inflation, and renewed consumer caution could push the US, and potentially Europe, into a recession, most likely in 2023."

Forex:

The dollar was slightly firmer against its major peers in a mostly cautious Asian session, as investors continued to weigh the path of Fed rate hikes and possible recession risks.

The euro remains sharply weaker against the dollar this year--it's near $1.05, compared with around $1.14 at the beginning of the year and will continue to slide if the ECB doesn't raise rates more aggressively, according to some analysts.

"The most negative news continues to emanate from Europe, where inflation is running hotter than in the U.S., since the euro has declined 8% against the dollar this year," said Navellier & Associates.

"Obviously, like the Bank of Japan, if the ECB continues to severely lag the Fed in hiking key interest rates, the euro will remain weak and likely reach parity with the dollar in the upcoming months."

Bonds:

Investors continued to buy government bonds on Friday, with the yield on the benchmark 10-year Treasury note remaining below 3%.

After mounting one of its fastest increases in history to start 2022, the 10-year yield has in recent weeks retreated from an end-of-day high of 3.482% reached on June 14, a reflection of traders' dimming views about the economy's path.

"The most notable development during the final full trading session of the week was 10-year yields' move below 3% for the first time since June 10 as buying interest to conclude the half pushed rates across the curve lower," said BMO Capital Markets.

"The belly of the curve was the outperformer, as 5-year rates probed 3% as well, and the breakdown of the price action resonates with the move in breakevens and the implications for the Fed. The lagged influence of monetary policy means that any tightening executed this year holds little bearing on 2022's realized inflation prints."

Other News:

Fitch has revised its outlook on the global sovereign credit sector to neutral from improving, adding "global sovereign credit conditions have deteriorated since the start of the year."

According to Fitch, "fiscal recoveries that were evident in 2021 and previously were forecast to extend into 2022 have become less certain."

Fitch said the Russia-Ukraine conflict and subsequent sanctions have "wide-ranging and far-reaching effects, altering global security considerations, interrupting trade and capital flows, and contributing to weaker economic growth and higher inflation."

None of these issues will be resolved this year, according to Fitch.

Energy:

Oil futures were slightly higher in Asia, supported by signs of tight supply as OPEC+ struggles to raise its production levels, with limited spare capacity, said ANZ.

ANZ added that a worsening economic outlook is clouding demand expectations and could limit the price gains. Also, U.S. motorists are likely planning fewer-than-usual trips during the country's peak driving season, which could hurt gasoline, and hence oil demand.

There's likely to be further tightness in spare production capacity and this tightness "makes the system fragile to any further marginal losses, " said Neuberger Berman. Under these conditions, absent any recession, "we expect markets to continue to offer a scarcity premium."

Oil futures ended lower on Thursday and posted a loss for the month, but logged strong first-half gains.

Metals:

Gold futures extended losses in Asia as a stronger dollar and expectations for aggressive action by the Fed continued to diminish the precious metal's luster.

Bullion settled lower for a fourth day in a row on Thursday, sending prices down by more than 2% for the month to their lowest finish since February. Silver prices also softened, down a third straight day and ending the month with a loss.

Commerzbank said while gold had risen in response to the earlier downward revisions in U.S. economic data, a pickup in dollar strength has more than erased those gains, adding that upcoming European inflation figures will be in focus on Friday.

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Aluminum and copper prices were lower as concerns over the global economic mount.

Industrial metals ended the second quarter on a negative note, with all major metals settling in the red, said ING. Copper fell 20%, with aluminum down 30%, making it the worst performer among LME base metals.

---

Iron ore futures were down almost 4%.

The steel industry's PMI in June plunged to its lowest level since the financial crisis of 2008, said ANZ Research. New steel orders sank in June, although steel inventories showed only a marginal drop during the month, despite production falling.

Fitch said iron ore prices may moderate in the second half as steel inventories have been building up.

"The longer it takes for construction and manufacturing sectors in China to reopen, the more likely it is that steel margins will come under pressure and some capacity is curtailed, putting pressure on iron ore prices."

   
 
 

TODAY'S TOP HEADLINES

China Manufacturing Output Rebounds as Covid Restrictions Ease

A private gauge measuring China's factory activity rebounded to its highest level in a year, pointing in the same direction as the official gauge to reflect an economic recovery from the impact Covid-19 lockdowns.

The Caixin China purchasing managers index rose to 51.7 in June, up from 48.1 in May, ending a three-month streak of contraction, according to data released Friday by Caixin Media Co. and S&P Global. The 50 mark separates expansion from contraction.

   
 
 

Japan's Large Manufacturers Sentiment Deteriorates, Tankan Survey Shows

TOKYO-Sentiment among Japan's large manufacturers deteriorated in the three months to June, reflecting concerns over lockdown in Shanghai and prolonged supply shortages.

The main index for sentiment among large manufacturers was +9, compared with +14 in the March survey, according to the Bank of Japan's quarterly tankan corporate survey released Friday. The reading marked the second straight quarter of lower sentiment and was below a projection for +12 from a poll of economists by data provider Quick.

   
 
 

S&P 500 Posts Worst First Half of Year Since 1970

U.S. stocks retreated on the final day of a brutal quarter for markets, weighed down by losses among shares of everything from banks to oil producers.

Thursday's trading was volatile. Major indexes fell sharply in morning trading, pared losses in the following hours, and then fell again late in the session.

   
 
 

Most Countries Lack Crypto Information-Sharing Laws, Watchdog Says

Most countries lack "travel rule" laws that could help prevent illicit use of cryptocurrency by criminals and terrorists, a global anti-money-laundering watchdog said Thursday.

   
 
 

Shiploads of Russian Grain and Good Weather Temper Wheat Crisis

Fine farm weather and a rush of Russian grain ships through the Black Sea have taken the sting out of global wheat prices, a welcome sign for vulnerable countries struggling with surging food costs.

The right mix of sun and rain in the U.S., Europe and Australia has raised hopes that end-of-summer harvests will be plentiful. That should help balance the sizable quantities of Ukrainian wheat stranded in the country by fighting and a Russian naval blockade.

   
 
 

Biden Backs F-16 Sales to Turkey Amid Deal to Expand NATO

President Biden affirmed his support for the sale of a new fleet of F-16 jet fighters to Turkey on Thursday, two days after the Turkish president dropped his threatened veto of Sweden and Finland's membership in the North Atlantic Treaty Organization.

"We should sell them the F-16 jets and modernize those jets as well. It's not in our interest not to do that," Mr. Biden said at a news conference after the NATO leaders' summit in Madrid.

   
 
 

New Zealand, European Union Settle on Free-Trade Agreement

SYDNEY-New Zealand has concluded negotiations for a free-trade deal with the European Union, eliminating tariffs on exports including wine, manuka honey, apples and most seafood.

The deal provides duty-free access on 97% of New Zealand's existing exports to its fourth-largest trading partner after China, Australia and the U.S.

   
 
 

Write to paul.larkins@dowjones.com

   
 
 

Expected Major Events for Friday

00:01/IRL: Jun Ireland Manufacturing PMI

07:00/POL: Jun Poland Manufacturing PMI

07:00/NED: Jun Netherlands Manufacturing PMI

07:00/TUR: Jun Turkey Manufacturing PMI

07:15/SPN: Jun Spain Manufacturing PMI

07:30/CZE: Jun Czech Republic Manufacturing PMI

07:30/SWI: Jun procure.ch Purchasing Managers' Index

07:45/ITA: Jun Italy Manufacturing PMI

07:50/FRA: Jun France Manufacturing PMI

07:55/GER: Jun Germany Manufacturing PMI

08:00/EU: Jun Eurozone Manufacturing PMI

08:00/GRE: Jun Greece Manufacturing PMI

08:30/UK: May Monetary & Financial Statistics

08:30/UK: May Bank of England effective interest rates

08:30/UK: May Money and Credit - Lending to Individuals, Lending to Businesses, Broad Money and Credit

08:30/UK: 4Q Postcode Lending statistics

08:30/UK: Jun S&P Global / CIPS UK Manufacturing PMI

09:00/ITA: Jun Provisional CPI

09:00/ITA: Jun Cities CPI

09:00/EU: Jun Flash Estimate euro area inflation

09:00/CYP: Apr Retail trade

09:00/DEN: Jun Danish PMI

10:00/POR: May Industrial production index

15:59/UKR: May Industrial Production

16:59/AUT: Jun Unemployment figures

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This article is a text version of a Wall Street Journal newsletter published earlier today.

 

(END) Dow Jones Newswires

July 01, 2022 00:39 ET (04:39 GMT)

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