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North American Morning Briefing: Stock Futures Climb after China Cuts Rate

MARKET WRAPS

Watch For:

Advance Quarterly Services; State Employment and Unemployment; earnings from Deere, Foot Locker, Booz Allen Hamilton

Opening Call:

Equity futures advanced Friday, recovering some ground after China's central bank cut a key interest rate.

Stocks have come under pressure this week from concerns about global growth. Investors worried about how aggressively the Federal Reserve would respond to the bout of high inflation and Covid-19 lockdowns in China that limited economic activity and snarled supply chains, driving a selloff.

Earlier Friday, the Chinese central bank unexpectedly cut a key interest rate that acts as a benchmark for mortgages, a move that is predicted to support the country's housing market. It kept other rates unchanged.

"We have a growth scare at the moment, coming from China and monetary policy biting in the U.S. So this morning, sentiment was helped with China's action," said Arun Sai, a multiasset strategist at Pictet Asset Management. "But we still need to build more evidence to convince markets that a soft landing is possible."

Shares of Ross Stores plunged 25% in premarket trading after the retailer posted a decline in sales and said it expects another drop this quarter. Palo Alto Networks surged nearly 11% after it reported quarterly revenue that beat analysts' expectations.

"Earnings season has been good, there are slightly more companies than usual beating expectations. The question is from the next quarter onward, where we will have the full impact of the jump in oil prices and the war in Ukraine," said Kiran Ganesh, a multiasset strategist at UBS. "That will be key, this is a bit of a preview."

Stocks overseas recovered somewhat from their recent losses, with the Stoxx Europe 600 adding 1.2% and Asian stocks charging higher.

Forex:

The dollar edged higher after the Fed's Esther George said that interest rates need to rise further to curb inflation. In an interview with CNBC, George also said policymakers aren't focused on the impact rate rises are having on the stock market.

"Not until the Fed pours cold water on tightening expectations should the dollar build a top," said ING. "And yesterday Fed hawk, Esther George, said that even this 'rough week' in equity markets would not blow the Fed off course."

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The European Central Bank could move away from negative interest rates soon but this may not considerably boost the euro as some anticipate, said RBC Capital Markets.

Looking at recent evidence on central banks moving into or out of negative rates, it's hard see why the ECB raising its deposit facility rate from -0.5% to zero would have more impact on the euro than 50 basis points of cumulative rises at any other point in the cycle, said RBC currency strategist Adam Cole.

A move to zero in September is more than fully priced and rates will still remain far below other developed markets, RBC said, which expects EUR/USD to fall to 1.00 by year-end, from 1.0567 currently.

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Sterling gained after data showed U.K. retail sales unexpectedly rose in April.

Retail sales increased 1.4% on month in April, with the March print revised to a 1.2% decline from the 1.4% drop initially estimated. Economists in a WSJ survey expected retail sales to fall 0.3% in April.

The data suggested the cost-of-living crisis hasn't caused consumer spending to collapse, said Capital Economics. "This adds weight to our view that the Bank of England will have to raise rates further to bring inflation back down to its 2% target."

Energy:

Oil prices ticked lower in Europe, on course to end the week largely where they began, as investors weigh concerns about both supply and demand.

Demand concerns stemming from Chinese lockdowns and flagging global growth are balanced by tight supplies, heightened by the threat of an EU embargo on Russian oil.

"The market continues to be torn between tight supply on the one hand, led by underperformance by the OPEC+ group and export declines in Russia, and weakening demand on the other, with lockdowns in China undercutting imports," said Fitch.

Metals:

Gold prices were higher in early European trading, adding to this week's gains, with the precious metal looking slightly more attractive to investors as other safe-haven assets slip.

Fitch said it expects significant volatility for gold prices going forward, but sees gold prices remaining elevated due to uncertainty surrounding the Ukraine invasion.

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Copper prices, higher early Friday, are set to post their first weekly gains since the end of March.

Expectations that China's copper demand is set to rise during the second half of the year combined with labor shortages and high energy costs hitting the red metal's supply growth, have helped support prices, said ANZ Research.

"The prospect of a rebound in demand in China, amid falling inventories, is unlikely to keep downward pressure on metals prices for long."

   
 
 
   
 
 

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May 20, 2022 05:33 ET (09:33 GMT)

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