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EUROPEAN MIDDAY BRIEFING - Stocks Fall as Economic Outlook Remains Dim



European stocks were in the red on Tuesday, with worries around inflation and recession continuing to dominate markets, and despite some positive news on U.S.-China trade relations.

Concerns over the risk of recession continued to loom large as central banks move to fight multidecade high inflation with higher interest rates, risking spurring a slowdown by denting economic demand.

A wave of economic data in the week ahead-including the U.S. nonfarm payrolls report on Friday-as well as minutes from the Fed's June meeting will be closely watched as investors focus on monetary policy expectations.

"It's been a quieter 24 hours for markets thanks to the U.S. holiday, but the market remains confused about how to price fixed income in an environment where a recession is coming at some point," said Jim Reid, a strategist at Deutsche Bank.

"We've seen a big yield selloff to start the week even if equities have stabilized, with a fresh rise in energy prices only adding to concerns about how different economies [particularly in Europe] will fare this winter if Russia cuts off the flow of gas."

While stocks were lower, there was some optimism in markets following what China said was a "constructive" call between U.S. Treasury Secretary Janet Yellen and Chinese Vice Premier Liu He, with the two agreeing better coordination on macro policies.

Expectations were also rising that the U.S. would pause tariffs on some Chinese imports, following a Wall Street Journal report detailing plans to lift tariffs for some consumer goods and launch a broad framework for importers to request tariff waivers.

"The market is alive with speculation that U.S. President Biden will cut tariffs on a swath of Chinese goods this week to lower inflation," said Jeffrey Halley, an analyst at broker Oanda.

In Europe, the airline sector was in focus, reacting to news that pilots at SAS, Scandinavia's main airline had started a strike that the carrier said will hobble operations and add to air travel woes.

SAS later announced that it has filed for chapter 11 bankruptcy protection in the U.S. as it seeks to push through its comprehensive financial restructuring to cut costs and raise capital under the supervision of the U.S. court system.

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Stocks to Watch:

Remy Cointreau is in a unique position to overcome the pressures of inflation and represents one of the most attractive long-term growth stories for the European beverages sector, Jefferies said.

Cognac retains its long-term attractiveness and is responsible for roughly 90% of the French spirit maker's profits, the bank said.

The reopening of China, as Covid-19 pandemic conditions stabilize, should generate earnings momentum to offset potential slowdowns in other regions going into 2023, it said.

The U.S. bank upgraded its rating on the stock to buy for the first time in a decade and raises its target price on the stock to EUR200 from EUR195.


A robust 12% growth outlook for the global biologics market, including cell and gene therapy, and the rising share of drug approvals bode well for Lonza's biologics segment, Citi said, upgrading the Swiss life-sciences company to buy from neutral.

The biologics segment contributes 50% to Lonza Group's sales and roughly 60% to Ebitda, Citi said. "The biopharma industry's focus towards new technologies like mRNA for Covid-19 and beyond creates significant optionality for longer-term and bodes well for Lonza, as it is one of the early adopters," it said.

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Economic Insight:

U.K. car sales skidded 24% in June, the worst performance for the month in 26 years.

The Society of Motor Manufacturers and Traders said 140,958 vehicles were registered, in what the trade body blamed on problems in component supply, which have been exacerbated by restrictions in China.

For the year, registrations have dropped 12%, the SMMT said.

"With motorists facing rising fuel costs, however, the switch to an electric car makes ever more sense and the industry is working hard to improve supply and prioritize deliveries of these new technologies given the savings they can afford drivers," the SMMT said.

U.S. Markets:

Stock futures gave up early gains to trade lower, as investors assessed the possibility of U.S. officials easing tariffs on Chinese imports.

Wall Street kicked off July trading on a positive note on Friday before the long weekend, but investors are bracing for more pain ahead this year.

On Tuesday, however, investors were focused on the tariffs report.

"The market is desperate for good news," said Florian Ielpo, head of macro at Lombard Odier Investment Managers. But, he said, it has become increasingly difficult to offset investors' growing fears about the outlook for the U.S. economy.

Even with the possibility of a rollback of tariffs on the horizon, he said, investors are asking: "How is going to solve the two key issues we have, which is mounting recession fears and strong inflation?"

In the bond market, the yield on the benchmark 10-year Treasury note fell to 2.891% from 2.901% Friday, also reversing gains notched earlier in the session.

In premarket trading, energy stocks climbed, boosted by a slight rise in Brent crude. Exxon Mobil gained 1.7% and Exelon rose 2.1%.

In contrast, shares of Tesla fell 0.9% after it said on Saturday that its vehicle deliveries fell quarter-over-quarter for the first time in more than two years after the company had to temporarily shut down its largest factory, in Shanghai, because of local Covid-19 restrictions.


Reports that Biden could roll back some tariffs on Chinese imports might improve risk appetite and reduce safe-haven flows to the dollar, but the currency impact will be modest, ING said.

The news is slightly dollar negative but Treasury yields are rising, serving as a reminder that if the Reserve Bank of Australia has cause to raise its key interest rate by 50 basis points to 1.35%, the tightening case is even more compelling for the Fed, ING said.

"On balance, DXY [dollar index] could probably drift back to 104.50 or a little lower, but should hold above 104.00 ahead of tomorrow's [Fed meeting minutes]," ING said.


Sterling could gain if Bank of England officials indicate that interest rates could rise more aggressively in speeches this week, Ebury said.

"Any indication that policymakers are erring towards raising rates by 50 basis points at the next [Monetary Policy Committee] meeting in August would be positive for the pound and may trigger a recovery rally from currently suppressed levels," it said.

BOE Governor Andrew Bailey and BOE member Silvana Tenreyro speak Tuesday at 1000 GMT and 1630 GMT respectively, while BOE Deputy Governor Jon Cunliffe and BOE chief economist Huw Pill speak Wednesday followed by BOE official Catherine Mann Thursday


Asian central-bank reserve managers selling foreign currency reserves to prop up their local currencies could hurt the euro, ING said.

"The issue here is that after Asian central banks intervene to sell USD/Asia, the next step is for their portfolio management team to sell EUR/USD in order to rebalance the euro weight in their FX reserves back to benchmark levels," the bank said.

"This looks like a real headwind for EUR/USD this summer and may be one of the reasons why EUR/USD struggles to make it much above 1.05 now," it said.


Fixed-income markets are currently subject to alternating concerns of interest rate rises and recession fears, which explains the huge, double-digit swings recently, UniCredit Research said.

In each of the past nine sessions, the 10-year German Bund yield has shown a trading range of wider than 10 basis points, it said, expecting more sessions with sharp moves.

"There is more to come, in our view," UniCredit Research said. Interest rate rise expectations might revive on the back of minutes from the Federal Reserve's and European Central Bank's meetings, due this week, while recession concerns are mounting at the same time, it said.


Mizuho's baseline strategy for rates this week is to look for some retracement in yields until Wednesday-Thursday, initially eyeing 3% in 10-year U.S. Treasury yields or around 1.4% in 10-year Bund yields.

For Tuesday, Mizuho said it favors a small short duration bias, while as attention shifts to Friday's U.S. payrolls, the case for being long duration might strengthen.

"The risk is that June's set of payrolls signal that tighter financial conditions are starting to make more of an economic impact," it said.


Oil futures were mixed in early European trading, with Brent lower but WTI within touching distance of $110, as economic-growth concerns outweighed positive sentiment from the possible lifting of Chinese import tariffs by Washington.

Despite improved risk sentiment and the possible easing of trade tariffs against China, "oil is still struggling to break out from its current recessionary malaise as the market pivots away from inflation to economic despair," said SPI Asset Management.

Current supply issues from Russia and OPEC+ are taking a "back seat" while consumer and industrial demand concerns influence the broader market, it said.


Goldman Sachs raised its forecasts for European gas prices on the uncertainty stemming from Russia reducing supply to Europe via Nord Stream 1.

The bank raised its forecast for the third quarter to EUR153 a megawatt hour from EUR104, and EUR121 a megawatt hour from EUR105 for the fourth quarter. It had previously banked on a full restoration of NS1 flows, but no longer sees this as possible, it said.

Goldman recommended long exposure on the Dutch TTF--a trading point for natural gas--on the highly volatile nature of prices, and the "expectation that the ongoing European tightness is not likely resolved in the near-to-medium term."


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July 05, 2022 06:18 ET (10:18 GMT)

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