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North American Morning Briefing: Stock Futures Dip as China's Growth Slows, Prompting Surprise Rate Cut

MARKET WRAPS

Watch For:

Empire State Manufacturing Survey for August; Canada Wholesale Trade for June

Opening Call:

Stock futures were declining early Monday after data showed China's economy stumbled in July as a two-month boost from easing lockdowns faded, prompting the country's central bank to unexpectedly cut two key interest rates in an effort to shore up faltering growth.

The rate cut is the second this year from Beijing as its stringent zero-Covid policy has forced businesses to shut, consumers to pull back on spending and growth to slow.

Esty Dwek, chief investment officer at Flowbank, told Bloomberg Television that investors were "focusing on the fact the U.S. seems to have finally started a period of disinflation."

Dwek added that "if China is slowing and isn't going to pick up very much then investors really need the U.S. to hold up."

The strength of the U.S. consumer will be closely watched this week by Wall Street as major retailers Walmart, Target and Home Depot report quarterly earnings, and retail sales data for July are released.

Read Barrons.com: Why the Stock Market Rally Could Be the Real Thing

Forex:

The dollar should remain strong in the near-term as the Federal Reserve is likely to continue raising interest rates even after data showed inflation slowed more than expected in July, Danske Bank said.

"Monetary conditions are not restrictive enough to ensure a return of inflation to 2%. Hence, we do not think it is time to reverse course on our bullish USD view."

It may take a couple of weeks when key economic data are published, or a decent rebound in oil prices, before dollar sentiment finds a renewed tailwind, Danske Bank said. It expects EUR/USD to fall below parity in the second half of the year.

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Eurozone economic releases this week, including German ZEW investor expectations on Tuesday and eurozone gross domestic product data on Wednesday, are likely to add to concerns about a weak economy and push the euro lower, ING said.

"Neither should provide much lasting support for EUR/USD, which can sink back into the 1.0150/0200 area."

Concerns are growing about the ongoing rise in gas prices in Europe, compounded by drought across much of Europe and low levels of the Rhine disrupting raw material transport networks and pushing up costs on other routes, ING said.

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Sterling's reaction to key U.K. data this week--including unemployment and inflation figures--may be modest, as they're unlikely to change interest-rate expectations for the BOE, ING said.

"That should mean EUR/GBP is able to hold below Friday's highs near 0.8485/90. Cable [GBP/USD], however, looks vulnerable to dollar strength and could quite easily make a return visit to 1.2000."

Bonds:

Relative valuations are at levels where selling BB-rated credit and buying BBBs and lower quality high-yield credit "makes a lot of sense" on a beta-neutral basis, Jefferies said.

"This view is gaining traction in the market as well."

Jefferies has started to see more active selling of BB-rated bonds and buying of lower-quality high-yield at the market level and it remains around neutral duration.

Energy:

Crude futures were almost 2% lower in Europe after a raft of Chinese data showed that economic activity in the world's largest importer of oil slowed last month.

Beyond China, traders are on the lookout for news on the Iran nuclear deal, which, if revived, could boost global oil production by about a million barrels a day inside a year.

The European Union has told Iran it wants a yes or no response to a draft proposal it circulated last week by today, The Wall Street Journal has reported.

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In other news, water levels in Germany's Rhine river continue to fall, hampering industrial flows through the country as the continent battles an ongoing drought.

With barges unable to pass, the flow of industrial goods has suffered as logistics costs rise, particularly for coal-powered plants which have traditionally imported coal via the river.

Read: Rhine Water Levels Drop Further as European Drought Continues

Metals:

Base metals and gold were down in early London trading as weaker-than-expected industrial data from China pressured the global economic outlook.

"Macro looks poor especially with this morning's China data overlapping with news of continued strikes in the U.K. as rising cost-of-living continues to be a sore point," Marex said, adding that the rising dollar was adding further pressure.

   
 
 
   
 
 

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August 15, 2022 05:16 ET (09:16 GMT)

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