EMEA Morning Briefing: Shares to Track Lower as Investors Digest Central Bank Decisions

MARKET WRAPS

Watch For:

EU bank stress test results published, business & consumer surveys; France GDP, CPI, PPI, consumer spending, housing starts; Germany GDP, CPI data for Germany, North Rhine Westphalia, Bavaria, Brandenburg, Hesse, Baden-Wuerttemberg, Saxony; Italy PPI; trading updates from AstraZeneca, Standard Chartered, Sanofi, Sberbank, Caixabank, BASF, Vanquis Banking Group, Atos, BBVA, International Consolidated Airlines Group, Capgemini, Bollore, Air France-KLM, Vinci, Engie, HermÃ..s International, Bouygues, Leonardo Finmeccanica, Eni, Intesa Sanpaolo, Clariant, OMV, Rightmove, NatWest Group, Intertek Group, Koninklijke Vopak, Signify

Opening Call:

European shares may track lower Friday as corporate earnings continue to roll in. In Asia, stock benchmarks were mostly lower; the dollar strengthened; Treasury yields also advanced; while oil fell and gold futures gained.

Equities:

Stock futures point to losses at the open in Europe on Friday, as investors digest the quarter-point rate increase by the European Central Bank and its marginally dovish tone along with the continuing corporate earnings.

The Bank of Japan kept its interest-rate targets unchanged Friday but said it would operate its interest-rate policies more flexibly.

Despite considerable speculation about a policy change ahead of Friday's meeting, the Japanese central bank decided to maintain its cap on the 10-year Japanese government bond yield at 0.5%. It also kept short-term interest rates unchanged at minus 0.1%.

However, it said that it would enforce the cap with greater flexibility and consider the upper bound as a reference point, not a rigid limit.

Meanwhile, investors are betting that the Fed's campaign to raise rates may continue if inflation remains sticky.

"Our own view is that Fed rates have peaked," said Seema Shah, chief global strategist at Principal Asset Management. But with rising commodity prices and a low unemployment rate, she said, "we can't entirely rule out the possibility of an inflation resurgence lurking around the corner."

"We raise rates, the nose is still up on the proverbial plane," said Ken Mahoney, CEO of Mahoney Asset Management.

"The opportunity cost to sit on the sidelines and complain about a recession that hasn't happened is significant."

Data released Thursday showed that U.S. gross domestic product grew 2.4% in the second quarter. That was more than economists had expected and a higher rate than the first quarter's 2% expansion.

Meanwhile, the earnings season "has provided more confirmation of the soft landing hypothesis," or the belief that the economy will avoid a sharp slowdown, said Nick Anderson, portfolio manager at Thornburg Investment Management.

Forex:

The dollar gained in Asia versus the yen in volatile trading after the decision of the Bank of Japan to keep its interest-rate targets unchanged.

Meanwhile, the euro looks vulnerable after the European Central Bank said further rate decisions would be dependent on data, signaling that the end of rate rises could be near, Ebury said.

"The possibility of an imminent end to hikes in the eurozone presents a clear downside risk to the euro," it said.

"In our view, the Governing Council is keeping its options open to raise rates again, although it also appears to be laying the groundwork for an end to tightening at upcoming meetings."

Better-than-expected U.S. gross domestic product data for the second quarter also weighed on the euro.

"I don't think the EUR/USD has any real business being up above 1.1100 or 1.1200 but it doesn't mean it won't happen again for a little while," Jefferies global head of forex W. Brad Bechtel said.

Bonds:

Treasury yields rose after the Bank of Japan kept its interest-rate targets unchanged Friday but said it would operate its interest-rate policies more flexibly.

The Japanese central bank decided to maintain its cap on the 10-year Japanese government bond yield at 0.5%. It also kept short-term interest rates unchanged at minus 0.1%.

However, it said that it would enforce the cap with greater flexibility and consider the upper bound as a reference point, not a rigid limit.

Nikkei, had without citing sources, reported on Thursday that BOJ officials would discuss a potential change to allow the yield on the 10-year Japanese government bond to trade above its cap of 0.5% "to some degree."

The Bank of Japan began implementing yield curve control, or YCC, in 2016, a policy that aims to keep government bond yields low while ensuring an upward-sloping yield curve. Under YCC, the BOJ buys whatever amount of JGBs is necessary to ensure the 10-year yield remains below 0.5%.

There was concern that Japanese investors, who have vast holdings of U.S. fixed income, including Treasury notes and other securities would liquidate those U.S. positions to reinvest the proceeds at home.

--

The ECB's softer tone on rate hikes should support shorter-term bonds, said Neuberger Berman.

The central bank lifted its deposit rates by 25 basis points, per expectations, but hinted it could now desist from any further hikes.

The bank "joins the camp of those anticipating a downward trend in inflation rate because its hiking rate cycle reached its goal of dampening demand,"

Neuberger Berman said, noting that this should support an outperformance of short-term to medium-term bonds.

Energy:

Oil futures declined in Asia in a possible technical retreat after settling higher Thursday as a stronger-than-expected U.S. GDP growth signaled an economic soft landing after the Fed's aggressive rate-hike cycle.

"The better economic outlook boosted sentiment in the oil market, with both WTI and Brent gaining more than 1%," ANZ analysts said.

Despite the morning losses, analysts remain optimistic about the price growth, as investors expect additional supply tightness.

UBS has projected a market deficit of around two million barrels a day in July and August.

"We expect oil prices to trend even higher once these deficits become visible in on-land oil inventories," UBS said.

"The size of the market deficit in September will depend, among other factors, on if the extra 1mbpd Saudi production cut is extended into September."

Crack spreads, or the price differences between oil and oil products, are rising along with oil prices, StoneX said.

That indicates the market is "forecasting stronger demand in the second half of the year, likely buoyed by Chinese stimulus, as well as signs that a U.S. recession could after all experience a soft landing."

Metals:

Gold futures gained after falling to its lowest in two weeks on Thursday.

However, the rise in Treasury yields and a push higher in the U.S. dollar following the BOJ decision may put pressure on the precious metal.

Strong U.S. GDP data gives the Fed "more fire power in relation to the interest-rate decision, which means that they need to be less concerned about the economic weakness" from increases in rates, Naeem Aslam, chief investment officer at Zaye Capital Markets said.

"This has brought more strength to the dollar and hence the gold price has experienced a move to the downside."

However, Altavest is still a longer-term gold bull, viewing Thursday's dip in prices as "likely a buying opportunity."

"We anticipate the economy slowing down and Treasury yields dropping in coming months. We are in the hard landing camp," it said.

Gold prices tend to advance in times of recession.

--

Aluminum edged lower amid abating supply-side issues.

There appears to be increasing supply of the base metal, ANZ said.

Smelters in China's southwestern Yunnan province have started to ramp up production, following reductions in aluminum output in the provinceafter hydropower capacity cuts prompted curbs on power use, it said.

--

Iron ore prices were lower in China trade, as the steel-making commodity continues to retreat from gains earlier this week, when Beijing's promise of more policy stimulus boosted investor enthusiasm.

While the potential support measures for real estate and domestic consumption could brighten iron ore demand outlook in the near term, analysts flag rising supply as a longer-term concern.

Galaxy Futures analysts pointed out that port inventories of iron ore have been rising in recent days, as overseas supply recovers from previous output disruptions.

This could weigh on buying interest and cap price upside, they said.

TODAY'S TOP HEADLINES

Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak

Worries about a possible policy tweak by the Bank of Japan threw a wet blanket on a stretched U.S. stock-market rally Thursday, with the Dow Jones Industrial Average snapping its longest winning streak since 1987 after the 10-year Treasury yield surged back above the 4% level.

The Japanese yen also strengthened after a news report said policy makers on Friday would discuss a possible tweak to the Bank of Japan's so-called yield-curve control policy that would loosen the cap on long-dated government bond yields.

Dow's historic winning streak ends at 13 sessions. Here's what it might mean for U.S. stocks and the economy.

The Dow Jones Industrial Average failed to extend its sizzling summer winning streak to a 14th session on Thursday - what would have been the longest stretch of consecutive gains for the average since June 14, 1897.

That means the blue-chip gauge concluded its winning stretch on Wednesday with 13 straight sessions in the green. It was the longest such stretch since January 1987.

BNP Paribas to Settle SEC, CFTC Probes Over Use of Banned Messaging Apps

BNP Paribas said the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission are investigating it over its employees' use of messaging applications that broke record-keeping rules.

(MORE TO FOLLOW) Dow Jones Newswires

July 28, 2023 00:18 ET (04:18 GMT)

Copyright (c) 2023 Dow Jones & Company, Inc.