European equities were mixed as investors parse the latest earnings reports and sentiment wobbles amid geopolitical tensions over Taiwan and the Federal Reserve's pathway on monetary policy.

Fed officials said they expect to keep lifting borrowing costs through at least early next year to slow the economy and bring down high inflation, pushing back against some investors' hopes of a milder rate path.

Geopolitical tensions make for a break from the most dominant macro forces moving markets of late--inflation at a four-decade high and the risk of recession from the Fed's shift to fight red-hot prices with much tighter monetary policy.

In early European trading, French bank Société Générale rose 3% after reporting a narrower loss than analysts expected, despite its exit from Russia. German healthcare firm Siemens Healthineers fell nearly 8% after saying its earnings were hit by higher costs and lower sales of Covid-related products.

Stocks to Watch:

Serco Group's potential to benefit from accelerating growth in U.S. defense spending and the expansion of the U.S. Navy is underappreciated by the market, Citi said, ahead of the company's first-half results on Thursday.

The U.K. outsourcing company's vast majority of contracts provide some kind of inflation protection, and with inflationary increases applying on the anniversary of contracts being signed, it is reasonable to expect results to benefit from at least a mid-single-digit inflation tailwind, Citi said.

"We expect Serco to highlight improved [foreign exchange] and inflationary tailwinds across its business," the bank said. Citi retains a buy rating on the stock and 244 pence price target.

Economic Insight:

The Bank of England is likely to act more forcefully against high inflation at Thursday's meeting with a 50-basis-point interest rate increase, Goldman Sachs Asset Management said.

The central bank will also likely signal the beginning of active quantitative tightening in October at a quarterly pace of GBP10 billion, it said.

The BOE will probably raise its short-term and medium-term inflation forecasts while cutting its 2022 economic-growth forecasts, Goldman Sachs Asset Management said.

The BOE will remain data-dependent with its policy decisions and willing to act aggressively if high inflation persists, it said.

"Despite the risks to growth, firm inflation and a tight labor market are supportive of further tightening beyond this month's meeting."

U.S. Markets:

Stock futures edged up ahead of services-sector data and corporate earnings, while Treasury yields pushed higher as investors continued to look ahead to the Fed's pathway on monetary policy.

Investor sentiment has wobbled since House Speaker Nancy Pelosi arrived on her historic visit to Taiwan --an island at the heart of the global chip-making industry that China considers part of its territory.

Mrs. Pelosi's landing on Tuesday was met with Chinese military aggression, with the world's second-largest economy planning drills around Taiwan that will be among the most significant in almost 30 years.

After falling on Tuesday, stocks were poised to make somewhat of a rebound in the day ahead.

"Risk assets are attempting to shake off the recent spike in U.S.-China tensions, with ...U.S. futures looking to have found a more solid footing after a wobbly start to August," broker Exinity said.

"Amid persistent uncertainty over the pace of U.S. rate hikes and global recession risks, markets now also have to contend with the resurgence in U.S.-China tensions," Exinity added.

"The aggressive tone emanating out of Beijing in response to Pelosi's visit to Taiwan has made for a classic safe haven play in recent sessions, with gold and Treasuries rising in tandem with the U.S. dollar and the Japanese Yen."


The dollar rose in early trade after Fed officials damped speculation that the central bank could shift away from raising interest rates amid U.S. recession fears.

Fed officials Mary Daly, Loretta Mester and Charles Evans on Tuesday signaled the Fed was committed to lifting rates further to tame inflation.

"Expect similar rhetoric to emerge from Fed speakers today from the likes of James Bullard (1330CET), Patrick Harker (1630), Mary Daly (1715) and Tom Barkin (1745)," ING said.

However, the bigger focus may be the OPEC+ supply meeting, the Dutch bank said. Any surprise increase in crude supplies would hit oil prices, weakening the dollar on reduced safe-haven flows, ING said.


The Bank of England may prefer a stronger pound to aid its battle against high inflation, ING said.

"Some BOE speakers have said that the pound has a role to play in monetary policy settings and indeed the trade-weighted pound has rallied 3% from its lows in July, largely on the back of the weaker euro," Dutch bank said.

With gas prices remaining high and the dollar likely to stay firm--adding to inflationary pressures--arguably the BOE wants a stronger pound, ING said.

Also read: Sterling Unlikely to Be Affected by UK Leadership Race


The Swiss National Bank is feeling the pain of its foreign -exchange interventions, Commerzbank said. The SNB recorded a loss of CHF95.2 billion in the first half, largely due to losses on forex positions, the bank said.

Increased spending on foreign currencies to curb the franc's rise inflated the SNB's balance sheet, which raised the risk of losses in case of fluctuating markets, Commerzbank said.

"In the end the SNB was unable to prevent the franc's appreciation; if at all it was merely able to dampen it--at a high cost as it turns out now," it said.


Government bond yields are unlikely to rise much from current levels in the second half of the year as investors' concerns over an economic slowdown take over inflation fears, Threadneedle Investments said.

"As we go into the second half and people start to look more at the potential slowdown in economies, that's when we reckon that actually bond yields are not going to rise further from where we are right now," the asset manager said.

10-year U.S. Treasury yields are likely to be at or below 3% 2H 2022 and the big yield increases seen in 1H won't be repeated in 2H, Threadneedle Investments said.


Government bonds seem to have already priced in much of the looming deterioration in economic growth, leaving a little room for bond yields to rise slightly in the coming weeks, Generali Investments said.

"With the peak in inflation still to come and further key rate hikes still in the offing, we expect yields to trend moderately upward again in the weeks to come," it said.

As both the ECB and the Fed have effectively abolished their forward guidance and turned to a data-dependent, meeting-by-meeting approach, "yield uncertainty is set to rather increase and will keep bond market volatility on a high level," Generali Investments said.


Italian 10-year government bond, or BTP, yields are a key gauge of investors' approach toward Italy's snap elections in September, Metzler said.

"The struggle of the 10-year Italian yield with the 3% mark is currently a good gauge of how nervous investors are with regard to the upcoming new elections in Rome," the German bank said.

Recent data from the European Central Bank indicates that the ECB has used Pandemic Emergency Purchase Programme reinvestments to support eurozone peripheral government bonds, Metzler said.


Oil prices edged lower ahead of the OPEC+ meeting. The cartel is set to decide on future production plans as its course of supply hikes comes to an end.

President Biden, following his visit to Saudi Arabia last month, has hinted that the group could continue to raise its supply quotas.

OPEC delegates told the Wall Street Journal that the cartel is undecided between a modest increase or keeping quotas unchanged. The virtual meeting is set to begin at 1130 GMT.

The former could be challenging seeing as the group has fallen short of its earlier targets. It also raises questions about whether extra supply quotas would translate into actual barrels of oil reaching the market.


Recession fears make OPEC members less likely to agree to raise production levels when they meet later Wednesday, DNB Markets said.

The cartel is caught between U.S demands to raise output further and its ally Russia, which is likely to oppose additional supply. Since President Biden's visit to Saudi Arabia last month, concerns about the global economy have grown, which could dampen the cartel's appetite to pump more.

"The weakening macro backdrop and rising risk of recession are weighing on OPEC+ confidence to add more production," DNB said. "With spare production capacity largely exhausted outside Saudi and U.A.E., it might prove difficult to line up full support for a production increase."


Metals markets remained mixed, with trading houses noting limited buying in Asian markets amid Nancy Pelosi's visit to Taiwan.

Mrs. Pelosi's statement of not abandoning Taiwan injects uncertainty to markets, helping to lower trading activity, according to Marex.

However, analysts are starting to discount the likelihood of China coming back with a military response despite drills being conducted in the South China Sea, it said.




Eurozone Retail Sales Fell in June Due to Higher Prices

Eurozone retail sales fell in June due to rising inflation and declining consumer confidence among households, the European Union's statistics agency Eurostat said Wednesday.

The volume of retail sales fell 1.2% in June compared with the previous month, Eurostat said. Economists polled by The Wall Street Journal had forecast retail sales would stagnate.


Ukraine Braces for Brutal Fight for Occupied Southern Regions as Referendum Looms

KYSELIVKA, Ukraine-When Ukrainian troops deployed in Kyselivka on the Kherson front line in April, the village's empty homes provided some protection from relentless Russian shelling.

"Now, there aren't many places left to hide here anymore," said a soldier who goes by his call sign Kulak, pointing to a landscape of craters and twisted trees. "Most houses have burned down from incendiary shells, and the church is gone, too. It is never quiet down here."


Germany Posts Trade Surplus For June

Germany posted a trade surplus for June as exports grew at a greater pace than imports.

Germany's trade surplus-the balance of exports and imports of goods-stood at 6.4 billion euros ($6.51 billion) in calendar and seasonally adjusted terms in June after recording a revised EUR0.8 billion surplus the previous month, data from German statistics office Destatis showed Wednesday.


OPEC+ Considers Modest Oil-Production Increase, Output Freeze, Say Delegates

OPEC and its allies are considering either a modest increase in oil production or maintaining output at current levels when they meet Wednesday, delegates say, as the alliance seeks more time to assess a possible slowdown in global energy demand.

The Saudi-led Organization of the Petroleum Exporting Countries faces some pressure to boost supply and help lower oil prices after President Biden's high-profile trip to the kingdom last month. But it needs to coordinate such a move with a coalition of Russia-led producers with which it has an enduring alliance.


SocGen Swung to Second-Quarter Loss on Russia Exit

Société Générale SA said Wednesday that it swung to a second-quarter net loss as it booked losses from its disposal of Russian assets.

The French lender reported a net loss of 1.48 billion euros ($1.50 billion) compared with EUR1.44 billion net profit a year earlier.


Commerzbank Beats Views on Solid Customer Business, Rising Interest Rates

Commerzbank AG said Wednesday that it beat expectations for second-quarter profit and revenue on customer demand and rising interest rates, as it drives forward with a cost-cutting program.

Net profit in the three months to the end of June was 470 million euros ($477.9 million), swinging from a loss of EUR527 million for the same period last year, Germany's second-largest lender said.


BMW Backs Auto Margin Target for 2022

BMW AG confirmed the margin target for its auto business this year, expecting lower deliveries to be offset partly by pricing, but posted lower second-quarter earnings.

The German luxury car maker said Wednesday that quarterly after-tax profit fell to 3.05 billion euros ($3.10 billion) from EUR4.79 billion in the same period a year earlier.


AXA Beats Expectations Despite EUR300 Million Ukraine Impact

AXA SA said Wednesday that first-half profit and revenues beat expectations as it launched a share buyback worth up to EUR1 billion.

The French insurer said net profit was 4.11 billion euros ($4.22 billion) in the six months to the end of June, slightly higher than the EUR4.00 billion it reported in the same period last year.


Just Eat Net Loss Widens Significantly on EUR3 Bln Grubhub Impairment

Just Eat NV said Wednesday that its first-half net loss widened significantly as it booked a 3.0 billion euros ($3.05 billion) impairment related to Grubhub.

The Amsterdam-based food-delivery group said net loss for the first half was EUR3.48 billion compared with EUR486 million for the year-earlier period.



Gas Prices Have Fallen for 49 Straight Days, Approach $4 a Gallon

U.S. gas prices have fallen for seven straight weeks and are approaching an average price of $4 a gallon, easing the pain of record-high fuel costs amid shrinking global demand for oil.

The average cost of a gallon of regular unleaded gasoline sank to $4.19 Tuesday, the 49th straight day that prices have declined, according to OPIS, an energy-data and analytics provider. That is a 17% decline from the previous high of $5.02 a gallon set back on June 14, according to OPIS.


Volatility Measure Hits Three-Year Low Despite Market Tumult

Wall Street's fear gauge has been relatively subdued for much of the year, even as stocks and bonds have slumped.

Some strategists credit changes in positioning and hedging strategies, rather than investor complacency, for the dissonance.


Pelosi Vows 'Ironclad' Defense of Taiwan's Democracy, as China Plans Live-Fire Drills

House Speaker Nancy Pelosi vowed to preserve democracy in Taiwan in the face of growing threats from mainland China in a closely watched meeting on Wednesday with Taiwan's president.

Mrs. Pelosi (D., Calif.), the highest-ranking U.S. official to visit Taiwan in a quarter-century, told Taiwan President Tsai Ing-wen that the U.S. wouldn't abandon its commitment to Taiwan, framing her visit as part of a broader struggle over democracy's future.


Senate Plan Would Put Bitcoin, Ether Under Commodity Regulator's Watch

WASHINGTON-Leaders of a Senate committee are set to propose legislation that would assign oversight of the two largest cryptocurrencies, bitcoin and ether, to the federal agency that regulates milk futures and interest-rate swaps.

Senate Agriculture Committee Chairwoman Debbie Stabenow (D., Mich.) and top-ranking Republican John Boozman of Arkansas, are planning to introduce a bill Wednesday that would empower the Commodity Futures Trading Commission to regulate spot markets for digital commodities, a newly created asset class. Currently the CFTC has authority to police derivatives, such as futures and swaps, rather than underlying commodities.


Ukraine Braces for Brutal Fight for Occupied Southern Regions as Referendum Looms

KYSELIVKA, Ukraine-When Ukrainian troops deployed in Kyselivka on the Kherson front line in April, the village's empty homes provided some protection from relentless Russian shelling.

"Now, there aren't many places left to hide here anymore," said a soldier who goes by his call sign Kulak, pointing to a landscape of craters and twisted trees. "Most houses have burned down from incendiary shells, and the church is gone, too. It is never quiet down here."


China Rattles a Much Bigger Saber as It Prepares Live-Fire Drills Around Taiwan

HONG KONG-Beijing is preparing live-fire military exercises this week in areas encircling Taiwan, a significant step up from its responses to previous crises and one that underscores China's fast-growing combat capabilities.

China revealed the drills minutes after U.S. House Speaker Nancy Pelosiarrived in Taipei late Tuesday. They are to run from Thursday to Sunday in waters and airspace across six zones that collectively surround the democratically self-ruled island, which Beijing claims as its own.


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(END) Dow Jones Newswires

August 03, 2022 07:00 ET (11:00 GMT)

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