MARKET WRAPS

Stocks:

European stocks were flat on Friday ahead of the closely watched July jobs report, which will give investors their latest view of the health of the U.S. economy as tighter monetary policy from the Fed risks causing a slowdown.

The jobs report, which the U.S. Department of Labor is set to publish Friday at 14:30 p.m. GMT, is likely to show that jobs growth decelerated last month, reflecting the impact of inflation, higher interest rates, and a slowing economy.

Economists expect that the U.S. added 258,000 jobs last month, with the employment rate steady at 3.6%.

Earnings season remains in sharp focus. Deutsche Post climbed after the German freight-and-logistics group posted increased earnings for the second quarter, beating expectations, and confirmed its earnings target for the year. German insurer Allianz lost ground on a slump in second-quarter net profit as market turbulence hit its asset-management activities.

Stocks to Watch:

Luxury-goods players can look forward to improvements in China and peak tourist season in Europe, though macroeconomic pressures may offset these boons, Equita Sim said. Second-quarter results were encouraging for the sector even in the face of lockdowns in China, the investment bank said, noting strong demand in other markets.

With China improving from June onward, the third quarter looks to be strong too, with European tourism seasonality also helping, Equita Sim said. However, the worsening macro situation in Europe and the U.S. leave visibility low in those markets in 2H and into next year, it warned.

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BASF's non-European operations will become increasingly important in the medium term as the German chemicals giant faces a cracking cost disadvantage in Europe and is exposed to the risk of production outages due to natural gas supply, Jefferies said, cutting the company's target price to EUR47 from EUR60.

Naphtha-based chemical cracking--a chemical process to break down complex organic molecules into simpler compounds--in Europe is now more expensive than Chinese coal-based cracking, contributing to a deterioration of the company's position on the global cracking cost curve, the bank said.

Economic Insight:

Eurozone economic growth was surprisingly strong in the first half of 2022, coming in at 1.2%, which is around 2% stronger than the U.S. economy, J. Safra Sarasin said. In the third quarter, some southern European countries will benefit from the revival of tourism, but the overall trend is clearly pointing down, the asset management firm said.

"A recession in the winter half looks increasingly likely," according to J. Safra Sarasin. Germany, the eurozone's largest economy, will be particularly hard-hit and might be in a recession already, it said.

U.S. Markets:

U.S. stock futures wavered as investor attention is focused on the July jobs report.

"Welcome to another payrolls Friday which after a week of better U.S. data on balance, probably isn't set up with the market as worried as it could have been," said Jim Reid, a strategist at Deutsche Bank.

"It's fair to say the market is probably going into today's print less worried about it than it was at the start of the week."

Nevertheless, the health of the economy is a crucial indicator for markets at the moment amid expectations that the Fed will continue to tighten monetary policy in a bid to tame red-hot inflation, which is at its highest in four decades.

The Fed has already raised rates four times this year, including two mega-size, 75 basis-point rate increases in June and July--the biggest since 1994--and is expected to keep raising rates this year before cooling off in 2023.

The risk is that denting economic demand, while it should bring inflation under control, could cause a recession. Signs that the economy is weakening, such as a deterioration of the labor market, could stem the pace of the Fed's tightening.

DraftKings is due to report quarterly earnings ahead of the market open.

Forex:

The DXY dollar index was steady ahead of the much-awaited employment report. The jobs report could fall short of expectations for employment growth of 250,000 in July, but this is unlikely to have much impact on the dollar, ING said.

"We doubt a softish headline jobs number will do too much damage to the dollar, given that average earnings should stay firm and next week should see another near 9% year-on-year U.S. consumer price index print, " the Dutch bank said.

It seems too early to conclude the Fed's battle against inflation is over, ING said.

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Sterling should weaken further against the dollar as the Bank of England's latest policy decision has encouraged markets to price in more interest-rate cuts for next year and beyond, MUFG Bank said.

The BOE on Thursday lifted its key rate by 50 basis points to 1.75% but it forecast a recession from the fourth quarter and expects inflation to undershoot its target by a larger amount in three years' time.

"It sends a strong dovish signal that lower rates will be needed once upside inflation risks have passed in the near-term," MUFG said, expecting GBP/USD to fall to 1.1790 by the end of the third quarter.

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The Ukraine war and its impact on the eurozone's terms of trade has damaged the euro's equilibrium fair value, ING said.

"Despite the recent weakness in EUR/USD spot, the drop in its BEER [behavioural equilibrium exchange range] fair value caused by terms of trade effects was so significant that we estimate the pair is still around 5% overvalued compared to its medium-term equilibrium level," the Dutch bank said.

Given the recent reduction in Russian gas supplies to Europe and concerning European growth prospects this winter, ING cuts its year-end forecast for EUR/USD to 1.02 from 1.08 previously.

Bonds:

German 10-year Bund yields edged slightly higher after falling on Thursday alongside U.K. gilt yields on the BOE's pessimism about the economic outlook even as it raised interest rates.

Thursday's fall in government-bond yields helped lift equities, Deutsche Bank analysts said. As yields edge back up, equities traded lower on Friday.

Energy:

Oil prices moved higher in early trade. "The focus is squarely on the U.S. nonfarm payrolls," SPI Asset Management said. The consensus estimates a softening of the labor market in July, SPI said, noting that crude prices are down nearly 10% this week.

"While lower commodity prices suggest supply-side inflationary pressures are receding, central banks are increasingly committed to procyclical monetary policy. However, U.S. rates pricing for 2023 implies that a growth slowdown will drive rate cuts, in contrast to hawkish Fedspeak this week," SPI said.

Metals:

Gold wavered after gaining on safe-haven demand in early Asian trade, driven by global recession risks, analysts said. Central banks worldwide are acknowledging recession risks, Oanda said. The Bank of England had a rather gloomy outlook and the Czech central bank surprised markets by halting its rate-increase cycle, it said.

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Industrial metals prices were up. "Yesterday's data showed that U.S. initial and continuing jobless claims continued to track higher but are still low and consistent with a tight labor market," the Commonwealth Bank of Australia said.

"The labor market is a lagging indicator of the economy," the CBA said. "We expect the labor market to remain tight for several more months at least."

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

Europe's Green Vision Finds Latest Foe in Dutch Farmers

Trienke Elshof's family has milked cows in the northern Netherlands for more than three decades, but a policy recently proposed by the Dutch government to slash agricultural greenhouse-gas emissions threatens to shut their dairy farm.

Dairy cows are as much a hallmark of the rural Dutch landscape as windmills and canals. In cities, milk is routinely the beverage at business lunches, and cheese shops abound.

   
 
 

Deutsche Post Backs 2022 View After Second-Quarter Earnings Rise

Deutsche Post AG said earnings increased in the second quarter, beating expectations, and confirmed its earnings target for the year.

The German freight-and-logistics group said Friday that quarterly net profit rose to 1.46 billion euros ($1.50 billion) from EUR1.29 billion a year earlier. Analysts had expected EUR1.23 billion, according to consensus estimates provided by the company.

   
 
 

Allianz Net Profit Slumped as Market Turbulence Hits Asset Management

Allianz SE said Friday that second-quarter net profit tumbled but operating profit rose, confirming full-year guidance despite its asset-management business struggling amid turbulent markets.

The German insurer and asset manager said net income in the three months to the end of June was 1.71 billion euros ($1.75 billion), down from EUR2.23 billion a year earlier.

   
 
 

London Stock Exchange Group Pretax Profit Rose, Sets Out GBP750 Mln Buyback

London Stock Exchange Group PLC reported on Friday a significant rise in pretax profit for the first half of 2022 and said it is launching a share buyback program with an aggregate value of up to 750 million pounds ($911.9 million).

The stock-exchange and financial-information company posted a pretax profit of GBP803 million compared with GBP463 million for the same period a year earlier.

   
 
 

WPP Lifts 2022 Organic Growth Guidance

WPP PLC said Friday that first-half pretax profit rose on broad growth and that it has raised its organic growth guidance for the full year.

The London-based advertising group said pretax profit was 418.6 million pounds ($509 million) compared with GBP394.4 million a year earlier.

   
 
 

Footfall at UK Stores Fell on Record High Temperatures, Inflation

Footfall at British retail stores declined in July when compared with prepandemic levels, according to the latest report by the British Retail Consortium and Sensormatic Solutions.

"Following four months of steady progress, U.K. footfall stalled in July as record temperatures and the rising cost-of-living deterred people from visiting local shops," BRC Chief Executive Helen Dickinson said.

   
 
 
   
 
 

GLOBAL NEWS

U.S. to Report on July Employment as Inflation and Fed Rate Hikes Hit Economy

The U.S. labor market likely cooled again in July, economists estimate, as the economy faltered under the weight of high inflation and Federal Reserve interest-rate increases to cool demand.

Employers are estimated to have created 258,000 jobs in July, with the unemployment rate staying steady at 3.6%, according to economists surveyed by The Wall Street Journal. That would mark a significant slowing of payroll growth in the first half of the year that was faster than during any other post-World War II period when the economy began contracting.

   
 
 

Stocks' Summer Rally Fueled by Drop in Bond Yields

A sharp decline in longer-term bond yields has powered a rebound in stocks, as slowing growth gives investors greater confidence that the postpandemic economy won't be defined by significantly higher interest rates than the one that preceded it.

The yield on the 10-year U.S. Treasury note, which sets a floor on mortgage rates and myriad other borrowing costs, settled June 14 at 3.482%, the highest level since 2011 and up from 1.496% at the end of last year, according to Tradeweb. July, though, marked its biggest one-month decline since March 2020 and it settled at 2.674% Thursday.

   
 
 

Why Crypto's Market Cap Never Booms, or Busts, as Much as You Think

Coverage of the manic booms and busts of cryptocurrency typically cite a popular statistic: market capitalization.

Familiar to stock investors, market capitalization is simply the supply of an asset multiplied by its price. But in the Wild West of crypto, neither the supply nor the price are always as they seem.

   
 
 

Global Food Prices Fell Sharply in July, Led by Vegetable Oil, Grains

Global prices for food fell sharply in July, as prices of vegetable oil and grains eased, the Food and Agriculture Organization of the United Nations said Friday.

The FAO's food-price index, a closely watched barometer of global food prices, averaged 140.9 points in July, down 8.6% from June. The July decline was the steepest monthly fall in the value of the index since October 2008, although it still remained 13% higher than in July 2021.

   
 
 

India's Central Bank Raises Rate to Rein in Inflation

India's central bank raised its policy rate in a bid to tame elevated inflation.

Reserve Bank of India Gov. Shaktikanta Das said Friday that the monetary-policy committee decided to increase its policy repo rate by 50 basis points to 5.40%.

   
 
 

RBA Cuts GDP, Unemployment Forecasts and Ramps Up Inflation Expectations

SYDNEY-The Reserve Bank of Australia has lowered its 2022 unemployment forecast, highlighting the continued momentum of the resource-rich economy despite rapidly rising interest rates and a jump in costs for households and businesses.

With the unemployment rate already at a 48-year low of 3.5%, the RBA now expects the figure to fall to 3.25% by the end of this year. In May, the central bank had forecast that unemployment would only fall to 3.75% this year.

   
 
 

Russia Is Open to Talks on Brittney Griner Prisoner Swap, Kremlin Official Says

A senior Kremlin official said Moscow was ready to discuss a prisoner swap with Washington that people familiar with the matter say could see U.S. women's basketball star Brittney Griner and former Marine Paul Whelan traded for a Russian arms dealer imprisoned in the U.S.

The comments from Russian Foreign Minister Sergei Lavrov, in a news conference in Cambodia, came a day after a Russian court sentenced Ms. Griner to nine years in prison following her guilty plea and conviction on charges she brought a marijuana product into the country. The U.S. maintains Ms. Griner has been wrongfully detained.

   
 
 

China Boasts of Ability to Blockade Taiwan as Military Exercises Continue

China touted its military exercises around Taiwan as proof of its ability to blockade the self-ruled island in the event of a war, as the operations in response to a visit by U.S. House Speaker Nancy Pelosi entered a second day.

Chinese warplanes and warships carried out maneuvers off Taiwan's coast on Friday morning, Taiwan's Ministry of National Defense said. During the operation, China's military crossed the median line in the Taiwan Strait, a notional boundary that Taipei says demarcates areas of de facto control, the ministry said.

   
 
 

Fugitive Chinese Businessman Convicted of Visa Fraud in U.S.

A Florida jury on Thursday convicted a fugitive Chinese businessman on two counts of fraud related to obtaining visas that he used to enter the U.S., marking the downfall of a tycoon linked to both Shanghai financial shenanigans and Hollywood moviemaking.

Shi Jianxiang had been charged last year in U.S. District Court in the Southern District of Florida with "fraud and misuse of visas, permits, and other documents" related to entry to the U.S. Prosecutors say he used a passport in another name to enter the U.S. at a time he was considered a fugitive from China.

   
 
 

Pelosi Says U.S. Won't Allow China to Isolate Taiwan

TOKYO-House Speaker Nancy Pelosi said Friday that the U.S. would continue engaging with Taiwan despite criticism from China, as Beijing encircled the island with rocket and ballistic-missile fire following her visit there.

"We will not allow them to isolate Taiwan," Mrs. Pelosi said of Beijing.

   
 
 

Write to nihad.ahmed@wsj.com

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This article is a text version of a Wall Street Journal newsletter published earlier today.

 

(END) Dow Jones Newswires

August 05, 2022 07:14 ET (11:14 GMT)

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