MARKET WRAPS
Watch For:
EU foreign trade; France new home sales; trading updates from Adyen, Gold Fields, Sasol
Opening Call:
Shares could be off to a weak start in Europe on Thursday amid concerns over further Fed tightening. In Asia, stock benchmarks were in the red; Treasury yields mostly gained; the dollar slightly strengthened; gold nudged lower, while oil inched higher.
Equities:
European stocks could start out on shaky ground on Thursday, following UK inflation data and after the Federal Reserve released minutes from its July policy meeting, which showed concerns about inflation revving back up.
Investors weigh the possibility of interest rates staying higher for longer after UK core CPI remained unchanged in July.
"While headline inflation numbers may look better, the resilience of core CPI means the Bank of England may have to work harder to fight inflation, risking a bigger UK economic downturn," IG said.
Minutes of the Fed's July 25-26 meeting said "most participants continue to see significant upside risks to inflation, which could require further tightening of monetary policy."
"The Fed wants to talk tough on inflation, but it's obvious they are done with rate hikes," Harris Financial Group said. "These minutes don't signal a pivot back to large rate hikes."
Fed funds futures traders priced in an 88.5% chance that the central bank will leave interest rates unchanged at a range of 5.25%-5.5% at its meeting on Sept. 20, according to the CME FedWatch Tool.
However, the chance of a 25-basis-point rate hike to a range of 5.5%- 5.75% at the subsequent meeting in early November went modestly higher after the release of the minutes.
Forex:
The dollar gained some ground in Asia amid higher Treasury yields, which boosted the allure of U.S. fixed-income assets and demand for the greenback.
The FOMC meeting's minutes didn't affirm that the Fed's hiking cycle ended in July, DBS Group Research said.
The Fed has kept the door open for the second rate increase which it penciled in June at the remaining three meetings of 2023, it added.
Meanwhile, Central and Eastern Europe currencies could devalue "at least 10%" against the dollar, Capital Economics said. It said CEE currencies are overvalued due to "exceptionally high inflation."
It added that over the past five years, CEE currencies are stronger against the greenback than the relationship between inflation differentials and nominal exchange rates of other major EM currencies would imply.
It expects global risk sentiment to "bring CEE currencies more or less back in line with levels implied by the change in relative prices--a fall of at least 10% against the greenback--over the next couple of quarters."
Bonds:
Treasury yields mostly rose, as data kept showing a resilient U.S. economy.
July housing starts and industrial production rose more than expected, while weekly jobless claims are expected to slow a little.
The rise in yields is making investors nervous, because past surges have at times proved destabilizing for markets.
With the 10-year yield is still well below the level of short-term interest rates set by the Fed, some analysts see ample room for it to keep climbing-a development that could lead to unexpected disruptions, as investors are forced to unwind wagers based on projections for lower yields.
When investors start demanding higher yields on longer-term bonds to compensate for the risk of inflation, that "is correlated with lower risk-asset prices," said Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management. "I think that's what markets are worried about right now."
Looking ahead, many investors say that the Kansas City Fed's annual symposium in Jackson Hole, Wyo., later this month could mark an important moment for the bond market, particularly since the central bank has said that the theme of the meeting will be "structural shifts in the global economy."
Energy:
Oil rebounded after falling earlier amid the dollar's strength, which makes U.S. dollar-denominated oil more expensive for holders of other currencies.
Oil is battling a strong dollar, which looks like it might not be done strengthening, Oanda said. Also, the U.S. manufacturing outlook remains downbeat despite Wednesday data that was boosted by rising auto production, it added, noting industrial production and rising capacity utilization reports released overnight.
Meanwhile, a string of disappointing China data and worries about the country's property sector have sparked concern about demand from the world's second-largest oil consumer.
"Despite analysts expecting supply to tighten in the second half of the year, recession fears and the sluggish economic recovery in China are currently dominating the mood in the oil market. Longer term, some of the key market factors affecting prices suggest a less rosy outlook for oil and retail investors seem to be responding with caution," said Spectrum Markets, a Frankfurt-based trading venue for securitized derivatives.
Metals:
Gold was slightly lower, but may be supported by a potential technical rebound after prices fell for an eight straight session on Wednesday, settling at their lowest levels since July 6, as higher Treasury yields and a firm U.S. dollar kept the pressure on the yellow metal.
The precious metal may also be underpinned by possible Chinese buying, some analysts said.
Top 10 traders in Shanghai have increased their net longs in gold to the highest levels since the summer of 2020, TD Securities said.
Rising crude-oil prices and stronger-than-expected U.S. economic growth stoked fears that inflation could re-accelerate, potentially forcing the Fed and other central banks to continue raising interest rates which could weigh on the prices of the yellow metal.
"In the commodity arena, gold has been drifting lower this month, stuck below a short-term downtrend line as the forceful rally in real yields and the dollar's revival have taken the shine out of the precious metal, " said XM.
"One could argue that gold being just 8.5% away from record highs despite the sharp spike in real yields is encouraging in itself, but equally, it's difficult to envision what will slingshot bullion back higher in the absence of a recession," it said.
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Copper prices were lower amid signs of stress in China's property sector.
New home prices in China's 70 major cities fell in July, shrugging off Beijing's attempt to reverse a prolonged real-estate slump, official data showed Wednesday.
Copper is widely used in the manufacturing sector and building construction.
"This is likely to keep pressure on property developers, including Country Garden Holdings, which faces a potential default after missing bond payments earlier this month," ANZ said.
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Iron-ore futures were higher in China trade, lifted by supply tightening and hopes for more property policy-easing.
However, analysts reckon prices may fall in the long run.
Consumption of iron ore may gradually decline with steel mills being cautious in purchasing raw materials amid Beijing's crude steel output control, Huatai Futures said.
TODAY'S TOP HEADLINES
Some Fed Officials Are Turning Cautious about Raising Rates Too High
Most Federal Reserve officials backed an increase in interest rates last month but some saw rising risks that they might raise rates too high, underscoring growing caution about further increases.
Minutes of the July policy meeting, released Wednesday, said some officials thought the risks of raising rates too much versus too little "had become more two-sided, and it was important that the committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening."
Bond Yield Hits Highest Since 2008, Adding Pressure to Borrowing Costs
The yield on the 10-year U.S. Treasury note hit a 15-year high, threatening steeper costs for many borrowers and raising concern on Wall Street about the potential fallout in the stock, bond and housing markets.
A key benchmark for interest rates across the economy, the 10-year yield settled at 4.258%, according to Tradeweb. That was up from 4.220% Tuesday and marked its highest close since June 2008, months before the collapse of Lehman Brothers and expansive Federal Reserve policy ushered in more than a decade of historically low bond yields.
Why U.S. stock-market investors need to keep an eye on a weak Japanese yen
Sleepy summer financial markets could get a rude awakening from Japan.
China's property-market woes are front and center among macroeconomic worries, but Japan remains a potential powder keg when it comes to volatility in global markets. Right now, attention should be paid to a weakening Japanese yen that might soon tempt the nation's authorities to step in to stop the slide, market watchers said.
Russia's War-Torn Economy Hits Its Speed Limit
The Russian central bank's jumbo interest-rate increase to halt a tumbling ruble this week points to a new reality for the Kremlin: Russia's economy has reached its speed limit.
The government has flooded the Russian economy with money to keep its troops in Ukraine supplied and insulate its businesses and citizens from the war. Thanks to the state's largess, demand in the economy is rising, helping it recover from last year's sanctions-induced recession. Supply-increasingly constrained by Russia's isolation and widespread labor shortages-isn't.
China Demands U.S. Lift Steel, Aluminum Tariffs After WTO Ruling
China's Commerce Ministry has demanded the U.S. immediately lift tariffs imposed on Chinese steel and aluminum products after the World Trade Organization ruled in favor of Washington against Beijing in the nations' tariff dispute.
A WTO dispute settlement panel said Wednesday that China acted "inconsistently" with the WTO obligations by imposing additional duties on some U.S. imports in response to U.S. tariffs on steel and aluminum.
Japan Exports Decline for First Time in Over Two Years
(MORE TO FOLLOW) Dow Jones Newswires
08-17-23 0016ET
