MARKET WRAPS

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EU Harmonised CPI, construction output; U.K. monthly retail sales figures; trading updates from Aegon, Koninklijke BAM Groep, Gold Fields, Adyen, Sasol

Opening Call:

Shares are seen headed to a weak start in Europe on Friday amid concerns over further Fed tightening. In Asia, stock benchmarks were lower; Treasury yields mostly fell; the dollar weakened; while oil and gold advanced.

Equities:

European stock futures are tracking lower early Friday as renewed investor concern about rate hikes gains a foothold.

On Thursday U.S. stock markets fell extending August declines spurred in part by higher treasury yields.

While second-quarter U.S. corporate earnings have largely beaten estimates, higher bond yields have undermined the value of mega-cap technology stocks in particular in recent weeks.

Rising yields tend to hurt stock prices by raising the borrowing costs of companies and making equity returns look less attractive.

Equity investors are "sharpening their pencils" to adjust models for the higher cost of capital as rates rise, said José Torres, senior economist at Interactive Brokers.

"The result isn't motivating much buying," Torres said.

"The stronger-than-expected economic data is certainly helping push yields higher, but there's a perfect storm with the Fitch downgrade, with the Bank of Japan's policy decisions changes, and with the bottoming and ticking back higher in inflation that we're seeing in the last inflation report," said John Luke Tyner, portfolio manager and fixed-income analyst at Aptus Capital Advisors.

"I think the likelihood of another hike in September is higher than what the market is currently reading," Tyner said.

"I'm sure that people want to hear what Chairman Powell is gonna say at Jackson Hole next week. They want to see more labor reports that are coming out the next month or two."

"It's really uncertain where terminal interest rates will land given the economy isn't giving us a decisive picture of being too strong or too weak. It's keeping the window open for more rate hikes potentially," said Mohannad Aama, a portfolio manager at Beam Capital Management.

Forex:

The dollar lost some ground in Asia as some Fed officials seem to have second thoughts about raising rates again and China tries to shore up the yuan.

The firmer CNY has aided other Asian currencies, Commerzbank analysts said.

There are reports that the Chinese authorities instructed state-owned banks to ramp up FX intervention to support the yuan, the analysts added.

China's central bank cut interest rates this week, in part to support the currency, in the wake of dismal economic data.

Also, the Fed minutes showed FOMC members were concerned about raising rates too much. Rising U.S. borrowing costs have been a key support for the dollar.

Bonds:

Treasury yields were broadly lower early Friday with yesterday's rise in long-dated yields being mostly attributed to higher real or inflation-adjusted rates that reflected the increasing cost of borrowing.

The rise in the 10-year Treasury yield over the past couple of weeks to over 4% "has been somewhat of a surprise to some market participants who've been positioned for lower interest rates on the 10-year Treasury, " said Yung-Yu Ma, chief investment officer for BMO Wealth Management in the U.S.

However, for income-focused bond investors, the rapid rise in long-term yields to prefinancial crisis levels has been a welcome sight.

"The recent rise in yields offers an opportunity to lock in attractive rates," said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.

Marcelli still expects that the Fed's July rate increase will be the last of the current cycle.

Fed funds futures traders were pricing in an 86.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool.

The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November was seen at 36.3%.

Energy:

Oil futures gained amid USD weakness.

The USD rally has stalled and oil looks like it may find support around the $80/bbl level, Oanda said.

U.S. earnings are also offering optimism that consumer sentiment remains strong and consumers are willing to spend and travel at year-end, Oanda added.

News flow this week has been "less encouraging [for oil] and renewed worries about the Chinese property sector, as well as China's economy more broadly, has poured some cold water on the economic growth optimism, " Tyler Richey, co-editor at Sevens Report Research said.

A moderate hawkish shift in Federal Reserve policy expectations has also "bolstered worries that tight policy will choke off growth and send the U.S. economy into a recession, a scenario that would be decidedly negative for oil and refined products from a demand standpoint," he added.

Metals:

Gold edged higher in Asia in a likely technical rebound.

The weakness of the greenback, which typically makes USD-denominated gold more attractive for holders of other currencies, may also be supporting the precious metal.

"Gold prices are trying to recover after some hawkish Fed minutes kickstarted a global bond market selloff. Bond yields are too high as more people become convinced inflation is not going away anytime soon," Oanda said.

When yields rise, the opportunity cost of holding low or zero-interest-bearing assets, including gold and silver, rises, said Fawad Razaqzada, market analyst at City Index and https://urldefense.com/v3/__http://FOREX.com__;!!F0Stn7g!HRvZiPhIQISGY312toLrqEMBBoBeBbmbKbpRUbM8VWH8wSvtQ3UTd5GNyMqxgtiS3QrgNJfxI_6_DSSKlxSH0ggTYuK9neg0aaWzqY9NEUo$ .

Despite strength in the U.S. Treasury yields and the recent rise in the dollar, "gold has held together fairly well," said Altavest's Armbruster. "This suggests to us that gold could rally should investor appetite for safe havens increase if risk assets see more substantial declines."

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Copper prices rose, recovering from this week's losses, as the market re-assesses the impact of China's property woes on demand.

Copper is broadly used in manufacturing and building construction.

"The prospect of additional stimulus measures amid low inventories continues to attract investor attention," ANZ analysts said.

Combined inventory in the Shanghai Futures Exchange and Chinese bonded warehouses were down 53% on year on Aug. 11.

The copper industry has been struggling to boost supply amid a hangover from subdued investment after the 2009 financial crisis, they added.

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Iron-ore futures were higher in early China trade lifted by the strong steel consumption data.

Chinese steel industrial data released Thursday showed the consumption of steel was stronger for the week ended August 17 compared with the week prior.

Iron ore demand was likely to remain resilient in the short term, Huatai Futures analysts said.


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08-18-23 0015ET