MARKET WRAPS

Watch For:

Manufacturing PMI data for eurozone, U.K., Germany, France, Italy; EU unemployment; U.K. nationwide house price index; unemployment data for Germany, Italy; trading updates from Diageo, HSBC, BP, Deutsche Post, Daimler Truck Holding, MFE-MediaForEurope, Weir Group, Fresnillo

Opening Call:

Shares may track lower in Europe on Tuesday as investors eye economic and corporate news. In Asia, stock benchmarks gained; Treasury yields were mixed; the dollar strengthened; while oil and gold futures declined.

Equities:

European stock futures are lower early Tuesday ahead of the EU's manufacturing PMI and unemployment data and as the earnings season continues.

A private gauge of China's factory activity tumbling into contraction in July may also weigh on sentiment.

"The market has fully embraced the soft landing scenario," said Bryant VanCronkhite, a senior portfolio manager at Allspring Global Investments.

A stretch of better-than-expected U.S. data on jobs and inflation has pushed traders to unwind some of their bets on a looming downturn. Some have ditched their gloomy forecasts on stocks and abandoned recession wagers, helping push swaths of the stock market higher alongside bond yields.

Still, some investors expressed caution about the big run-up in stocks this year. There is one big reason to be cautious on stocks right now, and it has nothing to do with corporate earnings or the economy, said David Sadkin, partner at Bel Air Investment Advisors.

Traders may also hold off on taking new positions until they see Friday's U.S. July jobs report, Oanda said.

"The key for the payroll report might be what is happening with wages, as it seems fears of an acceleration of inflation have been downsized," Oanda said.

On watch this week will be results from two of the biggest companies in the world, Apple and https://urldefense.com/v3/__http://Amazon.com__;!!F0Stn7g!Fawi0eN4uhW_HsGcMBz1kMpwJqIH76HkXZdIPCsY_w4dAJOeN7iMbDE-5HItK9WQyWQ4iXBOEApX_b4DbhNjTYnwPBorxkaNBK77qpdoL14$ on Thursday. Investors have piled into tech behemoths in a wager that they will benefit from a boom in artificial intelligence.

The Bank of England's meeting also takes place on Thursday.

The recent lower-than-expected U.K. inflation data for June makes a 25 basis point interest-rate rise more likely than a 50 basis-point increase, Rupert Thompson, chief economist at Kingswood, said.

"The markets will be focused on any clues as to how much further rates still have to rise," he said.

"Here they may be disappointed as the Bank may well just stick to the rather unhelpful mantra that further tightening will be required if there is evidence of more persistent inflation," he adds.

Forex:

The dollar advanced early Tuesday.

Market participants are looking ahead to tonight's U.S. ISM manufacturing PMI, said Philip Wee, senior forex strategist at DBS Group Research.

They're waiting to see if the prices paid and employment components will improve, Wee said.

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The most optimal outcome for the pound from this week's Bank of England meeting--where a rate increase is widely expected--would be forecasts of the U.K. avoiding a recession and a "more hawkish" outlook than the European Central Bank and Federal Reserve, Rabobank said.

Both the Fed and ECB hinted last week that rates could be near their peak.

"The most optimal outlook for sterling bulls from this week's BOE policy meeting would be a hawkish outlook combined with U.K. growth forecasts that avoid recession."

The market is unsure whether the BOE will opt for a 25 or 50-basis-point rate rise, though over-tightening would increase risks of recession, Rabobank said.

Bonds:

Treasury yields were mixed amid growing hopes the Fed stays put until it starts cutting rates next year.

On Monday, the Fed's quarterly senior loan officer opinion survey showed that banks tightened their lending standards and plan to keep tightening.

The Treasury Department indicated that it expects to borrow $1.007 trillion in the third quarter, or $274 billion more than it had estimated in May. The estimate is the largest ever for the July-September quarter, Treasury officials said.

The main focus this week is likely to be Friday's nonfarm payrolls report for July, which should contribute to the Fed's assessment of whether to continue tightening monetary policy.

Markets are pricing in an 80.5% 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 chances of a 25 basis point rate hike to a range of 5.50-5.75% at the subsequent meeting in November are priced at 29.3%.

The central bank is expected to take its fed funds rate target back down to around 5% or lower next year.

Energy:

Oil futures fell early Tuesday in a likely technical retreat, after ending July on a positive note as the U.S. crude benchmark posted its largest monthly rise since January 2022. Brent crude, the global benchmark, saw its largest monthly jump since May of last year.

"Exports from Saudi Arabia and Russia have been steadily falling over the past month, and the uncertain economic backdrop has fuelled expectations of further reductions in supply," ANZ analysts said.

"While the world continues to look to the U.S. to counter some of the output cuts by Russia and Saudi Arabia, rig activity suggests U.S. producers are in no hurry to fill the gap, clearing a path for steady undersupply over the near term," said Robbie Fraser, manager of global research and analytics at Schneider Electric.

"Additionally, while recession fears have hardly disappeared, most economist polls and measures of consumer confidence point to an improving situation, which generally triggers support for discretionary demand in categories like gasoline and jet fuel," he said.

Metals:

Gold prices slipped in Asia after gaining more than 2% in July, ending at the highest level since May and notching the best month of gains since March.

"Gold prices are attempting a bullish break out as optimism grows that the major central banks are all approaching the end of their tightening cycles," Oanda said.

"Gold's rally could extend if growth prospects turn sour," Oanda said.

"If Wall Street starts aggressively in rate cuts by the first quarter of 2024, gold could easily find a home above the $2000 level. It seems gold will need to wait for Apple's earnings and the nonfarm payroll report before it delivers its next big move."

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Macro-sensitive base metals prices, seesawing on hopes for Chinese stimulus, were giving up some of Monday's gains, with copper and aluminum lower.

While China's state planner Monday released a notice outlining measures to expand the country's consumption, initially buoying sentiment, "it is unlikely to stimulate consumption in the near term," Sucden Financial analyst Daria Efanova said.

"Weak consumer confidence remains a key driver in slower demand, and while supply conditions should improve, we do not expect this to drive base metals prices higher in a sustainable way."

Copper prices were also weighed by Tuesday morning's data showing a private gauge of China's factory activity declined into contraction in July.

However, losses in copper prices may be limited by supply-side risks, analysts said.

Codelco, the world's largest producer of the industrial metal, recently lowered its annual production guidance due to operational issues, ANZ Research analysts said.

They note that overall copper production in Chile fell 0.9% on year to 457.9 kilotons in June.

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Iron-ore futures rose in China trade after Beijing signaled more support for the property sector and steelmakers resumed production.

Overnight, China's State Council called for more support from local governments to ensure the property market's healthy development.

Many steel mills in the city of Tangshan, China's top steelmaking hub, have resumed production while port congestion has yet to ease, limiting supply and boosting iron ore prices, Huarong Rongda Futures analysts said.


TODAY'S TOP HEADLINES

China Caixin Manufacturing PMI Slips Into Contraction

A private gauge of China's factory activity tumbled into contraction in July, weighed down by slower output and weaker market demand.

The China Caixin manufacturing purchasing managers index fell to 49.2 in July from 50.5 in June, according to data released Tuesday by Caixin Media Co. and S&P; Global.


Earnings Season Threatens Lofty Stocks

U.S. stocks have stormed higher this year, but some investors say lackluster earnings projections threaten their ascent.

Stocks have rallied as the economy has proved more resilient than expected and investors bet the Federal Reserve could soon conclude its aggressive campaign of raising interest rates, which crushed stocks in 2022. Excitement about artificial-intelligence technology has also sparked a frenzy in markets, boosting megacap tech stocks such as Nvidia and Microsoft. The S&P; 500 is up nearly 20% this year, and the tech-heavy Nasdaq Composite has gained 37%.


Banks are making it tougher for consumers and companies to borrow money

The numbers: Major banks made it tougher for borrowers to qualify for a loan in the spring - and lending standards are likely to get even tighter by year end.

"Banks' lending standards have tightened since 2022 for all loan categories," the Federal Reserve's Senior Loan Officer Survey for the second quarter reported.


Goolsbee and Kashkari see higher odds of Fed curbing inflation without a recession

A pair of senior officials at the Federal Reserve say they are more hopeful the U.S. might avoid a recession even as the central bank raises interest rates to battle high inflation.

Austan Goolsbee, president of the Chicago Federal Reserve, said in an interview with Yahoo Finance on Monday that it would be a "historic triumph" for the central bank to achieve a so-called soft landing.


Russia Kills Six More Civilians as Ukrainians Struggle to Resume Routine

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08-01-23 0020ET