MARKET ENVELOPES

Shares:

European stocks fell on Thursday as political unrest in Italy weighed on market sentiment, while investors turned cautious ahead of the European Central Bank’s policy decision.

Prime Minister Mario Draghi resigned on Thursday, plunging the country into a period of uncertainty as it battles soaring inflation and an economic slowdown. Italian assets sold off on the news as investors worried that Draghi’s departure could hurt Italy’s chances of implementing economic reforms designed to improve efficiency and long-term growth.

“Draghi’s resignation means early elections in the fall in Italy, and political chaos at least until then,” said Swissquote analyst Ipek Ozkardeskaya. This will add a new layer of stress to the ECB, which is struggling to contain eurozone bond yield spreads, she said.

Actions to watch:

Morgan Stanley says Rio Tinto’s first-half capital returns may not be as significant as some believe.

“A combination of lower Ebitda in HY22, lower commodity prices and a deteriorating macro outlook should weigh on Rio Tinto’s capital return outlook in HY22,” MS said, forecasting a $3 dividend. $.20/share, a payout of 61%. That’s 11% below consensus, but he believes the dividend could be even lower if Rio Tinto budgets for a $100 per metric ton iron ore in the second half.

“A significant release of working capital or a significant shift in commodity price expectations in 2H22 would be required to warrant a higher payout and reach consensus estimates – both unlikely, in our view. ”

Economic overview:

Natixis Investment Managers said the only way to significantly curb inflation in the euro zone is to trigger a recession.

She considers that a soft landing does not really exist because it is very difficult for a central bank. The ECB has acknowledged it made a mistake, as has the Fed, and there is no alternative but to raise interest rates aggressively.

“It’s a new world compared to the world we’ve been living in since 2008.”

Natixis said that what matters is not the level of interest rates but the speed.

European Central Bank

The ECB is expected to provide details on a new anti-fragmentation tool, given the difficult macroeconomic backdrop, although it is likely to preserve flexibility on the conditions that justify its use, Goldman Sachs Asset Management said.

The ECB faces a difficult trade-off between weakening growth, rising inflation and potential further disruptions to Russian gas supplies, GS said, adding that the ECB must also manage stress risk in the sovereign bond markets.

“Whether the first rate hike in more than a decade is 0.25% or 0.5% is a tough decision, given the low starting point for policy and the likelihood that inflation will remain elevated in the coming months.”

—

The ECB has a history of predictability and so Canada Life Asset Management expects it to deliver an interest rate hike of 25 basis points while setting the stage for larger moves in the coming meetings.

“However, the risk of a 50 basis point hike is not negligible as inflation is at its highest since the start of the eurozone.”

The near parity level of EUR/USD is also fueling price increases via the import channel, Canada Life said. She expects the ECB to remain vague on the terms of its anti-fragmentation tool to ensure maximum optionality.

Deutsche Bank said the importance of the anti-fragmentation tool is highlighted with significant political unrest in Italy.

“The latest measures raise the possibility that Draghi could step down again after his bid last week was rejected by the president, which in turn opens up the possibility of a snap election.”

Read: Italian policy complicates ECB’s anti-fragmentation tool

US markets:

Equity futures fell as investors awaited another batch of earnings reports and the ECB’s monetary policy decision.

Before the opening bell, Tesla rose 1.5% after the company reported its first quarterly profit decline in more than a year. United Airlines, which has warned of the effects of rising fuel prices, fell 6.8% in premarket trading.

American Airlines, AT&T, Travelers and Blackstone are expected to file earnings before the market opens. Snap, PPG Industries and Boston Beer are expected after the close.

On the economic front, weekly unemployment insurance claims data is expected to show a slight drop in layoffs in the week ended July 16.

Forex:

The euro gained 0.3% ahead of an interest rate hike expected by the ECB and after gas pipeline operator Nord Stream 1 announced it was resuming flows.

However, the prospect of a snap election in Italy will add another “layer of stress” for the ECB, which is already struggling to contain the divergence between eurozone bond yields, Swissquote Bank said.

—

The dollar could rally on Thursday as the euro-dollar exchange rate could fall after the European Central Bank’s policy decision, ING said.

The ECB is likely to hike interest rates by 25 basis points as markets price in a 38 basis point tightening after reports of a possible 50 basis point move, ING said.

“As we expect the post-ECB reaction to trigger some EUR/USD weakness and given the other downside risks for the pair [Italian government collapse and curtailed Russian gas supply]we see room for a rebound in the dollar today.”

Meanwhile, the drivers of dollar weakness – reduced safe-haven flows and reduced US rate advantage – are beginning to fade, ING added.

Obligations :

The yield spread between Italy’s BTP and Germany’s 10-year Bund widened sharply at the start of European trading with Italy’s political crisis front and center, and SEB said the risks of a snap election were high.

“The risks are high that there will be a snap election, most likely in September, but the timing is problematic as the budget and disbursement of the EU support package are scheduled for autumn,” said the SEB. , adding that the importance of the ECB’s anti-fragmentation measures is increasing.

A snap election could push the 10-year Italian BTP-German Bund yield spread to 250-275 basis points, with the start of the Italian bond curve even more vulnerable to credit risk pricing, market strategists said. Citi rate.

“This [Italian backdrop] raises the bar for the ECB to unveil the anti-fragmentation tool today, which, however, is unlikely to address such idiosyncratic risks and only targets spread volatility, not spread levels. ”

Read: Draghi leaves reforms unfinished, Italian debt sustainability questionable

Read: Draghi’s departure from the political scene will be negative for Italy and the EU

Energy:

Oil extended losses in Europe after latest EIA data showed disappointing signs of U.S. gasoline demand

Gasoline production comes despite the United States being in driving season, which should be a seasonally strong time for gasoline use, but high pump prices appear to be dampening demand.

Other news:

Russian natural gas began flowing again at a reduced volume through a critical pipeline to Europe on Thursday, the pipeline operator said, buying governments time to decouple from Kremlin exports amid this that they expect to be an increasingly unreliable energy supply. Moscow is heading into winter.

Learn more here.

Metals:

Copper prices fell on concerns that weak US data pointed to a recession.

Housing starts in June fell to their lowest level since September 2021. High inflation is weighing on demand for new homes in the United States, which will also weaken demand for the metals involved in these construction projects.

Widespread concerns about global growth and China’s continued lockdowns have undermined copper prices, which are currently near their lowest level since November 2020.

“Falling risk appetite, USD strength, China lockdowns, weaker growth outlook and recession fears led prices to fall sharply from their March highs” , said Standard Chartered analysts.

DOW JONES NEWSPLUS

EMEA TITLES

Mario Draghi resigns as Italian PM as support plummets

Italian Prime Minister Mario Draghi resigned on Thursday, plunging the country into a period of uncertainty as it battles soaring inflation and an economic slowdown.

Mr Draghi’s announcement came a day after three major parties in his national unity coalition government failed to back the prime minister in a confidence vote in the Senate. Although Mr Draghi won the vote, the massive abstentions made it clear that he could no longer sustain his disparate coalition.

Russia resumes Nord Stream natural gas supply to Europe

BERLIN-Russian natural gas began flowing again at a reduced volume via a critical pipeline to Europe on Thursday, according to the pipeline operator, giving governments time to disassociate themselves from Kremlin exports amid what they expect to be an increasingly unreliable energy supply from Moscow before winter.

The Nord Stream gas pipeline linking Russia and Germany under the Baltic Sea resumed operations after its annual maintenance, ending 10 days of tense speculation over whether Vladimir Putin’s regime would cut off the flow of gas to the in retaliation for Western sanctions after its invasion of Ukraine.

Putin’s Gas Game: Playing With Europe’s Supply And Making Its Leaders Squirm

While Vladimir Putin is waging a conventional war in Ukraine, he has opened a second front in Europe which is reaching its climax: the battle for natural gas.

Gas began flowing through the main pipeline to Europe on Thursday at a reduced volume. European countries have been nervously waiting to see if the Russian president will reopen the taps after a 10-day period in which the pipeline was shut down for routine maintenance, and expect increasingly unreliable supplies from Moscow. as winter approaches.

SAP lowers profit outlook as Russia pullout hits revenue

(MORE TO BE FOLLOWED) Dow Jones Newswires

July 21, 2022 05:27 ET (09:27 GMT)

Copyright (c) 2022 Dow Jones & Company, Inc.