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The procession of interest rate hikes continued overnight as the RBA raised rates to 1.35% as expected, the highest level since May 2019. Asian markets continued their recovery after reports that President Biden was looking to roll back some China sanctions in a bid to both help tame inflation and also rebuild US-China ties. Janet Yellen and the Chinese vice premier also held talks, which may indicate some further easing of tensions may occur. Stock markets finished in positive fashion in Asia, with gains for the Nikkei, ASX 200 and CSI 300, and futures in both Europe and the US point to a higher open.

 

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It was another tough session for Asian markets, which matched the gloomy tone from Tuesday's session with fresh losses. Fears of a recession meant that chip makers, sensitive to global growth, led the falls, while miners and oil names also struggled. Meanwhile the dollar clung to its twenty-year high as investors sought out its safe haven. In the UK we can look forward to another day of political turmoil, as Boris Johnson faces the Commons for Prime Minister's Questions, just a day after a political crisis erupted thanks to key ministerial resignations. The day's news culminates in the release of Fed minutes, covering their latest interest rate hike. 

 

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While the Fed minutes last night stressed that more rate hikes would be needed, signs of weakness in commodity prices have given markets hope that perhaps the worst of the inflation surge is now behind us. Markets can, perhaps, cope with rate rises as long as the outlook further down the road is looking brighter. Asian indices made headway, taking their cue from the recovery in the US yesterday after a shaky couple of days. In the UK the political drama drags on, with no sign that the Prime Minister intends to resign yet even as resignations continue to flow from his cabinet and the wider government payroll. Investors now begin to turn their attention towards Friday's payroll figures, the main event of the week. 

 

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The gains in stocks have slowed overnight as attention turns to the next non-farm payrolls report this afternoon. US jobs growth has been one of the key pillars of the Fed's outlook, and its strength has supported the push for higher rates. Investors will therefore watch today's report with care to see if that confidence in the economy remains justified. The Fed thinks a 'soft landing' (i.e. avoiding a recession) remains the most likely outcome, a view echoed yesterday by comments from Fed members Waller and Bullard (although the FOMC had been fairly confident about transitory inflation too). 

Asian markets were muted overnight, although the MSCI Asia Pacific ex Japan index rose 0.3%. In Japan the yen rose and stocks saw some selling on news of an attempt on former prime minister Shinzo Abe's life at an election rally. US and European futures are under some pressure after yesterday's solid gains, due to pre-Non-Farm payroll nerves. 

 

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Worries about a fresh wave of lockdowns to combat a new Covid subvariant sent markets across Asia falling. The Hang Seng was down 3%, and the CSI 300 and Australia ASX 200 were under similar pressure. A weaker yen helped support the Nikkei, which bucked the trend with a 1% rise. European futures are sharply weaker as investors contemplate a future without Russian gas supplies. The Nord Stream pipeline is due to be shut for ten days for annual maintenance, but Europeans are increasingly worried that the Russians will keep it shut in order to put pressure on governments over sanctions relating to the war in Ukraine. This will disrupt attempts to build up winter storage of gas and intensify the problems with European energy markets. 

 

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Asian indices were under pressure again overnight, mirroring the losses seen across most US and European markets yesterday. After the risk-on move last week, which seemed to promise a further set of gains, sentiment may well have turned again, as the concerns about rate increases and a potential recession (particularly in Europe, given its high energy prices) combined with expectations of further lockdowns in China as Covid cases edge higher there. The dollar is in high demand, and EUR/USD is a whisker away from parity, another sign of how gloomy investors think the outlook for Europe is. 

 

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Asian markets reversed some of their losses overnight, rebounding ahead of a US inflation reading that should continue to confirm the strength of price increases. The South Korean and New Zealand central banks both raised rates by 50 basis points, and the Bank of Canada is expected to raise rates to at least the 2% threshold, a level not seen since 2008. Sentiment remains fragile given that today's CPI figure in the US is then followed by the start of earnings season, as the big American banks report performance for the second quarter. Should performance have been stronger then equities might find the scope to regain some lost ground. 

 

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Asian markets outside Japan once again came under selling pressure following yesterday's US CPI figure. The 9.1% reading for June was the highest in forty years, and the breadth of price increases showed that inflation is still widespread across the US economy. The dollar was given a fresh boost as expectations around the next Fed hike began to move towards a remarkable 100 bps. That this could be a possibility was underlined by the Bank of Canada's decision to do just that. European and US markets go into today's session under pressure again, as inflation and recession fears come to the fore. The start of US earnings season does perhaps offer some hope of a recovery, and investors will closely watch JPMorgan and others over the next two days for signs expectations going into reporting season were too negative. 

 

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Stocks in Asia were mixed as investors reacted to China's GDP numbers. Q2 growth was just 0.4% compared to last year, and shrank 2.4% from the last quarter. On Wall Street yesterday earnings season took over from inflation as the main story, but there was little good news, with tough figures from both JPMorgan and Morgan Stanley and warnings about the risk to the economy in coming months. US stocks rallied off their lows again however, which, given the news we have had this week, might suggest another attempt at a bounce is in the making. Earnings season continues today with Wells Fargo, Citigroup and others, along with data on US retail sales and the Michigan July confidence reading.

 

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Indices across Asia marched higher at the start of a new week, taking their cue from the rebounds in the US last week that came despite a surge in CPI and a somewhat less-than-stellar beginning to the latest reporting season. Japan was closed for a holiday, but the Hang Seng rose 2.2%, the ASX 200 0.95% and the CSI 300 1.4%. Even the announcement of more Covid testing in Shanghai was unable to dent the more positive mood. Futures point towards a stronger start for Europe and the US today as well, building on last week's gains.

While it is a quiet start to the week, the ECB's expected 25bps rate hike on Thursday and concerns that the Nord Stream 1 pipeline will not reopen after annual maintenance will mean that European indices face a potentially volatile week. In addition, the political crisis in Italy will keep markets on edge. Meanwhile earnings season in the US goes on, and IBM, Bank of America and Goldman Sachs are among the key firms reporting today. 

 

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Markets reversed some of their recent gains yesterday, dropping back after starting the week with a move higher. Impending central bank meetings, particularly in the eurozone, mean that the focus on monetary policy and inflation will not go away entirely. Tech stocks came under pressure following news that Apple plans to slow hiring and spending growth next year, and the likes of Alibaba and Samsung led the way lower in the region. The UK unemployment rate for May held at 3.8%, but real wage growth continued to fall thanks to inflation. Netflix becomes the first of the FANG stocks to report, and investors are looking to see if subscriber numbers can recover from Q1's fall.  

 

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European equity markets  looking to open in negative territory this morning. USD looking weaker and commodities flat. Crypto making gains.

Client sentiment: IG clients overall long equity markets, commodities and crypto with short positions versus the USD:

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Earnings season so far is providing the kind of good news stocks have been looking for, and also the welcome distraction from the growth and inflation concerns that have been so intractable over the past few months. US markets soared yesterday as more companies beat expectations, and even the loss of nearly a million subscribers for Netflix was unable to dent the mood, given that this was not as bad as the company had forecast, as well as the fact that it expected a return to growth in this quarter. Overall, this still looks like a rally in oversold risk assets, but for now the buyers appear to be in charge. Whether this can be sustained through tomorrow's ECB rate increase and on towards next week's Fed meeting remains to be seen. This morning has seen UK inflation increase again, rising to 9.4%, driven by higher energy and food prices, and the Bank of England may now have to raise rates by 50bps at its next meeting.

 

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The global equity rally looks to continue today as earnings improve and Russian gas starts to flow. While Japan managed to keep rates steady overnight, the ECB looks set to belatedly implement a rate hike of at least 25 basis points. The week has thus far been dominated by a more optimistic shift in sentiment that has also brought dollar declines, with the strong European open expected to maintain that positive sentiment. Also keep an eye out for US unemployment claims and earnings from Twitter and Snap.

 

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Stocks around the world have enjoyed a good two weeks, staging a rebound from recent lows. Even the decision by the ECB to hike by 50bps rather than 25bps did not provide too much of a shock, although concerns about the implementation of its new Transmission Protection Instrument meant that the euro failed to make any headway against the dollar. Earnings season has also provided a welcome distraction from growth and inflation fears, and this should continue, but as this week heads to its close thoughts will inevitably turn to the Fed decision next week. Today sees the release of a wave of flash PMIs for July, while the flow of big-ticket earnings cools somewhat ahead of next week's big tech names like Apple and Amazon.

 

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Coming off a week that was dominated by a surprise 50-basis point ECB rate hike, all eyes turn to the Federal Reserve in the days ahead as we seek to ascertain whether oversized rate hikes are now the norm in the face of elevated inflation. Today provides a slow start to the week from an earnings and economic perspective, with German Ifo Business Climate data and figures from Ryanair providing the main focus for traders. However, with a week jam-packed full of economic and corporate releases, this represents the calm before the storm.

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Markets throughout mainland Europe and the US have been largely consolidating overnight, with the FTSE 100 expected to outperform at the open. Relief that Russia had turned the Nord Stream 1 pipeline once again failed to last, with the decreased flow rate meaning that Germany now only receives roughly 20% of the gas seen pre-crisis. Yesterday's Ifo survey brought expectations of a swift recession in Germany, and another decline in gas imports will hasten that process. All eyes on the Fed ahead of tomorrows rate decision, with the dollar grinding lower despite expectations of a 75-100bp hike. Conversely, minutes from the BoJ overnight saw members agree that they will add further stimulus if necessary. Despite major devaluation of the Yen, these minutes showed little sign of the bank seeking to change their rhetoric in a bid to influence FX levels.

 

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US markets took a hit over the course of yesterday’s session, with the Nasdaq hit hard amid a 1.87% decline. Nonetheless, we have seen a relatively positive Asian session help elevate sentiment as we head into the European open, with both the FTSE 100 and DAX expected to move higher on the bell. That is despite the latest Gfk Consumer climate survey out of Germany (-30.6 from -27.7), which furthered the worrying picture highlighted in Monday’s Ifo release. Fears over the implications of ever tightening gas supplies from Russia remain prominent, but today see the focus shift on to the Federal Reserve. The Fed look nailed on to raise rates, with markets pricing in a likely 75 basis point move thanks to 40-year highs for CPI inflation. However, with the BoC opting to enact a whopping 100-basis points move, and the ECB also hiking by 25bp above expectations, there is also an outside chance the Fed opts to raise by 100bp today.

 

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European markets are expected to open in the green, although the dramatic gains seen across in the US look unlikely to be replicated closer to home. Yesterday's FOMC meeting brought a 75bp rate hike as expected, but it was the commentary that really provided a boost for markets. Powell's insistence that each meeting will now be data dependent, and his acknowledgment that recent hikes will negatively impact the economy do provide some hope that we will soon see the Fed slow their intervention. Data-wise, Australian retail sales disappointed this morning, with the slowest rate of sales growth since January (0.2%). Looking ahead, keep an eye out for US GDP and unemployment claims data, while earnings come from the likes of Amazon.com, Pfizer, Intel, and Apple.

 

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Asian markets have managed to regain lost ground towards the end of the session today, with a disappointing Caixin manufacturing PMI reading (50.4) initially denting confidence in the region. That private Caixin figure continued the weakness evident in both Chinese manufacturing and services PMI surveys released yesterday, with manufacturing unexpectedly falling back into contraction (49) in July. That provides a warning sign for data due out over the course of the week. A busy week ahead sees the RBA and BoE rate decisions, culminating in the US jobs report. Meanwhile, another busy week of earnings throughout Europe and the US brings grounds for further outperformance given the positive trend thus far (78% of S&P 500 beat on earnings).

 

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