European Midday Briefing : China Data Drags on Stocks as Fed Minutes Eyed

MARKET WRAPS

Stocks:

European stocks traded lower on Wednesday, as weaker-than-expected Services PMI data from China added to concerns about the prospects for global growth.

Read China's Services Sector Activity Growth Cooled in June

"China still plays a really critical role in terms of growth, so any disappointment has implications globally," PineBridge Investments said. "It's contributing to the loss of momentum and growth in Europe as well."

Investors also await the release of Federal Reserve minutes to its June meeting, which could point to the prospect of forthcoming increases in interest rates.

"The minutes may indicate how high the bar is for incoming data to prevent the Fed from hiking at its next meeting on 26 July," UniCredit Research said.

Stocks to Watch

BMW's second-quarter results might precipitate consensus upgrades, Deutsche Bank said, seeing the company's 2023 auto margin at 10.1%, slightly above the top-end of BMW's guided range of 8% to 10%. Read more .

Mercedes-Benz should post second-quarter results with strong pricing, sales volumes and product mix, though the margin should slip a bit from a high-performance first-quarter, Deutsche Bank said. Read more.

Renault has a stronger shield against consumers' diminishing discretionary spending than its rivals, Berenberg said, adding that Renault is more exposed to the spending trend than premium auto companies with a niche market such as BMW or Mercedes-Benz. Read more.

Investors may more fully appreciate Rio Tinto's copper business when the mining giant opens its Oyu Tolgoi site to analysts this month, Morgan Stanley said, adding that Rio Tinto's copper production volumes are already set to grow by 10% over the next five years. Read more.

U.S. Markets:

Stock futures were lower with treasury bonds broadly stable, after the China data and ahead of the Fed minutes.

Global investors were moving away from risky assets like stocks and into safer assets following the China data, Interactive Investor said.

Stocks to Watch

https://urldefense.com/v3/__http://Amazon.com__;!!F0Stn7g!FXMMIoSWWZP7KKZ6PGueCDtTzllayhRQTmUC_NUy29zGZuvMxAnHFwMtfHwm9-0wt-CcIA7tCL4bJy5VXwNJ08mNDNtIHzvN-0YgWpGGNKc$ was down 0.4% and Microsoft fell 0.6% following a report from The Wall Street Journal that said the U.S. was preparing to restrict Chinese companies' access to U.S. cloud-computing services. Read more.

Netflix gained 1.3% after it was upgraded to neutral from sell by Goldman Sachs, which also boosted the stock's price target to $400 from $230, the Fly reported.

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Forex:

The euro fell, turning slightly lower on the day after the eurozone services purchasing managers' index for June was revised down to a five-month low of 52.0.

This caused the composite index of services and manufacturing to drop into contractionary territory at 49.9.

"The eurozone economy ground to a halt at the end of the second quarter, ending a robust sequence of services-led growth seen since the beginning of the year," the compilers of the report said. The survey also showed easing pricing pressures.

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The dollar is unlikely to see any substantial moves until key U.S. data later this week, including ADP jobs data and ISM services figures on Thursday, then monthly nonfarm payrolls on Friday, ING said.

Fed minutes to the June meeting are unlikely to alter current interest-rate expectations, ING added.

"Overall, the dot plot projections and the post-meeting Fed communication suggest that markets may not find many hints to recalibrate their tightening expectations lower today," it said, adding that a trigger for this would need to come from weak U.S. data.

Bonds:

Eurozone government bond yields fell after the ECB's Consumer Expectations Survey showed that consumer inflation expectations for the next 12 months decreased further in May, while those for inflation three years ahead remained stable.

Median expectations for inflation over the next 12 months decreased to 3.9%, from 4.1% in April, while those for inflation three years ahead remained unchanged at 2.5%, the survey said.

Read Eurozone Gross Government Bond Supply Set to Decline in July

Energy:

Oil prices held firm, as weak demand traded off with cuts in supply.

"The recent pattern of OPEC+ oil output cuts that lift oil prices and macro headwinds that weigh on oil prices is worth pointing out," Commonwealth Bank of Australia said.

"The macro headwinds are unlikely to relent as higher interest rates weigh on global growth, particularly advanced economies."

Metals:

Base metals prices fell, while gold was flat in early London trade, as demand continued to remain subdued, particularly in China.

"Prices remain in the crosshairs of dollar moves, interest-rate hikes and tightening cycles; navigating risk appetite, macro data flow and growth expectations, with micro fundamentals taking a back seat," Standard Chartered said, pointing to base metals particularly having a weak first half of the year, expecting macro drivers to keep dominating.

"China's economic trajectory will be key, with the market focused on the recovery in manufacturing and industrial activity that is necessary to boost commodity-intensive sectors."

DOW JONES NEWSPLUS

EMEA HEADLINES

Casino Shares Slump After Bids to Strengthen Capital Base Disappoint

Shares of Casino Guichard-Perrachon plunged in early Wednesday trading after the debt-laden French grocer said two proposals it received to shore up its capital base would cause losses for existing shareholders.

At 0800 GMT, Casino shares were down 27% at EUR3.32.

Central Banks Are Right to Keep Raising Rates, Edmond de Rothschild AM Says - Interview

Central banks are right to keep raising interest rates to prevent inflation from reaccelerating, and this shouldn't pose a major threat to the economy, Benjamin Melman, global chief investment officer of Edmond de Rothschild Asset Management told Dow Jones Newswires.

"As long as markets are strong, the risk of overtightening [by central banks] is limited," he said in an interview in Paris.

Israel, Gaza Militants Trade Fire as West Bank Assault Ends

The Israeli military and Gaza militants exchanged fire early Wednesday as Israel wound down a massive two-day operation in the occupied West Bank that left at least 12 Palestinians and one Israeli soldier dead.

Israeli air defenses intercepted five rockets launched toward the southern town of Sderot after midnight local time, the Israel Defense Forces said. In response, jet fighters targeted what the IDF said was a Hamas weapons-production facility in the Gaza Strip. No casualties were reported.

GLOBAL NEWS

Markets Ignore the Looming Debt Peril

This was supposed to be the year that higher interest rates started to bite, taking down dodgy borrowers who had loaded up on too much debt. Some are now in trouble. But investors don't expect problems to spread far. I think they are making a mistake, especially if rates march higher.

Even as distressed companies start to hit the headlines, notably a major water utility in Britain, the riskiest part of the bond market has performed the best. The CCC-rated borrowers closest to default have returned 10% this year. The worst performing are safe investment-grade borrowers, with AA-rated corporate bonds returning 2.7%.

How the Fed and Investors Could All Be Wrong on Rates

Federal Reserve policy makers and investors aren't always on the same page, but when it comes to their expectations of where rates will end up over the long haul, they agree: much lower than they are now.

And they might all be wrong, a mistake that could force the Fed to radically reassess its rate expectations in addition to keeping longer-term interest rates-such as on the 10-year Treasury and mortgages-significantly higher than they were before the pandemic.

Republicans' New Border Plan: Send Military Into Mexico

WASHINGTON-Republicans running for president and in Congress are coalescing around a controversial way to wage war against illegal drugs-sending the U.S. military into Mexico.

Former President Donald Trump, who has previously called for building a wall along the southern border and giving drug dealers the death penalty, has also proposed creating a naval blockade of Mexico to prevent drugs like illicit fentanyl from entering the U.S. His leading opponent in the 2024 GOP nomination race, Florida Gov. Ron DeSantis, promised last week to use "deadly force" against anyone caught smuggling drugs across the border.

Judge Orders Biden Officials to Limit Contact With Social-Media Companies

A federal judge issued a broad preliminary injunction limiting the federal government from communicating with social-media companies about online content, ruling that Biden administration officials' policing of social-media posts likely violated the First Amendment.

In a 155-page ruling issued Tuesday, U.S. District Judge Terry Doughty of Louisiana barred White House officials and multiple federal agencies from contacting social-media companies with the purpose of suppressing political views and other speech normally protected from government censorship.

China's Brain Drain Threatens Its Future

Is China reopening to the world or turning inward again?

Many would argue the latter, but in one important way at least, the country is still going global: Residents appear to be leaving at a faster clip than they have in years, including a significant number of the wealthy and well-educated the nation needs to keep modernizing and investing.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

07-05-23 0621ET