MARKET WRAPS

Stocks:

European stocks were flat on Friday ahead of the closely watched July jobs report, which will give investors their latest view of the health of the U.S. economy as tighter monetary policy from the Fed risks causing a slowdown.

The jobs report, which the U.S. Department of Labor is set to publish Friday at 14:30 p.m. GMT, is likely to show that jobs growth decelerated last month, reflecting the impact of inflation, higher interest rates, and a slowing economy.

Economists expect that the U.S. added 258,000 jobs last month, with the employment rate steady at 3.6%.

Earnings season remains in sharp focus. Deutsche Post climbed after the German freight-and-logistics group posted increased earnings for the second quarter, beating expectations, and confirmed its earnings target for the year. German insurer Allianz lost ground on a slump in second-quarter net profit as market turbulence hit its asset-management activities.

Stocks to Watch:

Luxury-goods players can look forward to improvements in China and peak tourist season in Europe, though macroeconomic pressures may offset these boons, Equita Sim said. Second-quarter results were encouraging for the sector even in the face of lockdowns in China, the investment bank said, noting strong demand in other markets.

With China improving from June onward, the third quarter looks to be strong too, with European tourism seasonality also helping, Equita Sim said. However, the worsening macro situation in Europe and the U.S. leave visibility low in those markets in 2H and into next year, it warned.

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BASF's non-European operations will become increasingly important in the medium term as the German chemicals giant faces a cracking cost disadvantage in Europe and is exposed to the risk of production outages due to natural gas supply, Jefferies said, cutting the company's target price to EUR47 from EUR60.

Naphtha-based chemical cracking--a chemical process to break down complex organic molecules into simpler compounds--in Europe is now more expensive than Chinese coal-based cracking, contributing to a deterioration of the company's position on the global cracking cost curve, the bank said.

Economic Insight:

Eurozone economic growth was surprisingly strong in the first half of 2022, coming in at 1.2%, which is around 2% stronger than the U.S. economy, J. Safra Sarasin said. In the third quarter, some southern European countries will benefit from the revival of tourism, but the overall trend is clearly pointing down, the asset management firm said.

"A recession in the winter half looks increasingly likely," according to J. Safra Sarasin. Germany, the eurozone's largest economy, will be particularly hard-hit and might be in a recession already, it said.

U.S. Markets:

U.S. stock futures wavered as investor attention is focused on the July jobs report.

"Welcome to another payrolls Friday which after a week of better U.S. data on balance, probably isn't set up with the market as worried as it could have been," said Jim Reid, a strategist at Deutsche Bank.

"It's fair to say the market is probably going into today's print less worried about it than it was at the start of the week."

Nevertheless, the health of the economy is a crucial indicator for markets at the moment amid expectations that the Fed will continue to tighten monetary policy in a bid to tame red-hot inflation, which is at its highest in four decades.

The Fed has already raised rates four times this year, including two mega-size, 75 basis-point rate increases in June and July--the biggest since 1994--and is expected to keep raising rates this year before cooling off in 2023.

The risk is that denting economic demand, while it should bring inflation under control, could cause a recession. Signs that the economy is weakening, such as a deterioration of the labor market, could stem the pace of the Fed's tightening.

DraftKings is due to report quarterly earnings ahead of the market open.

Forex:

The DXY dollar index was steady ahead of the much-awaited employment report. The jobs report could fall short of expectations for employment growth of 250,000 in July, but this is unlikely to have much impact on the dollar, ING said.

"We doubt a softish headline jobs number will do too much damage to the dollar, given that average earnings should stay firm and next week should see another near 9% year-on-year U.S. consumer price index print, " the Dutch bank said.

It seems too early to conclude the Fed's battle against inflation is over, ING said.

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Sterling should weaken further against the dollar as the Bank of England's latest policy decision has encouraged markets to price in more interest-rate cuts for next year and beyond, MUFG Bank said.

The BOE on Thursday lifted its key rate by 50 basis points to 1.75% but it forecast a recession from the fourth quarter and expects inflation to undershoot its target by a larger amount in three years' time.

"It sends a strong dovish signal that lower rates will be needed once upside inflation risks have passed in the near-term," MUFG said, expecting GBP/USD to fall to 1.1790 by the end of the third quarter.

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The Ukraine war and its impact on the eurozone's terms of trade has damaged the euro's equilibrium fair value, ING said.

"Despite the recent weakness in EUR/USD spot, the drop in its BEER [behavioural equilibrium exchange range] fair value caused by terms of trade effects was so significant that we estimate the pair is still around 5% overvalued compared to its medium-term equilibrium level," the Dutch bank said.

Given the recent reduction in Russian gas supplies to Europe and concerning European growth prospects this winter, ING cuts its year-end forecast for EUR/USD to 1.02 from 1.08 previously.

Bonds:

German 10-year Bund yields edged slightly higher after falling on Thursday alongside U.K. gilt yields on the BOE's pessimism about the economic outlook even as it raised interest rates.

Thursday's fall in government-bond yields helped lift equities, Deutsche Bank analysts said. As yields edge back up, equities traded lower on Friday.

Energy:

Oil prices moved higher in early trade. "The focus is squarely on the U.S. nonfarm payrolls," SPI Asset Management said. The consensus estimates a softening of the labor market in July, SPI said, noting that crude prices are down nearly 10% this week.

"While lower commodity prices suggest supply-side inflationary pressures are receding, central banks are increasingly committed to procyclical monetary policy. However, U.S. rates pricing for 2023 implies that a growth slowdown will drive rate cuts, in contrast to hawkish Fedspeak this week," SPI said.

Metals:

Gold wavered after gaining on safe-haven demand in early Asian trade, driven by global recession risks, analysts said. Central banks worldwide are acknowledging recession risks, Oanda said. The Bank of England had a rather gloomy outlook and the Czech central bank surprised markets by halting its rate-increase cycle, it said.

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Industrial metals prices were up. "Yesterday's data showed that U.S. initial and continuing jobless claims continued to track higher but are still low and consistent with a tight labor market," the Commonwealth Bank of Australia said.

"The labor market is a lagging indicator of the economy," the CBA said. "We expect the labor market to remain tight for several more months at least."

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Deutsche Post Backs 2022 View After Second-Quarter Earnings Rise

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The German freight-and-logistics group said Friday that quarterly net profit rose to 1.46 billion euros ($1.50 billion) from EUR1.29 billion a year earlier. Analysts had expected EUR1.23 billion, according to consensus estimates provided by the company.


Allianz Net Profit Slumped as Market Turbulence Hits Asset Management

Allianz SE said Friday that second-quarter net profit tumbled but operating profit rose, confirming full-year guidance despite its asset-management business struggling amid turbulent markets.

The German insurer and asset manager said net income in the three months to the end of June was 1.71 billion euros ($1.75 billion), down from EUR2.23 billion a year earlier.


London Stock Exchange Group Pretax Profit Rose, Sets Out GBP750 Mln Buyback

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WPP Lifts 2022 Organic Growth Guidance

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Footfall at UK Stores Fell on Record High Temperatures, Inflation

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08-05-22 0714ET