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EU Mid-Market Update: Italy PM Draghi formally submits another resignation request; Focus on ECB rate decision.
**Notes/Observations**
-European indices start lower as earnings season is in full swing mode. Commodities and oil pull back as USD and bond yields turn higher. Risk off is building as session wears on, potentially from corporate guidance, Nord Stream 1 news, geo-political unrest and upcoming ECB decision.
-Asia closed mixed with Hang Seng underperforming at -1.7%. EU indices are lower -0.1%-2.2% with bond yields higher. US futures are pointing to the downside. Safe haven: Gold -1.1%, DXY 0.0%; Commodity: Brent -3.8%, WTI -4.1%, Copper -1.8%; Speculative: BTC -2.0%, ETH -2.4%
-Italy PM Draghi confirmed his resignation during a speech in Parliament. Follows a failed party confidence vote yesterday. FTSE MIB underperforming in Europe at -2.0% after the news.
-BOJ Gov Kuroda provided clear intentions of having no plans to raise rates or widen Yield Control (YCC) beyond the current 0.25% range.
-Indonesia Central Bank left their 7-day reverse repo rate unchanged at 3.50% as expected
-China US tensions continue to increase as China Foreign Min reiterated objection to Pelosi's trip to Taiwan. Biden is expected to meet with China Pres Xi within the next 10 days.
-Nord Stream 1 has restarted on schedule despite previous skepticism, but at reduced flows (roughly 30-40%) and Putin has warned of another potential maintenance period on July 26th
-ECB rate decision later with analysts relatively split between 25bps and 50bps hike. Reminder that the new decision time is at 08:15 ET. Focus will be on details of the anti-fragmentation tool following the political distress in Italy.
-After an abundance of European earnings, US pre-market earnings will report from the likes of Autonation, Blackstone Group, Danaher, Philip Morris, AT&T and Union Pacific
Asia:
- Bank of Japan (BOJ) left Interest Rate on Excess Reserves (IOER) unchanged at -0.10% and maintain its policy framework of "QQE with Yield Control" around 0.00% (both as expected)
- Bank of Japan (BOJ) Quarterly Outlook for Economic Activity and Prices cut the FY22/23 GDP growth forecast from 2.9% to 2.4% while raising the FY23/24 GDP growth forecast from 1.9% to 2.0%. BOJ raised the FY22/23 core CPI forecast from 1.9% to 2.3% and also raised the FY23/24 core CPI forecast from 1.1% to 1.4%
- Japan PM Kishidia said to plan on reshuffling his Cabinet in early Sept
- China local governments said to be planning to help developers contain risks and resume projects that have been delayed
Europe:
- Italy PM Draghi won Senate confidence vote but three major coalition parties boycotted the vote. PM Draghi likely to step down as he did not hold a Parliamentary majority following mass abstentions on confidence vote. Draghi to meet with President Mattarella on Thurs (July 21st)
- The 5th round of Tory leadership vote: showed Sunak with 137 votes and Truss came in second with 113 votes
Americas:
- President Biden expected to speak with China President Xi in next 10 days
- Bank of Canada (BOC) Gov Macklem stated that inflation would remain painfully high this year; Reiterated inflation to likely stay above 7% for the rest of 2022
Energy:
- Nord Stream 1 pipeline showing gas flows from Russia into Germany after maintenance; Flow to resume gradually; currently around 30%
- Russia Dep PM Novak stated that Govt would not sell oil if the price cap was below output costs
- Deputy Treasury Sec stated that looked to cap prices for Russia oil by Dec.
SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***
Equities
Indices [Stoxx600 -0.37% at 420.94, FTSE -0.40% at 7,235.56, DAX -0.80% at 13,175.42, CAC-40 -0.42% at 6,158.74, IBEX-35 -0.34% at 8,001.50, FTSE MIB -2.32% at 20,854.00, SMI +0.09% at 11,069.63, S&P 500 Futures -0.36%]
Market Focal Points/Key Themes: European indices open generally lower and stayed in the red as the session wore on; better performing sectors include consumer discretionary and technology; underperforming sectors include financials and materials; FTSE MIB underperforming with PM Draghi announcing resignation for second time; M&S acquires Gist; focus on upcoming ECB interest rate decision; earnings expected in the upcoming US session include Dow, AT&T, Philip Morris, American Airlines
***Equities***
- Consumer discretionary: Tesla [TSLA.DE] -1.5% (earnings), Ocado Group [OCDO.UK] -2% (earnings), Carnival [CCL.UK] -7% (shares offering), Electrolux [ELUXB.SE] -9% (earnings)
- Materials: Givaudan [GIVN.CH] -1.5% (earnings)
- Healthcare: Roche [ROG.CH] -1% (earnings)
- Industrials: ABB [ABBN.CH[ +0.5% (earnings), SAAB {SAABB.SE] -10% (earnings), Thales [HO.FR] -1.5% (sales)
- Technology: SAP [SAP.DE] -3.5% (earnings; cuts profit outlook)
- Telecom: Nokia [NOKIA.FI] +7% (earnings)
***Speakers:
- Italy PM Draghi again submitted his intention to resign (as expected); To meet again with President Mattarella
- Italian Presidential Office confirmed PM Draghi again tendered his resignation. President Mattarella asked Draghi to stay on as caretaker PM
- Ukraine Central Bank (NBU) devalued UAH currency (Hryvnia) by 25% to 36.59 per US dollar
- BOJ Gov Kuroda post rate decision press conference reiterated its overall assessment that domestic economy was picking up as pandemic impact faded. Inflation expectations were rising. Must maintain monetary easing to support economy. Believed that growth to outperform the potential growth rate but uncertainties were extremely high. Risks to the economy were to the downside. Must remain vigilant to financial and currency market moves and impact on domestic economy and prices. To continue to aim for stable inflation with easing and no change to policy stance as its outlook pointed to no stable inflation in sight. No intention of expanding YCC ceiling
- Indonesia Central Bank (BI) Gov Warjiyo pre-rate decision press conference saw the domestic recovery continuing. Inflation had risen due to supply pressure.Saw inflation pressure mostly on volatile food prices
- Indonesia Central Bank (BI) Policy Statement noted that the policy rate was in line with core CPI outlook. To continue to monitor risks from inflation expectations and strengthen IDR currency (Rupiah) stabilization to manage CPI risk
- China banking regulator (CBIRC) stated that would continue meeting financing needs of the real economy and support major infrastructure projects
- China Foreign Ministry Spokesperson Wang Wenbin reiterated govt stance that opposed House Speaker Pelosi planned trip to Taiwan. No information of any call between President Xi and President Biden
- Libya official stated that oil production recovered and was back above 700K bpd and to recover to 1.2M bpd in 7-10 days
**Currencies/ Fixed Income** -
- Focus on ECB rate decision and is expected to deliver its 1st rate hike in over a decade. The EUR/USD was drifting lower in the session as political tumult in Italy offset relief following the restart of Russian gas flows. Dealers noted Italy PM Draghi's likely departure from the political scene would be viewed negative for Italy and the EU. Pair at 1.0184 by mid-session.
- USD/JPY was higher after BOJ Gov Kuroda post rate decision press conference reiterated its stance of not thinking to raise rates at all with no plan to widen Yield Control (YCC) band. Pair at 138.60 afterwards and again within striking distance of fresh 24-year highs
- Italian bond yields were higher in the session. Analysts noted that snap election in Italy could take the 10-year Italian BTP-German Bund yield spread to 250-275 basis points (currently around 230bps). The importance of an anti-fragmentation tool from the ECB comes into focus amid significant political turmoil in Italy
**Economic data:
- (NL) Netherlands Jun Unemployment Rate: 3.4% v 3.3%e v 3.3% prior
- (UK) Jun Public Finances (PSNCR): £12.6B v £12.1B prior; PSNB (ex-Banking Groups): £22.9B v £24.0Be; Net Borrowing: £22.1B v £21.2Be; Central Government NCR: £12.3B v £11.5B prior
- (NO) Norway Q2 Industrial Confidence: 3.2 v 8.2 prior
- (JP) Japan Jun Final Machine Tool Orders Y/Y: 17.1% v 17.1% prelim
- (FR) France July Business Confidence: 103 v 103e; Manufacturing Confidence: 106 v 106e; Production Outlook Indicator: -5 v -7e; Own-Company Production Outlook: 11 v 5e
- (FR) France July Business Survey Overall Demand: 5 v 14 prior
- (CH) Swiss Jun M3 Money Supply Y/Y: -0.1% v +0.2% prior
- (HU) Hungary Central Bank leaves One Week Deposit Rate unchanged at 9.75%; as expected
- (ID) Indonesia Central Bank (BI) left the 7-Day Reverse Repo Rate unchanged at 3.50% (as expected)
- (PL) Poland Jun Real Retail Sales M/M: -1.4% v +1.3%e; Y/Y: 3.2% v 5.9%e; Retail Sales Y/Y: 19.9% v 21.7%e
- (PL) Poland Jun Construction Output Y/Y: 5.9% v 13.0% prior
- (HK) Hong Kong Jun CPI Composite Y/Y: 1.8% v 1.6%e
**Fixed income issuance:
- (ES) Spain Debt Agency (Tesoro) sold total €5.06B vs. €4.5-5.5B indicated range in 2025, 2027 and 2032 bonds
- Sold €1.131B in 0.00% May 2025 SPGB bonds; Avg Yield: 1.416% v 1.030% prior; Bid-to-cover: 1.92x v 1.86x prior (May 19th 2022)
- Sold €1.535B in 0.00% Jan 2027 SPGB bond; Avg Yield: 1.754% v 1.387% prior; Bid-to-cover: 1.75x v 1.38x prior (May 5th 2022)
- Sold €2.395B in 2.55% Oct 2032 SPGB bond, Avg Yield: 2.535% v 2.454% prior, bid-to-cover: 1.58x v 1.45x prior
- (FR) France Debt Agency (AFT) sold total €10.496B vs. €9.5-10.5B indicated range in 2025 and 2028 Bonds
- Sold €3.285B in 0.00% Feb 2025 Oat; Avg Yield: 1.00% v 1.59% prior; Bid-to-cover: 2.31x v 2.68x prior (Jun 16th 2022)
- Sold €3.510B in 0.75% Feb 2028 Oat; Avg Yield: 1.47% v 2.01%; Bid-to-cover: 2.69x v 2.12x prior (Jun 16th 2022)
- Sold €3.701B in 0.75% May 2028 Oat; Avg Yield: 1.42% v 2.01% prior; Bid-to-cover: 1.83x v 1.87x prior
- (UK) DMO sold £3.5B in 0.25% Jan 2025 Gilts; Avg Yield: 2.231% v 1.951% prior; bid-to-cover: 2.53x v 2.24x prior; Tail: 0.5bps v 1.0bps prior
**Looking Ahead** TIME-Zone (ET/GMT-5)**
- (ZA) South Africa Central Bank (SARB) Interest Rate Decision: Expected to raise Interest Rates by 50bps to 5.25%
- (CO) Colombia Jun Retail Confidence: No est v 39.0 prior; Industrial Confidence: No est v 14.4 prior
- 05:25 (EU) Daily ECB Liquidity Stats
- 05:30 (HU) Hungary Debt Agency (AKK) to sell 12-month Bills
- 05:50 (FR) France Debt Agency (AFT) to sell €1.0-1.5B in I/L 2028, 2031 and 2053 Bonds (Oatei)
- 06:00 (IL) Israel May Manufacturing Production M/M: No est v -0.4% prior
- 06:00 (CZ) Czech Republic to sell 1-month Bills; Avg Yield: % v 6.50% prior; Bid-to-cover: x v 2.09x prior
- 06:45 (US) Daily Libor Fixing
- 07:00 (TR) Turkey Central Bank (CBRT) Interest Rate Decision: Expected to leave One-Week Repo Rate unchanged at 14.00%
- 07:00 (UR) Ukraine Central Bank (NBU) Interest Rate Decision: Expected to leave Key Rate unchanged at 25.00%
- 07:00 (MX) Mexico May Retail Sales M/M: 0.5%e v 0.4% prior; Y/Y: 4.1%e v 4.6% prior
- 08:00 (ZA) South Africa Central Bank (SARB) Interest Rate Decision
- 08:00 (UK) Daily Baltic Dry Bulk Index
- 08:15 (EU) ECB Interest Rate Decision; Expected to hike Key Rates by 25bps. Expected to raise Main 7-day Refinaning rate by 25bps to 0.25%; Expected to raise the Marginal Lending facility by 25bps to 0.50%; Expected to raise Deposit Rate by 25bps to -0.25%
- 08:30 (US) July Philadelphia Fed Business Outlook: +1.5e v -3.3 prior
- 08:30 (US) Initial Jobless Claims: 240Ke v 244K prior; Continuing Claims: 1.34Me v 1.331M prior
- 08:30 (US) Weekly USDA Net Export Sales
- 08:45 (EU) ECB chief Lagarde post rate decision press conference
- 09:00 (RU) Russia Gold and Forex Reserve w/e July 15th: No est v $572.7B prior
- 09:30 (BR) Brazil Jun Tax Collection (BRL): 175.1Be v 165.3B prior
- 10:00 (US) Jun Leading Index: -0.6%e v -0.4% prior
- 10:30 (US) Weekly EIA Natural Gas Inventories
- 11:30 (US) Treasury to sell 4-Week and 8-Week Bills
- 12:00 (CA) Canada to sell 3-year notes
- 13:00 (US) Treasury to sell 10-Year Tips
- 17:00 (KR) South Korea Jun PPI Y/Y: No est v 9.7% prior
- 18:00 (NL) Netherlands Jun House Price Index M/M: No est v % prior; Y/Y: No est v 18.8% prior
- 19:00 (AU) Australia July Preliminary PMI Manufacturing: No est v 56.2 prior; PMI Services: No est v 52.6 prior; PMI Composite: No est v 52.6 prior
- 19:01 (UK) July GfK Consumer Confidence: -42e v -41 prior
- 19:30 (JP) Japan Jun National CPI Y/Y: 2.4%e v 2.5% prior; CPI Ex-Fresh Food (Core) Y/Y: 2.2%e v 2.1% prior; CPI Ex-fresh food/energy (Core-Core) Y/Y: 0.9%e v 0.8% prior
- 20:30 (JP) Japan July Preliminary PMI Manufacturing: No est v 52.7 prior; PMI Services: No est v 54.0 prior; PMI Composite: No est v 53.0 prior
- 23:30 (TH) Thailand Jun Customs Trade Balance: -$1.3Be v -$1.9B prior; Exports Y/Y: 10.1%e v 10.5% prior; Imports Y/Y: 19.8%e v 24.1% prior
- 23:30 (JP) Japan to sell 3-Month Bills
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