Draghi’s government looks set to fall after three key parties failed to back it in a confidence vote, which could complicate ECB plans to provide details on its new anti-fragmentation tool.
Preview Ciao, adios (Mario)
- US stocks rise as Europe falls
- After a volatile session, the 10-year UST closed 1bp higher at 3.03%
- Italian 10-Year BTPS Sells, Bund Closes 1bp Down
- The Euro on the back foot, dragging the other EU pairs down. AUD back below 69c
- Draghi’s government is about to fall, plunging Italy into months of political uncertainty
- Italian turmoil complicates ECB’s fragmentation tool
- Putin says Nord Stream will restart, but at reduced capacity
- Limited supply still forces EU to plan gas consumption cuts
- US existing home sales fall again, more expected
- Upcoming: NZ Trade, NAB Quarterly Survey, BoJ, ECB
I won’t stay here wasting mine on you, yeah, you
Ciao adios, I’m done
Ciao adios, I’m done – Anne-Marie
US stocks added to yesterday’s gains, albeit with some caution after Google warned it was revising its workforce (after Tesla shares jumped following the earnings beat). In contrast, European stocks fell with Italian stocks leading the decline as Draghi’s coalition government looks set to fall, potentially sending Italy into months of political uncertainty, complicating ECB plans on its fragmentation tool. Putin says Nord Stream will restart, but at reduced capacity, limited supply still forces the EU to plan gas consumption cuts. After a volatile session, the 10-year UST ended the day 1bp higher at 3.03%, ahead of the ECB’s Italian 10-year BTPS selloff and the euro trading lower, dragging the other EU pairs down. The AUD starts the new day below 69c.
The night was mixed for US and European equities. The S&P 500 posted back-to-back gains for the first time in nearly two weeks, ending the day up 0.59% while the NASDAQ gained 1.58%. The technology and consumer discretionary sectors advanced with Netflix’s earnings (after yesterday’s bell) coming in better than expected, supporting the idea that the US consumer remains resilient. Prior to the close, shares retreated from overnight highs after Google said a two-week pause in hiring was needed to allow the company to review staffing needs and ” align with a new set of priority staffing requests for the next three months.” This follows layoffs or slowing hiring at other big tech companies, including Tesla and Apple, as companies brace for a possible recession. Ford said it plans to cut up to 8,000 jobs in the coming weeks. After the bell, Tesla shares jumped to better-than-expected earnings (2Q adj. eps $2.27, est. $1.83) reflecting progress in getting production back on track. Alcoa also gained on better-than-expected earnings.
In contrast, ahead of the ECB meeting tonight, European stocks fell, with Italian stocks leading the decline. The Stoxx 600 index closed down 0.2% while the Italian FTSE MIB fell 1.60%, Draghi’s government looks set to fall after three key parties failed to back him in a confidence vote. Amid growing economic uncertainty, Draghi won a vote of confidence late Wednesday (95 senators voting for and 28 against), but the result mattered little as the center-right League and Forza Italia , as well as the Five Star Movement, have done so. not participate. The Prime Minister insisted that without broad support he could not govern and implement much-needed reform. A collapse of the coalition government would send Italy into months of political uncertainty with another election slated for sometime in the fall. Italy’s political uncertainty complicates the ECB’s plans to provide details on its new anti-fragmentation tool, especially regarding the conditions for triggering the tool. In theory, the tool should be triggered when peripheral bonds come under unwarranted pressure, but if they sell off due to irresponsible or unruly governments, the case for ECB intervention becomes less justified. A massive sale of Italian bonds could be destabilizing for the Union, but the intervention of the ECB in this scenario could be seen as supporting irresponsible governments.
Italian bond yields rose during the European session, closing up 6 basis points at 3.374%, and the BTPS-Bunds 10-year spread closed around 213 basis points. But after the Italian, the news emerged after closed futures indicated the spread is now closer to 230 basis points, near recent multi-year highs. Similarly, futures on the Italian stock market lost more than 4%. After surging in recent days, political uncertainty put the euro under pressure overnight, falling 0.5% to back below 1.02. Meanwhile, in the US, after a volatile session, UST 10-year yields ended the day up 1bp at 3.265, although that was after falling to an intraday low of 2.941%.
Turning to Europe, late last night Russian President Putin said Nord Stream gas flows would restart this week (good news!!) but flow could be as low as 20% of capacity ( not so good after all!). Gazprom has blamed technical issues around a broken turbine for restricted gas flows, but most suspect Putin wants to keep the pressure on Europe, by not delivering enough supplies to countries to fill storage facilities before winter. If Putin keeps his promises, it would avoid the worst-case scenario of a complete EU shutdown and impending recession, but still leave Europe in a very difficult position. The expected supply of 20% could be enough to meet demand in the short term, but will not allow Europe to build up stocks for the winter and, of course, it also leaves the Union at the mercy of the Putin’s next move. LNG gas prices in the Ducth Hub ended the day a little higher (+0.4%), but still at very high levels of €155.38.
EU President Ursula von der Leyen meanwhile said a complete gas cut was a “likely scenario”. The European Union has proposed that the bloc cut its natural gas consumption by 15% over the next eight months. Germany stands to lose 4.8% of its economic output if Russia cuts off the country’s natural gas supply, the International Monetary Fund has warned.
Looking at FX in more detail, The Euro’s decline weighed on other EU currencies, with the NOK and SEK returning some of yesterday’s gains, down around 0.5%, while the NZD and AUD showed some resilience, helped by the rebound in US equity sentiment. . The Kiwi actually managed to pull off small gains against the USD, up 0.08% to 0.6239 while the AUD was down 0.14% from yesterday’s levels at this time. Looking at the intraday chart, the Aussie traded as low as 0.6873 early this morning and now it starts the new day at 0.6887.
In terms of economic news, headline inflation in the UK continued to rise, reaching 9.4% in June, slightly above expectations. The Bank of England expects headline inflation to hit 11% later this year after energy companies hike prices. There was not much reaction in GBP or UK rates, with inflation numbers moving closer to expectations and investors focusing more on developments in Europe over the next 48 hours. The GBP is down around 0.2% at 1.1970 overnight.
Meanwhile, bucking the trend of global inflation upside surprises, Canada’s headline CPI came in much lower than expected at 8.1% y/y (8.4% ex .), still its highest level in almost 40 years. The average of the Bank of Canada’s three measures of core inflation rose to 5% year-on-year, close to market expectations. The market’s reaction was short-lived, with an initial drop in Canadian short-term rates quickly reversing and the CAD recovering most of its initial selloff, now little changed on the day.
US existing home sales surprised on the downside and fell 5.4% to 5.12 million in June. It was the fifth consecutive month of declines, which is now down 14.2% from a year ago, with expectations of further declines over the coming months amid increased supply. and high mortgage rates.
- This morning, New Zealand and Japan released their trade figures for June with a growing trade deficit as the theme for both economies. The NAB Quarterly Business survey is released in Australia, with New Zealand getting credit card spending data later today.
- The BoJ is meeting today and the Bank is expected to leave its ultra-loose monetary framework unchanged. Regarding the JPY, we believe that the Bank will reiterate that it is watching the currency closely with sudden large movements (depreciation) considered undesirable from a financial stability perspective, but a weaker currency on its own is still considered a net benefit for the economy and for the Bank’s quest to bring inflation back towards 2% on a sustainable basis. YCC adjustment talks appear premature as more evidence of rising domestic pricing pressures (something the Tankan survey suggests is underway and the same should be expected ) are required before considering any changes.
- Later in the day, the ECB meeting is the event to watch in Europe. We expect a 50 basis point hike to zero in the deposit rate and guidance to repeat a 50 basis point hike in September, with the Bank aiming to price in rate hikes ahead of weaker conditions later in 2022 and into 2023, when the room for maneuver could be more limited. . The ECB is expected to unveil more details on its anti-fragmentation tool and this is where we see the risk of disappointment given a likely lack of detail and clarity on what might trigger an activation of the tool.
- US receives Philly Fed survey, main index and unemployment insurance claims.
- Roche, Philip Morris, SAP, American Airlines and Blackstone are among the US companies reporting earnings tonight.