Equities are slipping ahead of US inflation data, income barriers

People walk past an electronic screen showing Japan’s Nikkei stock price index inside a conference hall in Tokyo, Japan on June 14, 2022. REUTERS / Issei Kato

SYDNEY / LONDON, July 11 (Reuters) – Shares fell on Monday as investors prepared for a US inflation report that could force another super-large rate hike, and the start of a earnings season where profits will be under pressure.

The STOXX index for European equities fell 1.3% (.STOXX), with S&P 500 futures down 0.8% and Nasdaq futures down 0.9%, as a positive US earnings report in June raised expectations of an increase of 75 basis points from the Federal Reserve.

MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) fell 1.8%, while Chinese blue chips (.CSI300) lost 1.9% after Shanghai discovered a COVID-19 case involving a new subvariant, Omicron BA.5.2.1. read more

Bond yields and the sharp US dollar also rose, the latter reaching a 24-year high against the yen.

To underscore the global nature of the inflation challenge, central banks in Canada and New Zealand are expected to tighten their policies further this week.

While Wall Street gained some momentum last week, market sentiment will be tested by earnings from JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo the following day.

Another obstacle will be Wednesday’s US consumer price report, where markets see that headline inflation accelerates further to 8.8%, but a slight decline in the core target to 5.8%.

An early reading on consumers’ inflation expectations this week will also receive a great deal of attention from the Fed.

“Unexpected weakness in these releases will be necessary to remove expectations of a 75 bps July 27 Fed rate hike, which rose from about 71 bps to 74 bps after the wage report,” said Ray Attrill, head of currency strategy at NAB.

PARITY PARTY

Treasury yields climbed around 10 basis points on the job report, and the 10-year period was 3.09% on Monday, up from a recent low of 2.746%.

A hawkish Fed combined with fears of recession, especially in Europe, has kept the dollar at 20-year highs against a basket of competitors. The dollar broke above 137.00 to reach its highest since 1998 at 137.28 yen when the Bank of Japan remained dove. read more

Japan’s conservative coalition government was estimated to have increased the majority in the upper house’s election on Sunday, two days after the assassination of former Prime Minister Shinzo Abe. read more

The euro continued to struggle at $ 1.0122, after falling 2.4% last week to reach a two-decade low and large reversal target of $ 1.0072.

“With little economic easing on the horizon for Europe, and US inflation data likely to mark a new high for the year and keep the Fed up aggressively, we believe the risk remains skewed in favor of the dollar,” said Jonas Goltermann, senior market economist at Capital Economics .

“In fact, we believe the EUR / USD exchange rate will break through parity soon, and may well trade some way through that level.”

Rising interest rates and a strong dollar have been a headache for non-returnable gold, which was $ 1,739 per ounce, after falling four weeks in a row.

The oil price also lost around 4% last week when concerns about demand outweighed supply constraints.

Data from China coming on Friday will probably confirm that the world’s second largest economy collapsed sharply in the second quarter amid the coronavirus.

Brent traded down $ 1.27 lower to $ 105.76, while US crude fell $ 1.43 to $ 103.36 a barrel.

Reporting by Wayne Cole and Lawrence White; Edited by Kenneth Maxwell, Bradley Perrett and Kirsten Donovan

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