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After US Services PMI (and ISM) unexpectedly plunged from record highs in June, analysts expected the plunge to stop in preliminary July data (despite an ongoing downtrend in ‘hard’ economic data performance)… they were wrong.

While US Manufacturing picked up modestly from 62.1 to 63.1 (better than the 62.0 expected), US Services tumbled further to 59.8 from 64.6 (well below the 64.5 expected).

Source: Bloomberg

That is the weakest Services print since February.

 

The drop in Services weighed heavily on the US Composite which dropped to 4-month lows.

Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit, said:

“The provisional PMI data for July point to the pace of economic growth slowing for a second successive month, though importantly this cooling has followed an unprecedented growth spurt in May. Some moderation of service sector growth in particular was always on the cards after the initial reopening of the economy, and importantly we’re now seeing nicely-balanced strong growth across both manufacturing and services.

“While the second quarter may therefore represent a peaking in the pace of economic growth according to the PMI, the third quarter is still looking encouragingly strong.

“Short-term capacity issues remain a concern, constraining output in many manufacturing and service sector companies while simultaneously pushing prices higher as demand exceeds supply. However, we’re already seeing signs of inflationary pressures peaking, with both input cost and selling price gauges falling for a second month in July, albeit remaining elevated.

“Inflationary pressures and supply constraints – both in terms of labour and materials shortages – nevertheless remain major sources of uncertainty among businesses, as does the delta variant, all of which has pushed business optimism about the year ahead to the lowest seen so far this year. The concern is this drop in confidence could feed through to reduced spending, investment and hiring, adding to the possibility that growth could slow further in coming months.”

By Michael Every of Rabobank

Our ECBeebies’ analysis of the ECB’s strategic review (“Lost in Translation”) notes there was no new stimulus. However, by shifting the focus on inflation reaching the 2% target to “well ahead” of the end of its projection horizon, the ECB emphasized it will be “persistently accommodative”. This may have added some downward bias to the markets’ reaction function to inflation forecasts, with the end-point of the staff projections becoming less indicative for policy. In short, the ECB is a loooong way from raising rates whatever data we see ahead. Which we already knew.

Indeed, as noted yesterday, one could speculate Lagarde may never raise rates, just as Draghi never did. Notably, the last ECB hiking cycle was now a decade ago, with two 25bp moves, rapidly reversed, and more, over 2012-15 following the Eurozone crisis. Moreover, *every* ECB hiking cycle has been followed by reversal: they hiked from late 2005 to July 2008, when the GFC was biting – and had to cut in October; and they hiked from late 1999 to late 2000, as the tech bubble was about to burst – and cut in May 2001. Are key messages being lost in translation somewhere?

On which, at a CNN Town Hall US President Biden was asked: “What is your administration doing to ensure the poor and middle class are not hurt by higher prices?” in light of the inflation risks from two multi-trillion dollar packages the White House is pushing. The reply was:

“No, look, here’s the deal. Moody’s today went out, Wall Street firm, not some liberal think-tank, said if we pass the other two things I am trying to get done, we will in fact reduce inflation. Reduce inflation. Reduce inflation. Because we are going to be providing good opportunities and jobs for people who in fact are going to be reinvesting that money back in all the things we are talking about. Driving down prices, not raising prices. And so it, it is, I, I, I sincerely mean this. Prices are up now. And they are up – for example, we’re in a position where you’re trying to build a house, trying to find two-by-fours and lumber. Well guess what? People stopped working. Cutting lumber. They stopped doing it because they, the unemployment was so…..Now all of a sudden there’s this need, because people are coming back and guess what, instead of paying ten cents, you’re paying twenty. You understand what I am saying?” (“Yes,” adds the CNN host; “No,” says I.) “It relates to what in fact is now needed because we’re growing.”

Trying to translate, high inflation is driven by a loss of labor supply, due to unemployment benefits, and as this reverses –yesterday’s surprise spike in weekly initial claims aside– so will inflation. Relatedly, a small business owner was told they needed to raise the minimum wage to $15 to get staff. That’s a worthy goal, and one which would help close labor vs. capital gaps; but SMEs are least-well placed to raise wages without passing those costs on; big corporations can – but generally just offshore or automate as an alternative.

Moreover, this view overlooks just how strained US supply chains are: there is almost no spare capacity on rails or road at present. One report just seen is of another US firm placing a two-week delay on all containers moving into Chicago, which will naturally have to sit in West Coast ports. Moreover, there is as large a problem with *international* supply chains as US demand surges. Yet, according to the president, even more demand won’t make things worse because this money will be “reinvested back in all the things”: so trillions in public spending will be saved by households and pumped back into Treasuries again? That’s how tax cuts for big businesses work, rather than driving investment, but Joe Public’s marginal propensity to consume is different, no? Anyway, Presidents Biden and Erdogan can swap their views on inflation as well as NATO next time they speak.

President Biden also had this to say on Covid-19: “And the question is whether or not we should be in a position where are why can’t the experts say we know that this virus is in fact it’s going to be or excuse we know why the all the drugs approved are not temporarily approved and but permanently approved, but that’s underway too.”

Which, to be fair, is in keeping with how little sense almost everything everyone in authority everywhere has been making in the last 18-months. As examples: US Senator Klobuchar has introduced a Section 230 bill specifically to punish social media if they allow public dissemination of virus “disinformation”; Dr Fauci is accusing Senator Paul of slander; Senator Paul wants a “criminal referral” for Dr Fauci’s actions; China refuses to cooperate with a WHO investigation into Covid-19 origins; and US Democrats just blocked a bill to force the Director of National Intelligence to declassify US investigations into it.

Indeed, on inflation and labor shortages and Covid, the UK now faces empty supermarket shelves, with people warned not to panic buy by the government – naturally producing panic buying? A list of key workers is now being made of those who do not need to self-isolate if ‘pinged’, which is so long that one wonders why they are still bothering to ping at all. But with Covid case numbers about to grow exponentially as restrictions are dropped, some experts warn, and pinging still a thing, pingmageddon looks likely to continue. Not coming soon to a supermarket near you.

So are we inflating or deflating? Reopening or locking down? Singing or pinging? Markets have difficulty translating this noise into a signal, but are erring on the side of caution (today) – while central banks are making it abundantly clear they are doing nothing.

Meanwhile:

Bloomberg purrs how China-US trade is booming despite tariffs and the trade/Cold War backdrop. Something appears to have been lost in translation there too. Covid is hardly normal times, and China’s SHARE of exports to the US, even under the current extreme circumstances, has *declined*. Imagine when things get back to normal – if that is still a thing.

Russia seems to be able to translate some things extremely well. The day after the US and Germany agreed a Nord Stream 2 deal to allow Germany and Russia to get everything they wanted, and Ukraine bupkis, Moscow is suing Kyiv for a slew of alleged offenses, including the downing of MH17(!); and there has been another major cyberattack on Western firms’ websites. (And on South Africa’s main port and rail system by the way, making more of a mess there.)

In China, Evergrande continues to wobble – as it waits to find out which particular de facto public bailout will emerge? Beijing has also announced Didi is facing “unprecedented” punishment for its US IPO, which may include a fine, the suspension of some operations, or the introduction of a state investor. In other words, the $4bn Didi just raised from the US may end being at least partly handed over to Beijing; or as a business loss; or nationalized. Wall Street singularly failed to translate those evident political risks “because markets”.

In Tokyo, the Olympics are about to start with fewer athletes, less sponsorship, no spectators, and no director of the opening ceremony – because of some far-beyond-lost-in-translation Holocaust jokes nobody in Japan was capable of Googling before hiring him for the job.

Happy Friday.

The 2020(1) Summer Games officially commenced Friday in Tokyo where a scaled back opening ceremony went off without a hitch: it began with the Japanese flag being carried out by a group of children, before dancers representing traditional carpenters re-enacted the construction of traditional wooden dwellings common in Japan.

A wooden set of Olympic rings featured in the ceremony was reportedly constructed from the wood of trees planted in the summer of 1964, the last time Tokyo hosted the Games. Japan’s emperor was on hand to officially open the Games as well.

But while the 1964 Games were a watershed moment for a post-war Japan, the tone was markedly different this year. Crowds of Japanese protesters, furious that organizers are allowing the Games to continue without spectators in the middle of a State of Emergency, gathered outside. First Lady Jill Biden and French President Emmanuel Macron were among the special guests in the mostly empty 68,000-capacity stadium.

Still, as one twitter user pointed out, “you have to appreciate the audacity of the Olympics to try to sell the message of unity while Japan’s citizens are protesting the Games…”

Have to appreciate the audacity of the Olympics to try to sell the message of unity while Japan’s citizens are protesting the games, and after showing the world that they will disregard life and science for the money. https://t.co/zpPB8lK0KI

— Zito (@_Zeets) July 23, 2021

And western media outlets published plenty of photos of the sizable crowd, which dwarfed the fewer than 1,000 spectators allowed to witness the opening ceremony in person.

On top of the difficulties posed by the pandemic, the Opening Ceremony was plagued by other obstacles. Three directors and a musical composer were fired over various scandals. Despite the fact that Japan had an extra year to prepare, the planning for the opening ceremony seemed to crumble at the last minute, as Kentaro Kobayashi, the last of the directors, was fired just a day before the ceremony as a standup bit he performed in the 1990s featuring a joke about the Holocaust happened to resurface.

Just over half of the athletes set to compete in the Games marched during the Opening Ceremony (5,700 out of 11,000 athletes), and those who did march observed social distancing protocols.

You will find more infographics at Statista

The ceremony also stood out for the lack of visible corporate sponsors after top-tier sponsors like Toyota and Panasonic abandoned plans to sponsor the event. Other domestic sponsors, including NTT and NEC, are also staying away, according to Nikkei. Many of the sponsors said they feared having their brands associated with an event that the overwhelming majority of Japanese oppose.

Authored by Paul Joseph Watson via Summit News,

A German television news reporter was suspended after a video showed the journalist smearing herself with mud in an apparent attempt to look more authentic while reporting on devastating damage caused by flooding.

RTL presenter Susanna Ohlen was in the town of Bad Münstereife to ‘help out’ with flood recovery efforts, but the clip shows the reporter deliberately dirtying herself by running the dirt on her forehead and cheeks.

Artikel: “Aufräumarbeiten nach Flut: RTL-Moderatorin Susanna Ohlen packt in Bad Münstereifel mit an”

Was auch geschah:pic.twitter.com/zp1p3XbAaK

— Argo Nerd (@argonerd) July 22, 2021

“Zahlreiche prominente Helfer packen ebenfalls mit an und unterstützen die Menschen vor Ort tatkräftig. Eine von ihnen ist Susanna Ohlen (39).”https://t.co/3saW2cIJ53 pic.twitter.com/h5IHpgYdUZ

— Argo Nerd (@argonerd) July 22, 2021

Another video shows Ohlen reporting live for RTL at the same location.

pic.twitter.com/eQBchE9fls

— Andrej Leonenko (@andrejlnnk) July 22, 2021

An RTL report initially claimed, “Numerous prominent helpers also lend a hand and actively support the local people. One of them is Susanna Ohlen.”

However, as soon as the video clip of Ohlen’s behavior emerged, the article was deleted from RTL’s website.

Addendum

How it started How it’s goinghttps://t.co/pKj6kWDNLlhttps://t.co/i5LgKCzhd0 pic.twitter.com/14Yaq1bOgK

— Argo Nerd (@argonerd) July 22, 2021

“Our reporter’s approach clearly contradicts journalistic principles and our own standards,” said RTL in response to the incident. “We therefore gave her a leave of absence on Monday after we heard about it.”

Das Vorgehen unserer Reporterin widerspricht eindeutig journalistischen Grundsätzen und unseren eigenen Standards. Wir haben sie daher direkt am Montag, nachdem wir davon erfahren haben, beurlaubt.

— RTL (@RTLde) July 22, 2021

*  *  *

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Another day, another communist crackdown by Beijing on a booming private sector, another plunge in Chinese stocks as the facade of “socialism capitalism with Chinese characteristics” is slowly chipped away.

China’s government is planning a crackdown on the country’s booming off-campus tutoring industry, in one of the biggest overhauls of the education sector that sent dozens of publicly listed stocks tumbling in Shanghai and Hong Kong, as part of a sweeping set of constraints that could decimate the country’s $100 billion education tech industry, sending shares crashing.

According to SCMP, in one of the biggest overhauls in local edtech industry, local authorities will ask companies that offer tutoring on the school curriculum to go non-profit; they will also ban the provision of holiday and weekend tutoring, “and will no longer approve the establishment of new tuition centres, according to sources briefed on a newly released policy document promulgated by the State Council.”

As part of this non-profit conversion, companies that operate edtech platforms, or services that provide online education, will not longer be allowed to raise capital through initial public offerings. Listed companies and overseas investors will be barred from investing, or acquiring stakes, in education firms that teach school curriculum, according to the rules.

Bloomberg adds that local regulators will also stop approving new after-school education firms seeking to offer tutoring on China’s compulsory syllabus and require extra scrutiny of existing online platforms, the people said. Vacation and weekend tutoring on school subjects will also be banned, they said. Changes may still occur as the rules haven’t been published. The 21st Century Business Herald earlier reported the bans on IPOs and investments by listed firms.

The new set of regulations, devised and overseen by a dedicated branch set up just last month to regulate the industry, could wipe out the enormous growth that made stock market darlings of TAL Education Group and Gaotu Techedu Inc. The regulatory assault mirrors a broader campaign against the growing heft of Chinese internet companies from Didi Global Inc. to Alibaba Group Holding Ltd.

Beijing is coming down hard on the sector as “excessive tutoring anguishes young pupils and burdens parents with expensive tutoring fees” according to Bloomberg. It’s also regarded as an impediment to one of the country’s top priorities, boosting a declining birth rate. Last month, China said it will allow a couple to have three children and released a slew of support measures to encourage births and lower child expenses.

The booming industry – estimated at 811 billion yuan (US$125 billion) in 2021 by Frost & Sullivan – has added to the costs of young households, contributing to a financial burden that has dissuaded families from having more children, even as the government abandoned its one-child policy population control. – SCMP

“The motivation behind the government’s move to ease the burden for students is that many people are not willing to have children due to the huge cost of raising kids,” said Li Qingshan, research director at EqualOcean. “There are fewer and fewer newborns in recent years. And that’s the problem the government needs to solve as the top priority.”

The latest rules are details that added to the edict by Chinese President Xi Jinping during a May 21 meeting, during which he instructed the government to rein back on runaway investments in the education industry, and promulgated a set of rules to ease the burden of homework and after-school training for primary and secondary school students.

Beijing has taken issue with for-profit companies for stressing out kids while enriching investors and startup founders. In May, President Xi Jinping chaired a meeting with top officials where they approved a new set of rules to ease the burden of homework and after-school training for primary and secondary school students.  Last month, China’s education ministry created a dedicated division to oversee all private education platforms for the first time. That followed a plethora of restrictions, including caps on fees firms can charge and time limits on after-school programs. Regulators have fined two of the biggest startups for false advertising: Alibaba-backed Zuoyebang and Tencent-investee Yuanfudao. A new law on minor protection, which went into effect June 1, also bans kindergarten and private institutions from teaching the primary-school curriculum to pre-schoolers — not uncommon previously.

Making the whole sector go non-profit “would make being a listed entity meaningless,” said Justin Tang, head of Asian research at United First Partners. “Investors are selling out first and asking questions later. It’s all being done to reduce cost of education and motivate citizens to raise kids.”

Others agreed: “Making the sector non-profit is just as good as eradicating the industry all together,” said Wu Yuefeng, a fund manager at Funding Capital Management (Beijing) Co. “The regulations on financing are a major surprise and shows that to the authorities, this is a matter of no small importance. In the short term for the sector, any news will be bad news.”

In response, Gaotu Techedu, TAL Education and New Oriental Education & Technology Group all plunged by at least 50% this morning  while Koolearn Technology Holding Ltd. tumbled 28%, also its biggest-ever single day loss.

It wasn’t just techedu stocks that got crushed: shares of some of the biggest US-listed Chinese firms also dropped in premarket trading Friday as concerns surrounding further regulatory scrutiny deepen. Didi shares sink as much as 12%, extending their losing streak to a second straight day and taking their post IPO losses to 35% in just three weeks! The ride-hailing giant fell more than 11% on Thursday after Chinese regulators were said to be considering “unprecedented penalties” for the firm after its disastrous IPO last month.  Chinese tech-giants, which have been under pressure amid China’s ongoing crackdown of the sector, are also lower in premarket: Alibaba falls 3%, Pinduoduo slides 3.9%, JD.com slips 3.7%, NetEase declines 3.1%, Nio loses 2.8%, Baidu drops 2.5%, Xpeng is down 2.4% and Li Auto falls 3.2% as of 8:05 a.m. in New York.

As Bloomberg adds, shares of China’s largest private education companies are among the world’s worst performers in recent months, with New Oriental Education, TAL Education and Gaotu Techedu together shedding nearly $100 billion of value from their highs reached earlier this year. Gaotu hasn’t received official notification of the rules, the company said in an email.

As much as $10 billion of venture capital poured into China’s edtech sector last year alone, spawning hundreds of start-ups, apps, and edtech platforms that provided everything from K-12 tutoring to elementary mathematics, language skills and music. Alibaba, Tencent Holdings Ltd. and ByteDance Ltd.all entered the arena, seeking to capitalize on Chinese parents’ desires to give their children every academic advantage. A spokesman from the education ministry said relevant polices are still being formulated and declined to provide more details.

Several high-profile startups in the sector  including Yuanfudao, which at $15.5 billion is the most valuable of the lot, are likely to have to put initial public offering plans on hold because of the crackdown.

The “transitory” inflation that the Fed is certain of – yet has proclaimed repeatedly to not understand (including former Fed Chair Janet Yellen once calling inflation a “mystery”) seems to be well understood not only by the consumers who are forking over more cash for their everyday products and services, but also to the companies who produce these products. 

One of those companies is Jeep maker Stellantis. The company’s Chief Executive Officer Carlos Tavares offered a warning this week that the company is under pressure, not only from the ongoing global semiconductor shortage that we have been covering for the last 12 months, but also from “rising raw material prices”, according to Bloomberg.

In fact, in a webinar organized by the Detroit-based Automotive Press Association, his exact words were: “I see the inflationary pressure very clearly. I see inflation coming from many different areas.”

This real-world example of how prices are starting to run amok is referred to as a “disconnect” between the view of some economists who say that price increases aren’t structural, Bloomberg notes. This stands at odds with what Tavares says he is experiencing firsthand at his company. 

“Transaction prices are rising and lacking supply of components like semiconductors is causing disruptions and cost increases,” Bloomberg notes Tavares as saying.

Stellantis is the latest in a long line of manufacturers that are starting to make it clear that inflation is rearing its head. Mercedes has also cited a rise in the cost of raw materials. 

Recall, just days ago we wrote about how paint company PPG, who supplies to major manufacturers like Ford and Boeing, is raising the prices of its paint and coatings solely as a result of “inflation in raw material and logistics costs”.

PPG’s CEO commented earlier this month: “What we’re obviously studying now is the need to be out with a third set of price increases. Inflation is across-the-board, it’s obvious and customers don’t have a lot of good ways to counter the argument that we need to have price relief.”

And it isn’t like PPG is just a localized business experiencing a one-off in costs: the company is in more than 70 countries and is still “feeling the pinch from the prices of oil, freight and distribution going up and raw materials running scarce”. 

Chief Executive Officer Michael McGarry continued: “I’m not seeing this as transitory. This work-from-home phenomenon is going to lead to additional wage inflation, because people are going to have the opportunities to figure out where they want to work.”

The V-shaped recovery has officially concluded, with eminis hitting 4,383 this morning, touching reaching their all time high from the second week of July (technically that was 4,384) as markets propel higher on earnings optimism despite mixed economic data and worries over Covid variant. At 7:30 a.m. ET, Dow e-minis were up 170 points, or 0.49% and S&P 500 e-minis were up 21.5 points, or 0.49%.

Nasdaq 100 e-minis were up 72 points, or 0.48%, trading above 15,000 points for the first time. Nasdaq futures hit a record high on Friday, helped by megacap technology stocks and strong earnings from social media companies Twitter and Snap, with investors eyeing business activity data later in the day.

Twitter gained 6.3% in premarket trading after it reported upbeat revenue growth, as the social media platform rolled out ad-targeting improvements to help brands reach potential customers. Snap Inc. (SNAP) climbs 17% in premarket trading with the social-media firm’s 2Q results and guidance well ahead of analyst expectations, affirming its position as a top pick in digital advertising, and notching the highest growth rates since late-2017.  Strong results from the social media firms set a positive precedent for Facebook Inc, which rose 2.8% ahead of its second-quarter results next week. Other major tech names, including Amazon.com, Apple Inc, Microsoft Corp, and Google-owner Alphabet Inc, were up between 0.4% and 1.4%.

On the other end, Intel fell 1.9% after the chipmaker said it still faces supply chain constraints and gave an annual sales forecast that implied a weak end of the year. Industrial conglomerate Honeywell rose 0.8% after posting a 32% rise in quarterly profit, helped by improving demand for aircraft parts. Schlumberger rose 1.5% after it reported a rise in its second-quarter profit. Other premarket movers:

• NRx Pharmaceuticals (NRXP) jumps 33%, pointing to a second day of double-digit gains, on plans to make a commercial formulation of a still experimental Covid-19 therapy, Zyesami (aviptadil), in million dose quantities.
• Shares in U.S-listed Chinese education stocks slump in premarket trading following a report that China is said to consider turning tutoring firms into nonprofits. New Oriental Education (EDU) sinks 42% and TAL Education (TAL) plummets 50%, while Gaotu Techedu (GOTU) plunges 55%.
• Twitter (TWTR) shares rise 5.5% with its 2Q results topping expectations. KeyBanc says its execution remains strong and Truist flags a “robust” product pipeline on the horizon for the social-media company.

“One of the most under-appreciated things about the equity markets right now is just how much these earnings have risen, and how much analysts have had to revise their earnings estimates up,” Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute, said on Bloomberg Television. She added she’s tracking the delta variant in case it affects consumer behavior.

In Europe, the Stoxx 600 index headed for a fourth day of gains, with all industry sectors in the green. Telecommunications were among the biggest gainers after an upbeat report from Vodafone Plc, while car-parts maker Valeo’s earnings beat boosted the automobile sector. Yields on core European bonds rose after the European Central Bank’s dovish tilt. Here are some of the biggest European movers today:

• Valeo shares gain as much as 8.8% after 1H results, which Morgan Stanley says were “solid” with Ebit well ahead of consensus. The company also confirmed its full-year guidance.
• Skanska rises as much as 7.6%, most since Nov. 9, after the Swedish construction company’s 2Q operating profit beat estimates.
• Dassault Aviation gains as much as 8% in Paris after the company reported 1H results, with adj. net sales that beat estimates. Berenberg noted a strong rebound in business-jet orders.
• Vodafone rises as much as 4.4%, the sharpest gain in more than five months, after the telecom operator posted a sales beat, with analysts saying the update could boost sentiment.
• Ultra Electronics soars as much as 34%, the most ever, and hits a record high after the U.K. defense firm said it was “minded to recommend” a new GBP2.58b takeover offer from Cobham.
• Signify drops as much as 9%, the most since March 2020, after 2Q results which both Morgan Stanley and Citi say were a miss on adjusted Ebita.
• Scatec falls as much as 19% after 2Q results missed estimates.

Earlier in the session,  Asian share markets were in a mixed mood on Friday after a volatile week in which sentiment over global growth waxed and waned with every new headline on the Delta variant.Hong Kong stocks slid as potential penalties for ride-hailing giant Didi Global Inc. sapped sentiment toward Chinese tech firms.

“In the face of headwinds from the Delta variant of the COVID-19 virus, the global economic expansion is moving forward—albeit more tentatively than a month ago,” said Sara Johnson, executive director of global economics at IHS Markit. “Outlooks in advanced countries with high vaccination rates remain bright, but near-term prospects in emerging and developing countries with low vaccination rates are murkier.”

That diverging outlook was reflected in MSCI’s broadest index of Asia-Pacific shares outside Japan which slipped 0.4%, leaving it down 1.1% on the week so far, led by Vietnam and Hong Kong, amid growing concerns about the economic impact from the spread of the delta variant. The MSCI Asia Pacific Index fell 0.6%, dragged by a broad-based selloff of defensive and cyclical sectors, including consumer staples and consumer-discretionary names. Chinese education stocks plunged, dragging the Hang Seng Tech Index lower by 3%, as the country considers asking companies that offer tutoring on the school curriculum to become non-profit. Stocks in Vietnam and the Philippines were also among the top decliners as Southeast Asian nations struggle to control Covid-19 outbreaks. The rapid spread of the delta variant continues to hurt regional shares, with the MSCI Asia Pacific Index down more than 8% from a February peak. The gauge is set for a third week of losses in four.

“Cyclical heavy-weighted stock indices like Singapore and Thailand” are more likely to underperform against their regional peers, said Kelvin Wong, an analyst at CMC Markets (Singapore). “Slow vaccination roll-outs in some Asian countries and the delta variant are likely to reinforce the ‘Peak Growth’ narrative theme play, which could be detrimental to cyclical stocks.” Shares in India edged higher in a volatile session, even as most quarterly earnings announced so far in the country have missed analysts’ estimates. Japan’s stock market is closed as the Summer Olympics officially begins in Tokyo, but was off 1.7% for the week and a whisker away from a seven-month trough.. It will be the first time in history that the games are held without spectators due to Covid-19 restrictions.

Investors are now looking ahead to the Federal Reserve’s policy meeting next week where more discussion about tapering is expected, though Chair Jerome Powell has repeatedly said the labor market remains well short of target. He also still argues that the recent spike in inflation will prove fleeting, which may be one reason bond markets have been rallying so hard. 

Meanwhile, the Summer Olympics officially begin in Tokyo, though for the first time in history events will be held without spectators due to Covid-19 restrictions. In the U.S., a recent rise in infections shows no signs of abating as the delta variant spreads through unvaccinated sections of the population.

In rates, the 10Y Treasury yield traded around 1.29%, 0.8bp higher on the day having hit a five-month low of 1.128% early in the week. Treasuries were narrowly mixed in early U.S. session, with long-end yields cheaper by ~1bp, steepening the curve amid subdued futures activity especially during Asia session with cash trading remaining closed for holiday and scant price action. 10-year yields are little changed on the week despite having touched lowest level since February on Tuesday as virus developments called into question economic growth assumptions. Losses were bigger for bunds and gilts as European stocks advance amid solid PMI data and haven demand is unwound. German 10-year bonds performed even better, with yields dropping seven basis points so far this week to -0.42%, the lowest since mid-February. The rally was helped by a dovish tilt from the European Central Bank overnight when it pledged not to raise rates until inflation was sustainably at its 2% target.

“Currently the ECB is forecasting inflation at 1.4% in 2023, and it anticipates a very gradual recovery towards target thereafter,” noted analysts at ANZ. “The guidance implies the ECB will not get caught up in future global tightening cycles unless it is justified by euro area dynamics. The policy puts the ECB at the dovish end of the global central bank hawkometer.”

That outlook has contributed to a steady decline in the euro to $1.1773 , near the four-month trough of $1.1750 touched earlier in the week. This helped lift the dollar index to its highest since early March, and it was last at 92.818 . The Bloomberg Dollar Spot Index is up 0.3% on the week. The euro has also been struggling against the safe-haven Japanese yen and hit its lowest in four months this week before steadying at 129.68 yen . With all the action in the euro, the dollar has been relatively steadier on the yen at 110.24 . The New Zealand dollar and Swedish krona led G-10 currency gains, while moves were mostly muted with Japan shut for a holiday

In commodity markets, gold dipped to $1,802 an ounce and was 0.4% easier on the week. Base metals have fared much better as strong demand meets restricted supply. Oil prices have also been buoyed by speculation demand will outpace supply in coming months even after OPEC+ agreed to expand production. Brent was last off 27 cents at $73.52 a barrel, after jumping overnight, while U.S. crude lost 25 cents to $71.66 per barrel.

Looking at the day ahead, the main highlight will likely be the release of the flash PMIs for July from around the world, whilst other data includes the UK’s retail sales for June. Otherwise, earnings releases include Honeywell, NextEra Energy and American Express, and today also marks the start of the Olympic Games in Tokyo.

Market Snapshot

• S&P 500 futures up 0.4% to 4,376.75
• STOXX Europe 600 up 0.5% to 459.01
• MXAP down 0.6% to 201.70
• MXAPJ down 0.7% to 675.50
• Nikkei up 0.6% to 27,548.00
• Topix up 0.8% to 1,904.41
• Hang Seng Index down 1.4% to 27,321.98
• Shanghai Composite down 0.7% to 3,550.40
• Sensex up 0.5% to 53,095.99
• Australia S&P/ASX 200 up 0.1% to 7,394.35
• Kospi up 0.1% to 3,254.42
• Brent futures down 0.3% to $73.56/bbl
• Gold spot down 0.1% to $1,805.41
• U.S. dollar index little changed at 92.86
• German 10Y yield rose 1.8 bps to -0.407%
• Euro little changed at $1.1782
• Brent Futures down 0.3% to $73.59/bbl

Top Overnight News from Bloomberg

• Negotiations between the European Union and the U.S. to recognize each other’s vaccination passes are struggling to make headway due to the absence of a federal certification system in America
• Companies across Europe are stepping up price hikes to cope with mounting cost pressure and business disruption, adding to the alarm bells about an inflation spike that could spell trouble for the economy
• Britain’s economy showed signs of slowing in July as euphoria following the easing of restrictions eased and a resurgence of the coronavirus caused widespread staff shortages
• Spreads are blowing out between short-term German debt and its peers after the European Central Bank signaled it may not raise interest rates for years

A more detailed look at global markets courtesy of Newsquawk

Asian stocks traded mixed with the region indecisive following on from a choppy performance stateside and with the continued absence of Japanese participants, as well as rising COVID-19 cases adding to the subdued mood. ASX 200 (+0.1%) swung between gains and losses with strength in tech, healthcare and consumer stocks offset by weakness in the top-weighted financials and commodity-related sectors, while the mood was also kept tentative by New Zealand PM Arden’s announcement to pause the trans-Tasman travel bubble for eight weeks and after New South Wales Premier Berejiklian flagged an extension to the Sydney lockdown beyond July 30th. KOSPI (+0.1%) was positive as earnings took centre stage including the nation’s largest bank KB Financial Group which topped forecasts for Q2 net, although gains for the index were limited by rampant infections which has forced the government to extend social distancing rules for another two weeks. Hang Seng (-1.5%) and Shanghai Comp. (-0.7%) were negative whereby healthcare led the declines across defensives and property developers were pressured after Chinese banks tightened mortgage lending in various cities, while local authorities also bolstered measures aimed at curbing home prices. In addition, tensions continued to linger ahead of US Deputy Secretary of State Sherman’s visit to China from Sunday with the US said to be disappointed by China’s response to the WHO plan for a phase two probe of COVID origins and stated that this is not a time for China to be stonewalling.

Top Asian News

• Zomato Soars 80% in Debut of India’s New Tech Generation
• Chinese Startup Meicai Said to Mull Hong Kong IPO Amid Crackdown
• Malaysia Apologizes for ‘Human Error’ Over Empty Covid Jab
• Condom Maker Lifestyles Is Said to Mull $500 Million Sale

Bourses in Europe remain on the front foot as the region holds onto the gains seen at the open (Euro Stoxx 50 +0.8%), although momentum has somewhat stalled with this week’s risk events out of the way, with sights now set on next week’s FOMC. US equity futures also conform to the mild risk appetite with broad-based gains across the majors. News flow has remained light and Flash PMIs varied, with the EZ largely topping forecasts whilst the UK disappointing, but nonetheless, the Delta variant themes resonated across all releases alongside the likelihood of higher costs feeding through to higher consumer prices in coming months. Sectors are predominantly in green with no overarching theme. Autos top the charts, closely followed by Basic Resources, Tech, and Retail, whilst Oil & Gas, Travel and Media lag. In terms of individual movers, Vonovia (+0.1%) and Deutsche Wohnen (-1.3%) came under pressure amid source reports the latter’s takeover will likely fail and the 50% vote threshold likely not be reached. Venovia said it is still counting shares tendered by Wohnen shareholders and the result is expected on Monday. In terms of earnings-related movers, Vodafone (+2%) is underpinned after topping revenue forecasts. Valeo (+7.5%) extends its earlier gains after constructive earnings but warned of rising raw material prices.

Top European News

• Isolation Scrapped for Key Workers Over U.K. Shortages
• ECB 2% Goal Must Be 12-18 Months Away Before Hike, Villeroy Says
• KPMG’s Banking Audits Aren’t Good Enough, U.K. Watchdog Says
• Gold Steadies on ECB’s Support Pledge, Mixed U.S. Economic Data

In FX, the Dollar is firmer almost across the board after recovering from several bouts of selling pressure on Thursday post-ECB and IJC that pushed the index down to within a whisker of 92.500 at one stage before a firm, late bounce. The DXY is hovering just under 93.000 within a 92.964-777 band vs yesterday’s 92.926-504 range, and looking for further direction from Markit’s preliminary US PMIs beyond outside influences that may well prompt more pronounced price action in the interim, like a marked change in overall risk sentiment or yield and curve backdrop. On that note, the Yen looks very vulnerable as the general market mood continues to improve and Treasuries bear-steepen at the end of a second consecutive Japanese market holiday, with Usd/Jpy now approaching 110.50 having breached a series of recent highs just shy of 110.40 plus the 21 DMA that comes in at 110.42 today and tested, but respected or rejected 110.00 a couple of times. Similarly, the Pound seems prone to another fall following fades at fractionally lower peaks vs the Greenback and Euro, not to mention far from flash UK PMIs, as Cable pulls back below 1.3750 and Eur/Gbp rebounds through 0.8550.

• CHF/CAD – Also unwinding residual safe haven premium and losing out due to unfavourable rate dynamics, the Franc has retreated to 0.9200 vs the Buck and nearer 1.0850 than 1.0800 against the Euro, while the Loonie has lost some traction from oil awaiting Canadian retail sales for some independent impetus as it meanders inside 1.2600-1.2550 extremes.
• NZD/EUR/AUD – All marginally divergent against their US rival, with the Kiwi benefiting from another change in crosswinds vs the Aussie after a slide in Australia’s services PMI under the key 50.0 threshold and NSW’s Premier warning that Sydney’s lockdown will have to be extended again beyond next Friday due to conditions in parts of the city deemed to be at national emergency levels. Nzd/Usd is holding above 0.6950, whereas Aud/Usd has backed off from 0.7400 and Aud/Nzd from just over 1.0600. Elsewhere, the Euro is still keeping afloat of 1.1750, and with the aid of upbeat German preliminary PMIs that underpinned the Eurozone prints following sub-consensus French readings. However, Eur/Usd is capped into 1.1800 where 1 bn option expiries reside.
• EM – Very little reaction to standard 2-way, but basically stable Yuan mantra from China’s FX regulator, understandably, but the Zar has extended post-SARB and Eskom power shutdown declines and the Rub is looking for guidance from the CBR that is expected to hike 50 bp amidst comparative calm in Brent crude prices between Usd 73.97-32/brl.

In commodities, WTI and Brent front-month futures have been consolidating within tight ranges overnight after yesterday’s settlements with a gain of over USD 1.50/bbl apiece. The overnight holding pattern came amid a lack of fresh catalysts and with Japanese players away from their desks due to a domestic holiday. The demand picture remains at the helm of COVID variant developments and the race to double-vax (and a possible booster jab), whilst the supply side of the equation holds some near-term certainty with the OPEC+ quotas set and the next meeting slated for September. In the absence of developments that impact the supply/demand balance, crude prices are likely to take a cue from the broader market sentiment, with WTI meandering around USD 71.75/bbl and within a relatively tight USD 71.46-79 band. The Brent contract trades on either side of USD 73.50/bbl in a USD 73.32-86 intraday range, with the arb between the two front-month contracts steadier around the USD 2/bbl mark. Elsewhere, spot gold has been contained within a USD 10/bbl range throughout most of the session in the absence of news flow and with key risk events out of the way, but the yellow metal resently dipped below USD 1,800/oz. LME copper briefly reclaimed the USD 9,500/t handle as the constructive risk appetite throughout the week (so far) alongside the rosy demand fundamentals. That being said, IHS in their Flash EZ PMI release noted “Supply chain delays remain a major concern for manufacturing, however, constraining production and pushing firms’ costs higher. These higher costs have led to a near record increase in average selling prices for goods and services, which is likely to feed through to higher consumer prices in coming months.” – highlighting some fears that prompted China’s crackdown on the surge in base metal prices.

US Event Calendar

• 9:45am: July Markit US Composite PMI, prior 63.7
• 9:45am: July Markit US Services PMI, est. 64.5, prior 64.6
• 9:45am: July Markit US Manufacturing PMI, est. 62.0, prior 62.1

DB’s Jim Reid concludes the overnight wrap

It’s your last chance this morning to respond to our latest monthly survey, link here. This month we ask a number of questions about covid restrictions to judge how you feel about how life is progressing and will progress over the coming months. We also ask whether the UK has done the right or wrong thing by lifting all legal covid restrictions. In addition, we ask all the normal regular and market directional questions. All responses gratefully received. It should only take 3-4 minutes to complete and is totally anonymous.

It may be the Olympic Opening Ceremony this morning, but markets failed to take the ‘faster, higher, stronger’ motto to heart yesterday, with investor risk appetite starting to show signs of slipping back again after the recent bounceback. Although the ECB dominated attention, some weaker-than-expected US data served to dampen sentiment ahead of next week’s Fed meeting, whilst residual concern about the delta variant’s spread and the prospect of tighter restrictions remained in the background for a number of key economies.

Starting with the ECB, the main headline was that the Governing Council updated their forward guidance in light of the recent Strategy Review, taking into account their new symmetric 2% inflation target. In the statement, the ECB said that they expect interest rates to remain “at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon”. So given that the ECB’s latest forecasts in June pointed to headline HICP inflation at +1.5% in 2022 and +1.4% in 2023, it’s implying that there’s still a long way to go before rate hikes would be consistent with the inflation outlook. Indeed, the statement said in addition that this “may also imply a transitory period in which inflation is moderately above target.” Meanwhile in their reaction piece (link here), our European economists have now pushed back the timing of the strategic PEPP exit decision from September to December, as a result of President Lagarde still saying that PEPP exit would be premature and the uncertainty of the new delta variant.

In response to the ECB, sovereign bond yields moved lower across the continent, with those on 10yr bunds (-3.2bps), OATs (-3.9bps) and BTPs (-5.1bps) all hitting their lowest levels in at least 3 months. There was also a noticeable tightening in spreads, with the gap between Italian (-2.0bps) and Spanish (-2.6bps) 10yr yields over bunds both coming down on the day, while the Euro (-0.20%) closed at a 3-month low against the US dollar of $1.177. That said, press reports indicated that there wasn’t complete consensus on the Governing Council around the new approach, with Bloomberg saying that Bundesbank President Weidmann and Belgian Governor Wunsch were against the new forward guidance and were concerned about making an overly long-term commitment to keeping monetary policy loose.

Speaking of central banks and inflation, yesterday DB Research put out the second note in our “What’s in the tails?” series, where our research group is considering alternative viewpoints of interest. This edition looks at heightened inflation risks in Germany, where the ECB’s policy of achieving 2% inflation across the Euro Area as a whole means that inflation within Germany could exceed the 2% mark for several years without triggering an ECB policy response. Indeed, this scenario is made even more likely by the fact that the ECB has announced it will wait until they’re fully convinced their policy has worked before adjusting, making such a scenario even more likely. You can read the latest note here.

Although European equities put in another decent performance yesterday, with the STOXX 600 up +0.56%, US indices were more subdued as the S&P 500 only rose +0.20%. Tech stocks outperformed on both sides of the Atlantic, with the NASDAQ up +0.36% and the more concentrated NYFANG+ index gaining +0.46%. Furthermore, after the close both Snap and Twitter reported earnings that beat estimates, which saw both rise in after-hours trading, and also support Facebook and Google’s share prices. However, small-cap stocks lost ground yesterday after their best 2-day performance since January, with the Russell 2000 down -1.55%. And reflecting the broader cautious tone, yields on 10yr Treasuries declined another -1.0bps to close at 1.278% on the back of lower real yields.

Staying on the US, the potential infrastructure bill continued to move toward the finish line with the bipartisan group of Senators agreeing on a portion of funding that will come from delaying Trump-era Medicare regulation. Senator Joe Manchin, one of the moderate Democrats at the centre of the negotiations, declared that there was “an agreement on 99%” of the bill with the pay-fors lined up. Many Senators are expecting the legislation to move forward early next week with votes from both parties needed. Lastly, Senate Majority Leader Schumer announced that he would push to delay the Senate’s August recess – currently set to start on August 9 – to finish working on the bill.

Updating our screens overnight, Asian markets have similarly put in a subdued performance, with the Hang Seng (-0.99%) and Shanghai Comp (-0.65%) each losing ground, whilst the Kospi (+0.10%) and India’s Nifty (+0.16%) have made modest gains. In Japan, markets are closed for a public holiday, and outside of Asia, futures on the S&P 500 are up +0.24%.

Looking ahead now, the main highlight today will likely be the release of the flash PMIs from Europe and the US, which should give us an initial indicator of how their economies have fared into the start of Q3. Back in June, the final Euro Area composite PMI hit a 15-year high of 59.5, while the US number came in at 63.7, which was its second-strongest on record, so it’ll be interesting to see if that momentum has been maintained, particularly given the recent uptick in Covid-19 cases and concerns about the delta variant. Overnight, we’ve already had the flash numbers from Australia, which showed a material weakening in the services PMI given the imposition of lockdown in various regions, which fell to a contractionary 44.2 (vs. 56.8 last month) and brought the composite reading down to 45.2 (vs. 56.7 last month). As we’ve seen in other regions however, manufacturing activity was relatively shielded, with the PMI there still at 56.8 (vs. 58.6 last month), and above the crucial 50-mark that separates expansion from contraction.

One asset class that put in a relatively strong performance yesterday was commodities, with Bloomberg’s commodity spot index up +0.85% in its 3rd consecutive advance, leaving it within 1% of its high for the decade back in June. Oil prices supported the rebound, as Brent Crude (+2.16%) and WTI (+2.29%) moved back into positive territory for the week following Monday’s rout. However, one of the most notable moves yesterday was in coffee prices, which surged +10.03% yesterday to a 6-year high thanks to a major frost in Brazil hurting production. So you might start to see inflation showing up in the price of your morning coffee as well now.

Turning to the pandemic, we had some brighter news from the UK yesterday as the number of new daily cases came in at 39,906, which means that the 7-day average of cases now stands at 46,460, down from 47,696 the previous day. That’s the first decline in the 7-day average since May 18, so the big question now is whether this will be sustained given the reopening on Monday, to which we should find out the answer in the coming days. As previously discussed, we think that the UK is an interesting case study to watch, since their vaccination programme is relatively advanced (over two-thirds of adults are fully vaccinated), while the vast bulk of legal restrictions have now been removed, with even nightclubs open again. So if the UK can make it through the summer without seeing pressure on its health service, that’ll offer a positive signal to other countries as to where you can potentially get to with high vaccination rates.

In terms of what’s going on elsewhere, Portugal announced that it would be extending restrictions to further municipalities in light of a recent rise in cases. Chancellor Merkel said at her summer press conference that cases could double in less than two weeks, as was seen in France – where yesterday they announced cases were up over 133% in a week. Separately, Italy announced that some activities, such as indoor dining, will be restricted for residents who are not vaccinated against Covid-19 or recently tested negative. And over in the US, weekly cases were up over 225k in the last week with the CDC projecting cases are likely to increase to over 305k per week by mid-August. States with relatively lower vaccination rates are unsurprisingly driving much of the current case growth, with Florida, Missouri, Arkansas, and Louisiana the current hot spots in terms of cases per capita over the last week. Finally in Asia, Singapore has said that it will postpone its annual independence day celebrations to August 21 from August 9 in order to control the spread of the virus, and South Korea has also decided to extend its current social distancing restrictions in the greater Seoul area for another two weeks.

On the data side, we had a number of weaker-than-expected US releases yesterday, most notably with a poor set of initial jobless claims for the week through July 17, which surprised noticeably to the upside with a 419k reading (vs. 350k expected). That’s a +51k increase from the previous week, marking the biggest weekly increase since March, whilst the prior week’s number was also revised up +8k. Otherwise, existing home sales for June came in at an annualised rate of 5.86m (vs. 5.90m expected), the Chicago Fed’s National Activity index was at 0.09 in June (vs. 0.30 expected), and the Kansas City Fed’s manufacturing activity index for July came in at 30 (vs. 25 expected).

To the day ahead now, and the main highlight will likely be the release of the flash PMIs for July from around the world, whilst other data includes the UK’s retail sales for June. Otherwise, earnings releases include Honeywell, NextEra Energy and American Express, and today also marks the start of the Olympic Games in Tokyo.

Thousands of people flooded the streets of Turin, a city located in northern Italy, Thursday evening to protest harsh government restrictions for unvaccinated citizens, dubbed the “green pass.” 

The Italian prime minister, Mario Draghi, told a press conference Thursday that the country will need to act and suppress another wave of COVID-19 infections at a time the Delta variant is spreading throughout Europe.  

The green pass — a digit certificate containing proof of immunization will be necessary for anyone older than 12 to enter stadiums, museums, theatres, cinemas, exhibition centers, swimming pools, and gyms. The pass is an extension of the EU’s digital Covid certificate and will also be required for restaurants.

The updated version of the vaccine passport will begin on Aug. 5 and didn’t sit well with residents who see their freedoms whittled away by the government. This violation of freedom sparked a massive protest in Turin. 

“As soon as the Italian government announced the introduction of the “health passport” people took to the streets to protest. The images below are from Torino just now. The feeling in the streets is one of anger at the government’s decision,” the Twitter user said. 

🚨🚨Itália 🇮🇹: Tão logo o governo italiano anunciou a introdução do “passaporte sanitário” as pessoas foram às ruas protestar.
As imagens abaixo são de Torino agora pouco. O sentimento das ruas é de raiva pela decisão do governo. pic.twitter.com/HMiK7LQIl9

— ivan kleber (@lordivan22) July 22, 2021

Like the thousands of French citizens protesting in the streets in the past week, the Italian people were outraged by additional restrictions. 

NOW – Thousand take it to the street in #Turin as Italy makes Covid “green pass” mandatory for most public places.pic.twitter.com/8QJnFMhjJd

— Disclose.tv 🚨 (@disclosetv) July 22, 2021

The removal of COVID measures to restart European economies was widely hailed as a success. Still, the new Delta variant is causing concern and giving politicians the optimal cover to implement more populous control via green passes.