US futures were flat (bouncing off session lows), and a rally in tech stocks reversed after three days of gains as recessionary PMI data out of Europe and disappointing results from COF, CRSR, SAM, SIVB, STX and others raised concerns about sliding corporate profits amid slowing economic growth. Contracts on the Nasdaq 100 were down 0.5% as 7:30am in New York, while S&P futures ticked 0.3% lower, but are on pace to close the week more than 3% higher after solid rallies in the past two days.

Europe's Stoxx 600 Index added 0.5%, poised for a weekly advance as investors shrugged off worries about the economic outlook prompted by the worst Euro Area PMI data which dropped to a 17-month low in July, dipping beneath the level that signals a contraction, and confirming Europe has entered a recession. The downturn was driven by worsening output among manufacturers and a near-stalling of service-sector growth. Economists had expected a mild expansion.

Despite the dismal European economic data, global stocks remain on course for their best week in a month, paring this year’s equity market rout to about 18% amid speculation that the world is headed for a recession which will force central banks to end their tightening earlier than expected. Earnings have been a mixed bag so far in Q2, with the scandal-plagued Twitter due to report results later.

“Q2 earnings were seemingly not as bad as feared,” Mizuho International Plc strategists Peter McCallum and Evelyne Gomez-Liechti wrote in a note to clients. “That said, tech giants announced spending cuts and a hiring slowdown. Consumer firms lowered this year’s guidance.”

In premarket trading, Snap shares plunged 28% as the company reported missed its already slashed guidance and removed guidance, roiled partly by a major slowdown in ad spending. Other social media-linked stocks, including Facebook-owner Meta Platforms, Google-parent Alphabet and Twitter, also fell. Meanwhile, Seagate Technology shares are down 13% in premarket trading, after the computer hardware and storage company issued a weak forecast for the current period. Intuitive Surgical shares plunged 12% in US premarket trading after the company’s second-quarter profit and revenue both missed the average analyst estimate. At least four analysts cut their PTs on the surgical systems maker, noting the capital concerns and macro headwinds that weighed on the performance. Verizon slumped more than 2% after the company slashed its FY adj EPS range from $5.40-$5.55 to $5.10-$5.25.It wasn't all bad news: American Express jumped after reporting that spending on its network soared, leading the firm to raise its forecast for full-year revenue.

“The Snap results came as a warning for other Big Tech names that rely on ad revenue,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “The results could reverse appetite for at least a couple of them, including Google and Meta before the closing bell.” 

These technology heavyweights, which led the rally in US stocks following the pandemic-driven slump in early 2020, have been among the biggest decliners this year as the Federal Reserve began an aggressive cycle of interest rate increases. The tech sector has been particularly vulnerable as higher rates mean a bigger discount for the present value of future profits, hurting growth shares with the highest valuations. With the Fed expected to announce another hike at its meeting next week, focus has been on the second-quarter earnings season for clues on how companies are holding up amid surging inflation and a possible looming recession.

In Europe, the Euro Stoxx 50 rose 0.5%. IBEX outperforms peers, adding 0.6%, FTSE 100 is flat but underperforms peers. Travel, real estate and utilities are the strongest performing Stoxx 600 sectors. Here are some of the biggest European movers today:

• Uniper shares were volatile after Germany confirmed the rescue package for the utility. The shares pared earlier gains of as much as 11% to briefly turn negative. Majority-owner Fortum rose as much as 13%.
• Delivery Hero shares surge as much as 21%, the most since December 2019, after lifting full-year adjusted Ebitda margin target.
• Beazley shares jump as much as 13% to the highest in more than two years after an upgrade to profit guidance driven by cyber insurance.
• Sinch shares jump as much as 15% following a volatile run for the cloud messaging platform firm, with Handelsbanken saying its recent results contained few positive surprises but that there are good operational signs.
• Stora Enso shares fall as much as 9.8%, the most since May, after a quarterly update analysts say looks somewhat soft, with a miss on earnings for the Finnish packaging and forestry group.
• Lonza shares fall as much as 3.4% after it reported 1H results. While noting the Swiss company is a “structural long- term growth story,” the lack of an upgrade to 2022 outlook may leave some disappointed, Jefferies says.
• Aston Martin shares fall as much as 13%, paring the gains of the past week, as Jefferies says the announced boost to the company’s capital structure leaves open questions, with the stock likely to remain “volatile” in coming weeks.
• Temenos shares drop as much as 7.7%. 2Q results missed estimates and analysts anticipate investors may be skeptical that the software firm will be able to hits its confirmed FY guidance.
• Electrolux Professional shares fall as much as 6.5%, after component shortages eroded the appliance manufacturer’s margins in the second quarter.

Earlier in the session, Asian stocks headed for the biggest weekly gain in four months as renewed optimism in Chinese technology shares helped offset downbeat sentiment triggered by a disappointing earnings report by Snap Inc. The MSCI Asia Pacific Index was poised for a slight gain Friday, maintaining a weekly rally of more than 3%. Shares in Hong Kong edged higher, with a gauge tracking China’s technology sector posting a three-day gain, while Japanese stocks also gained.  Investors are looking anew at China’s tech sector after Beijing wrapped up a year-long probe into ride-hailing giant Didi Global Inc., which was fined $1.2 billion. Sentiment has improved as US chipmaker stocks staged a stunning rebound on evidence that supply-chain issues are easing and demand is growing. 

Asian stocks are up less than 1% so far this month after slumping almost 7% in June, the market’s worst month in over two years, as traders pared expectations of aggressive monetary tightening by the US Federal Reserve and as the dollar softened. “Recession risks have definitely risen in the developed markets, but one of the bright spots that we’re seeing is really in places like Asia ex-Japan, where a lot of economies are still continuing to reopen pretty strongly,” Clara Cheong, global market strategist at JPMorgan Asset Management, told Bloomberg TV. Expectations China will rebound in the second half should “help to bolster Chinese equity markets and the broader Asia ex-Japan region,” Cheong said.

Japanese equities erased earlier losses as investors assessed US earnings results amid economic uncertainty.  The Topix index rose 0.3% to 1,955.97 as of the market close in Tokyo, while the Nikkei 225 advanced 0.4% to 27,914.66. Keyence Corp. contributed the most to the Topix’s gain, increasing 3%. Out of 2,170 shares in the index, 1,147 rose and 865 fell, while 158 were unchanged. “Strong US markets were a supporting factor for Japanese stocks today,” said Masahiro Ichikawa, chief market strategist at Mitsui DS Asset Management

Key stock gauges in India completed their best weekly performance since early-February 2021 as foreign funds turned buyers. The S&P BSE Sensex rose 0.7% to 56,072.23 in Mumbai, taking its weekly gain to 4.3%. The NSE Nifty 50 Index also rose 0.7% Friday. Nine of the 19 sectoral indexes compiled by BSE Ltd. advanced, led by a gauge of lenders. Foreigners net-bought more than $1 billion of local stocks this week through July 20, after 15 straight weeks of net selling. Read: After $30 Billion Exodus, Global Money Trickles Back Into India The decline in crude oil prices and rebound in foreign inflows helped the Sensex to close above 56,000, Amol Athawale, vice president at Kotak Securities, wrote in a note.  “The fear of aggressive rate hikes by both the US Fed and RBI seems to be moderating, which is giving investors some room to lap up stocks of companies with good fundamentals,” Athawale said.  In earnings, Reliance Industries Ltd., India’s biggest company by market value, is scheduled to announce results later Friday. Infosys, Kotak Mahindra Bank and ICICI Bank are due to report their results over the weekend.

In FX, the euro turned lower, pushing the Bloomberg Dollar Index to only its second daily advance this week after flash PMI data in France, Germany and the euro zone as a whole disappointed. The euro dropped as much as 1% to $1.0130.  UK readings were in line with expectations. CAD and CHF are the strongest performers in G-10 FX, EUR and DKK underperform.

In rates, Treasuries were richer across the curve, following wider rally seen in bunds after flash PMI data in France, Germany and the eurozone as a whole disappointed and entered contraction territory. US yields richer by up to 6.5bp across 5-year sector, tightening the 2s5s30s fly byb 6.5bp on the day, adding to Thursday’s belly-led gains. US 10-year yields around 2.82%, richer by 5.5bp on the day with bunds outperforming by ~10bp in the sector. Three-month dollar Libor -1.67bp at 2.76629%. IG dollar issuance slate empty so far; Thursday saw a quiet session for issuance, following a rush of deals seen at the start of the week.

European bonds also rallied, led by the short-end, with 2-year German bond yields falling as much as 25 basis points to 0.42%, its biggest plunge since 2008 on expectations a recession is now unevitable; money markets traders no longer fully price in a 50-basis-point ECB hike in September. Peripheral spreads are mixed to Germany; Italy tightens, Spain and Portugal widen.

In commodities, crude futures dropped 2% erasing an earlier gain after the catastrophic european economic data. Most base metals trade in the green; LME aluminum rises 1.5%, outperforming peers. LME tin lags, dropping 0.9% Spot gold is little changed at $1,718/oz

Bitcoin remains bid and has eclipsed the USD 23.5k mark at best, though this was brief and it has since waned marginally.

Looking to the day ahead, and the main data highlight will be the global flash PMIs for July. Otherwise, we’ll hear from the ECB’s Villeroy. Earnings releases include Verizon Communications, NextEra Energy, American Express and Twitter.

Market Snapshot

• S&P 500 futures down 0.3% to 3,987.25
• STOXX Europe 600 up 0.3% to 425.79
• MXAP up 0.2% to 159.10
• MXAPJ little changed at 521.40
• Nikkei up 0.4% to 27,914.66
• Topix up 0.3% to 1,955.97
• Hang Seng Index up 0.2% to 20,609.14
• Shanghai Composite little changed at 3,269.97
• Sensex up 0.7% to 56,083.03
• Australia S&P/ASX 200 little changed at 6,791.50
• Kospi down 0.7% to 2,393.14
• German 10Y yield little changed at 1.07%
• Euro down 0.7% to $1.0157
• Gold spot up 0.0% to $1,719.20
• U.S. Dollar Index up 0.21% to 107.14

Top Overnight News from Bloomberg

• Private-sector activity in the euro area unexpectedly shrank for the first time since the pandemic lockdowns of early 2021, adding to signs that a recession might be on the horizon. A survey of purchasing managers by S&P Global dropped to a 17- month low in July, dipping beneath the level that signals contraction.
• US social-media giants shed nearly $47 billion in market value in extended trading Thursday, as disappointing revenue from Snap Inc. raised concerns about the outlook for online advertising.
• Former President Donald Trump ignored pleas to call off the mob storming the US Capitol and remained publicly silent as he watched the violence unfold on television from his personal dining room off the Oval Office, according to evidence and testimony to the committee investigating last year’s insurrection.
• US equity futures fell Friday and Asian stocks wavered after disappointment over technology earnings stoked worries about the economic outlook and took some of the shine off this week’s global equity rebound.

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were mostly higher after the gains in the US but with upside capped by lingering growth concerns. ASX 200 was rangebound near the 6,800 level after PMI data slowed but remained in expansion territory. Nikkei 225 was kept afloat after the recent dovish affirmations from the BoJ and Governor Kuroda but with gains limited amid the COVID situation and with Core Inflation rising by its fastest pace in 7 years. Hang Seng and Shanghai Comp. were mixed amid earnings releases and with suggestions that President Biden could temporarily reduce China tariffs in response to supply chain disruptions and rising inflation.

Top Asian News

• US Democrat Rep. Ami Bera said President Biden could opt for a "temporary reduction" of Trump-era tariffs on China in response to supply chain disruptions and rising inflation, according to Nikkei.
• Hong Kong Faces First Prime Rate Hike Since 2018 on Hawkish Fed
• South Korea Restores Military Drills Once Reduced to Help Trump
• China Says Japan ‘Shall Pay’ If It Handles Fukushima Water Wrong
• Russia Rises With China in Latest Japan Threat Assessment
• UK Politicians Voice Concern Over HSBC China Communist Committee
• Inflation to Drive RBI’s Rate Action Rather Than Rupee, DBS Says

European bourses are resilient despite Flash PMIs for June moving into contractionary territory, with the regions upside perhaps derived from potential less-hawkish ECB implications.  Stateside, futures are subdued but have been fairly contained after late Wall St. action and ahead of further key earnings. Sectors are mostly in the green and feature upside in Real Estate and Travel while Banks, Resources and Autos lag.

Top European News

• Euro-Zone Activity Is Suddenly Shrinking in Ominous Growth Sign
• Crude Fluctuates Amid Soft European Economic Data
• UK Businesses Say Economic Growth Slowed to a Crawl in July
• Delivery Hero Cuts Order Forecast for 2022 With Growth Slowing
• Russia Rises With China in Latest Japan Threat Assessment

FX

• Euro reverses further from post-ECB hike peaks after dire EZ PMIs, including sub-50 manufacturing headlines - EUR/USD down to circa 1.0130 and only finding support ahead of 10 DMA.
• Pound down in sympathy, but holding up better around 1.1950 vs Greenback as UK retail sales come in above forecast along with preliminary PMIs.
• Aussie hampered by slowdown in PMIs and hefty option expiries at the 0.6900 strike.
• Yen and Franc cushioned by soft yields to an extent and DXY fading into 107.500, USD/JPY middle of 137.95-02 range and USD/CHF nearer base of 0.9706-0.9658 band.
• Loonie retains 1.2800 handle as oil settles down somewhat in the run up to Canadian consumption data.

Fixed Income

• Bonds extend already extensive recovery rallies from post-ECB hike lows.
• Bunds up to 154.32 from 149.69 at worst yesterday, Gilts to 117.43 from 114.20 and 10 year T-note at 119-24 compared to 117-14+.
• Curves bull steepen as poor EZ PMIs prompt further rollback of tightening expectations.
• BTPs latch on to the bid after early Italian political wobble as 10 year benchmark rebounds from 120.85 to 123.241, at best.

Commodities

• Crude benchmarks have given up initial gains following the release of Flash PMIs which point to a Q3 QQ EZ GDP contraction; prior to this, contracts were firmer.
• TotalEnergies (TTE FP) commits to a large-scale fuel price reduction programme until end-2022 for all service stations in France. September 1st - November 1st: EUR 0.20/litre reduction vs global market quotation prices; November 1st - December 1st: EUR 0.10/litre reduction vs global market quotation prices.
• UN spokesperson expects the signature of the grains agreement between Russia and Ukraine to take place today at 14:30BST/09:30EDT.
• Spot gold continues to inch higher above the USD 1700/oz mark and has risen as high as USD 1725/oz thus far.

ECB

• ECB SPF (Q3). HICP Inflation: 2022 7.3% (prev. 6.0%; ECB June 6.8%,) 2023 3.6% (prev. 2.4%; ECB June 2.1%), 2024 2.1% (prev. 1.9%; ECB June 2.1%), Longer-term/2027 2.2% (prev. 2026 2.1%). Click here for more detail.
• ECB's de Cos says the most important aspect of the anti-fragmentation tool is its creation.
• ECB's Kazimir says the September rate hike could be 25bps or 50bps, via Bloomberg; it will take a while to get inflation to desired levels, wishes to never use TPI but "we will see".
• ECB's Villeroy says, if necessary, we will be as determined in activating TPI as we have been in creating it, no pre-defined limits to purchases.
• Bundesbank says Germany faces slower growth and new spike in inflation; expects inflation to remain high in the coming months and spike in September once govt subsidies on fuel and rail tickets expire on Aug 31st.

US Event Calendar

• 09:45: July S&P Global US Composite PMI, est. 52.4, prior 52.3
• 09:45: July S&P Global US Services PMI, est. 52.7, prior 52.7
• 09:45: July S&P Global US Manufacturing PM, est. 52.0, prior 52.7

DB's Jim Reid concludes the overnight wrap

I'm off to my colleague Henry's wedding tomorrow. He was in charge of the EMR yesterday and mentioned his upcoming nuptials. A number of people didn't read properly that the EMR was coming from his email address yesterday and congratulated me on getting married instead. I'm afraid I don't have much time for bigamy at the moment.

Markets were as volatile yesterday as my wife would be if I told her I was getting married tomorrow as they grappled with the first ECB rate hike in over a decade, the resignation of Italian PM Draghi and fresh elections set for September, a market disappointment by the ECB anti-fragmentation tool, the resumption of gas flows through the Nord Stream pipeline, a US President who has Covid, poor Snap earnings and last but not least signs of softening in the US labour market. That accumulation of downside risks saw a huge rally in US rates but was not enough to knock risk markets off their stride, with the S&P 500 (+0.99%) and Europe’s STOXX 600 (+0.44%) both gaining ground after a back and forth day. Futures are down as well on the after hours Snap results. Sovereign bonds actually initially sold off in reaction to the ECB, but worries about Italy and fears of a global recession eventually dominated to send core sovereign yields mostly lower on the day, especially in the US, just as other cyclical assets like oil prices fell back as well.

Running through all that, we’ll start with the ECB which our Europe economics team wraps up in full here. They begun their hiking cycle with a 50bp hike for all three of their main interest rates, which leaves the deposit facility rate at 0%, and the main refinancing rate at 0.5%. There are a number of lessons we can take from this, but a key one is that forward guidance appears to be dead, as this went against the ECB’s explicit comments from their June meeting, when they indicated they intended to commence with a 25bps move. And in their statement this time around, they said that the Governing Council would “make a transition to a meeting-by-meeting approach to interest rate decisions.” Bear in mind that it was only at the start of this week that the possibility of a 50bps hike began to be taken seriously following a number of media reports, so we could have to get increasingly used to a world in which central bank decisions remain in doubt up to just a few days before, which is unlike what we’ve been used to in recent years, when markets have been strongly guided towards specific outcomes way before the meetings themselves. Our Europe economists expect at least another 100bps of hikes in the near term and maintain their call for a 2% terminal rate, even if it is delayed until 2024 over a two-stage hiking cycle that has to pause because of a recession.

As well as the decision to hike, the ECB also announced their new Transmission Protection Instrument (TPI), which they said could be “activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area.” Notably for markets, they further said that “The scale of TPI purchases depends on the severity of the risks facing policy transmission. Purchases are not restricted ex ante.” So an indication that purchases can be unlimited. There were some conditions applied to the TPI, including that the country is complying with the EU fiscal framework and is not subject to an excessive deficit procedure. But the ECB clearly see this as enabling them to go further as they hike, and openly drew a link in saying that “the reinforced support provided by the TPI” was something that enabled them “to take a larger first step on its policy rate normalisation path than signalled” in June.

Overall the market didn't seem to like the complexity of the TPI vehicle but perhaps the main issue was that it made its debut on the same day as Draghi officially resigned and triggered fresh elections on September 25th. The ECB can't help but hang over the election campaign now.

The initial reaction to the ECB’s decision (pre-press conference and US data) was a sharp sell-off among European sovereign bonds, with yields on 10yr bunds up by +11.7bps shortly after the decision came through. However, they then entirely pared back that increase to end the day -3.7bps lower. That came as markets moved to price an even more aggressive hiking cycle, with +144bps worth of further hikes at the remaining 3 meetings this year, so just shy of pricing continued 50bp hikes at the remaining meetings this year.

However, even as the ECB unveiled their new instrument, Italian spreads continued to widen against the backdrop of continued political turmoil in the country, with the gap between 10yr Italian yields over bunds up by +18.0bps to 230bps. That came as Prime Minister Draghi delivered his resignation to President Mattarella yesterday morning, with the latter subsequently dissolving parliament. Draghi will remain in office in a caretaker capacity until Italy stages early elections on September 25, with the center-right bloc currently leading the polls.

In more positive news yesterday, partial gas supplies resumed through the Nord Stream pipeline as its scheduled maintenance came to an end. The line is still only running at 40% of capacity so we shouldn’t get ahead of ourselves, but clearly this is much better than the complete shut-off that some had feared in recent days. The big question is what will happen as we move towards the colder months in Europe, with major efforts underway to build up gas storage and reduce demand ahead of then. Our German economists reacted to the news with another gas supply monitor (link here). The 40% supply is clearly far from secured going forward with fresh turbine servicing rows looking possible next week and beyond. One interesting conclusion from the note was that if 40% flowed up until the end of September and then a complete shutdown followed through the winter, Germany would likely run out of gas at some point in April assuming a normal amount of that gas was exported. Given that the government wouldn't likely let storage go below 10%, such a scenario would likely involve rationing.

Anyway with a very very big week for Europe now past its peak, the next big focal point for markets comes with the Fed’s next decision on Wednesday. Sadly there wasn’t much in the way of good news on the US economy ahead of that, as the weekly initial jobless claims pointed to a softening labour market, although to be fair that's part of the reason for rate hikes. For the week through July 16, they came in at an 8-month high of 251k, and this wasn’t just a one-off, with the smoother 4-week moving average now at a 7-week high of 240.5k. In addition, the Philadelphia Fed’s business outlook for July fell to -12.3 (vs. 0.8 expected), which is its lowest level since May 2020. Tim and Henry on my team have been putting out a weekly “recession watch” monitor that shows how recent data and broader developments push us closer to or farther away from imminent recession. Yesterday’s edition is here.

Yesterday’s run of more gloomy data releases meant that investors became more pessimistic on the ability of the Fed to keep hiking rates much above neutral and yields on 10yr Treasuries came down by -15.2bps over the day, closing at 2.87%, in what was largely a parallel shift on the 2s10s yield curve which wound up little changed. This morning in Asia, 10yr yields have edged +1.87 bps higher as I type. Even with the worsening growth outlook, however, our US economists have just put out a piece arguing that the Fed cannot reverse course and start cutting rates next year unless inflation materially slows, unemployment moves above 6%, and the Fed reaction function starts to take labour slack into consideration contrary to their recent one-track focus on inflation. See the full piece here.

In the current environment, bad news has been good news for equities, as the market anticipates that the Fed will have to ease off the gas sooner rather than later. Yesterday that translated to a +0.99% gain in the S&P, led by tech and mega-cap firms who’s valuations are particularly sensitive to the Fed. This drove the NASDAQ +1.36% higher and the FANG+ Index +2.33% higher. To drive the point home, since growth fears first sent jitters through markets in mid-June, driving a re-pricing lower of Fed terminal rates, the NASDAQ has rallied +13.28% from its YTD lows while FANG+ has increased +15.69% from just above its YTD lows. The tech and mega-cap groupings were likely aided by Tesla’s earnings (up +9.78%) which came out the night before. Indeed, it was a rather strong day for S&P 500 earnings across the board, with 23 companies reporting during trading and 19 beating analyst earnings estimates. After hours though, Snap saw shares sink more than -20% after advertisers left the platform, and there were further reports that tech giants Alphabet and Microsoft were planning on slowing or freezing hiring, so we’ll see if some of that positive tech sentiment reverses today. So far contracts on the S&P 500 (-0.40%) and NASDAQ 100 (-0.77%) are notably lower. Twitter continues the tech earnings today.

Equities in Asian markets are still generally trading in positive territory this morning but the scale of this reflects the after hours set back. The Nikkei (+0.24%) is recovering from initial losses with the Hang Seng (+0.21%), Shanghai Composite (+0.28%) and the CSI (+0.25%) also slightly higher in early trade. Elsewhere, the Kospi (-0.37%) is weak with the new conservative government's plan to cut corporate taxes having a limited impact on sentiment as the move is subject to approval from the opposition-controlled parliament.

Early this morning, data showed that Japan’s headline inflation edged down to +2.4% y/y in June (v/s +2.5% in May) but Core-CPI inflation advanced to +2.2% in June from +2.1% in May, both in line with consensus estimates but remaining above the BOJ’s 2% target. Separately, Japan’s July factory activity growth slowed to a 10-month low as the Jibun Bank Flash Manufacturing PMI slipped to 52.2 in July from the previous month’s final reading of 52.7 as output and new orders contracted. At the same time, services also expanded at a slower rate as the flash PMI weakened to 51.2 in July from June's final 54.0, suggesting a more subdued demand at home as a weaker yen increased import costs.

To the day ahead now, and the main data highlight will be the global flash PMIs for July. Otherwise, we’ll hear from the ECB’s Villeroy. Earnings releases include Verizon Communications, NextEra Energy, American Express and Twitter.