ECB is Expected to Double Down on Anti-Inflation Crusade as Gas Prices Keep Soaring

Yesterday, U.S. equities lost early gains and ended lower as a stronger-than-expected PMI report on the services refueled speculation of more Fed rate hikes ahead. For the Nasdaq, it was the seventh consecutive losing session. Since the August 16 highs, the Dow, Nasdaq Composite and S&P 500 are down 8.6%, 11.8%, and 9.3%, respectively.

The futures market is leaning even further into negative territory this European afternoon, despite wide expectation that it is due for a bounce from a short-term oversold condition. Investors are waiting for the U.S. Federal Reserve to give its summary on current economic conditions, AKA the Beige Book, later tonight. Also, the U.S. foreign trade report for July will be released at the market open. Economists expect a deficit of $70.5 billion for total goods and services trade in July compared with a $79.6 billion deficit in June.

Tech stocks, which become less attractive as interest rates move higher, dropped. All the FAAMG stocks traded lower. Shares of Intel (INTC) and other semiconductor companies declined. Shares of Netflix (NFLX) and rival streaming services lost ground. Moderna (MRNA) shares tumbled 6%. Corporatewise, Sundar Pichai, CEO of Google parent Alphabet (GOOGL), defended the internet-search giant against claims that it is anticompetitive, citing established rivals in the digital advertising market and upstart mobile app TikTok as examples of robust competition in technology.

As of 1:40 p.m. CET, the pan-European Stoxx 600 is trading down 0.5% by mid-noon, having recovered some of its earlier losses. Basic resources dropped 1.9% as most sectors slid into the red, while autos bucked the trend to add 0.7%. The British FTSE 100 fell 0.38% while both the French CAC 40 Index and the German DAX declined 0.28%.

The Eurozone GDP grew 0.8% QoQ during Q2, against a 0.6% growth in the second estimate, while the number of active jobs rose by 0.4% on the quarter to 164.1 million. Industrial production in Germany declined 0.3% MoM in July, while Halifax house price index in the UK increased 11.5% YoY in August. The ECB is expected to front-load a series of rate hikes and sacrifice growth in the region in a bid to tame inflation of 9.7%, which is forecast to rise further. Russia has indicated that the shutdown of the Nord Stream 1 pipeline will be long-lasting as OPEC+ announced a 100K barrel per day cut in oil production the day before. A “jumbo” rate hike of 75 basis points is a possibility and has been largely priced in by markets.

Markets in Asia-Pacific traded lower earlier this morning. A macro report showed China’s exports grew 7.1% in August on an annual basis, but missed estimates of 12.8% consensus forecast, after growing 18% in July. The USTR confirmed that China trade tariffs will remain in place while Chinese authorities extended the lockdown of the cities of Chengdu and Guiyang, the capital of Guizhou province, is now in a Covid-related lockdown. The Reserve Bank of Australia has raised its cash rate by 50 basis points to 2.35%, as expected.

Meanwhile, the Japanese yen continued to crumble against the dollar (more in our special report today). USD/JPY is up 2.2% to 144.54, which is a new 24-year low. The Chinese yuan, meanwhile reached a 2-year low against the dollar after the PBOC fixed the midpoint at 6.9096. On a related note, the PBOC also announced that it is cutting the foreign exchange required reserve ratio for financial institutions by 200 basis points to 6.00%, effective September 15, in a move designed to support for the yuan.