Corporate earnings in focus, Fed direction remains uncertain

Stocks struggled for direction as investors processed a busy day of corporate earnings and fresh signs of strength in the US and UK economies that may support the case for further interest-rate increases.

SAP SE fell, dragging down technology shares and making them Europe’s worst-performing sector Friday, after the software company reported sales for its key cloud unit that missed analyst estimates. Bioprocessing company Lonza Group AG slumped after cutting its 2023 forecast. Contracts for US equities edged higher, after the tech-heavy Nasdaq 100 index dropped the most in nearly five months on Thursday. 

Earnings in Europe have got off to a slow start, according to strategists at Morgan Stanley, with results coming in softer than in previous quarters and only the largest companies showing strong profits. Companies are striking a more cautious tone in their forward guidance and mentions of “weaker demand” are at a record, the strategists including Giorgio Magagnotti said.

Signs of resilience in the US and UK economies challenged investor expectations that central banks may soon be done with their rate tightening campaigns to curb inflation. British retail sales rose more than expected during the warmest June on record, data out Friday showed. On Thursday, an unexpected pullback in US jobless claims prompted higher odds of a further rate hike beyond the Federal Reserve’s meeting next week.

The pound strengthened after the UK retail sales numbers, while the dollar was little changed and Treasury yields were steady.

It’s still difficult to declare that the Fed has succeeded in taming inflation, according to Eugenia Fabon Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB. 

“Going beyond the lower-than-expected CPI, all the other indicators are saying not only of a resilient US activity, but some of the activity indicators are even accelerating,” she said on Bloomberg Television. “There is a risk that inflationary pressures could actually re-accelerate at the end of the year if the Fed were to stop prematurely.”

Asian equity markets were mixed. Shares in mainland China fluctuated, while those in Taiwan and Japan fell. Sentiment soured in the semiconductor sector after Taiwan Semiconductor Manufacturing Co. cut its sales outlook for this year. Both the Hang Seng Index and the Kospi gauge clung to modest gains. The Chinese government earlier released some measures to support consumption, including on home appliances and car purchases, that helped prop up consumer-related stocks.

The yen slipped after strengthening earlier as Japan reported inflation that was slightly higher than estimates in June. The latest data will present a challenge for Bank of Japan officials when they meet next week as Governor Kazuo Ueda continues to back the case for persistent monetary stimulus.

EXPECTING MORE STIMULUS

Some investors expect to see even more support measures in China at the end of the month.

“Additional stimulus measures may come through after the Politburo meeting (July 28-30), but the scale and targeted areas remain to be confirmed,” Morgan Stanley strategists, including Laura Wang, wrote in a note.

However, as more prudent and balanced consideration of policy choices could result in longer decision-making and action-taking, “we see further downward pressure on corporate earnings through the next one to two quarterly results seasons,” they said.

The offshore yuan was little changed after the People’s Bank of China once again set its daily fixing for the currency at a level that was stronger than estimate. 

The Bloomberg Commodity Index is set for its third weekly gain, following a surge in wheat prices after an escalation of tensions between Russia and Ukraine in the Black Sea. Natural gas futures in Europe and the US are also set to notch near 10% gains this week as extreme heat boosts power demand for air conditioning. Oil is set to eke out a fourth weekly gain while gold has retreated from a two-month high on the recent strength of the dollar. 

Some of the main moves in markets:  

Stocks

• The Stoxx Europe 600 was little changed as of 8:13 a.m. London time
• S&P 500 futures rose 0.1%
• Nasdaq 100 futures rose 0.2%
• Futures on the Dow Jones Industrial Average rose 0.1%
• The MSCI Asia Pacific Index fell 0.3%
• The MSCI Emerging Markets Index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.1139
• The Japanese yen fell 0.1% to 140.23 per dollar
• The offshore yuan was little changed at 7.1725 per dollar
• The British pound rose 0.2% to $1.2894

Cryptocurrencies

• Bitcoin rose 0.3% to $29,837.2
• Ether rose 0.2% to $1,892.58

Bonds

• The yield on 10-year Treasuries was little changed at 3.85%
• Germany’s 10-year yield was little changed at 2.50%
• Britain’s 10-year yield advanced two basis points to 4.29%

Commodities

• Brent crude rose 0.9% to $80.32 a barrel
• Spot gold was little changed

This story was produced with the assistance of Bloomberg Automation.