Drawing the battle lines

A look at the day ahead in markets from Saikat Chatterjee.

For all the excitement about the European Central Bank’s first rate hike since 2011 and the launch of a new tool to contain a blowout in borrowing costs, the euro and core bond yields are back to levels where they were before Thursday’s meeting.

As pleased as bond vigilantes may be that the ECB has not wasted any time in hiking by a more aggressive 50 bps and still thinks it should be able to repeat that feat in September, for markets the TPI (Transmission Protection Instrument) appeared to be strong on promises but weak on detail.

The ECB may be able to finesse that and clear some of the market confusion in time, but the question remains what happens if markets have reason to test it sooner?

Throw into the mix an expectation that soft U.S. economic data this week will not deter the Federal Reserve from raising interest rates by another whopping 75 bps next week even as the economy slows under the weight of soaring inflation.

So, it’s not surprising that investors are singing a gloomy tune on Friday.

World stocks are set to snap a three-day rising streak, the U.S. dollar index has rebounded smartly from Thursday’s lows and the Treasury yield curve, a gauge of recession risks, is pushing deeper into negative territory.

U.S. stock futures are in the red thanks to grim earnings from social media darling stock Snap Inc sending its shares down by 25%. That’s a reminder that stock punters are quick to dump richly valued mega cap stocks at the first signs of trouble.

Key developments that should provide more direction to markets on Friday:

Italy’s national election will be held on Sept. 25, government source told Reuters on Thursday.

PMI: France, Germany, EU Composite, UK

UK retail sales fall by 0.1% in June

Schindler cuts 2022 revenue guidance on China slowdown