Income and gas worries keep Europe moderate

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  • European stocks dampened by rising concerns about gas crisis
  • Heavy tech earnings on Wall Street
  • Bond yields ease ahead of expected Fed rate hike

LONDON, July 26 (Reuters) – European equities fell and bond markets in the region rose Tuesday as some disappointing earnings, this week’s looming rate hike in the US and an escalating gas crisis kept the mood cautious.

Asia was supported overnight by new Chinese plans to tackle the real estate crisis and by tech giant Alibaba seeking a primary listing in Hong Kong, but Europe was unable to keep it going.

The pan-European STOXX 600 index (.STOXX) stagnated as higher commodity inventories and a profit improvement from consumer giant Unilever were offset by a 6% dive into UBS shares  and wider fears of a recession.

“The main question we have as these gains come out is how much price power these (consumer-facing) companies have,” said Diamond Hill international equity portfolio manager Krishna Mohanraj, referring to the pressures of higher inflation.

Shares in US retailer Walmart were down 10% after the bell after it slashed its forecasts on Monday over those exact issues.

But Unilever, which makes everything from laundry detergent to ice cream, raised its full-year profit forecasts in Europe because of what its CEO Alan Jope said, “strong pricing to reduce input cost inflation”.

European Union countries were also preparing to adopt watered-down emergency proposals to curb their gas consumption. Russia’s Gazprom (GAZP.MM) had warned Monday that it would further reduce flows this week due to another maintenance issue.

Dutch and UK day-ahead prices rose 8% and 16.5% respectively on Tuesday and a decline in euro-zone bond yields in fixed income markets has led analysts to increasingly anticipate a recession in the bloc.

“The potentially enforced 15% cut that all member states would have to adhere to was very unpopular with several members,” said Deutsche Bank’s Jim Reid. “Expect a lot of carve-outs and compromises if a plan is agreed upon that can move forward.”

Investors are also waiting for a likely 75 basis point rate hike from the Federal Reserve on Wednesday — with markets pricing in a roughly 10% risk of a bigger hike, and waiting to see if economic warning signs trigger a shift in rhetoric.

The International Monetary Fund will later release its closely monitored global forecasts, which are expected to point to even slower growth and higher inflation.

“We’re leaning towards the view that 75 basis points is most likely, but won’t be the end unless they see some demand destruction and some moderation in inflation,” said John Milroy, an investment advisor at Ord Minnett.

TECH PROBLEMS

Global tech giants Microsoft and Google will both report later after the Wall Street bell, followed tomorrow by Facebook owner Meta and Apple and Amazon on Thursday.

It equates to over $7.5 trillion in market capitalization, Deutsche Bank’s Reid noted. While these 5 stocks were down about -13% (Apple) YTD to about -50% (Meta) while the other three were down about -20 to -25%, this figure would have been closer to $10 trillion beginning of the year.”

Later, GM, NXP Semiconductors, Raytheon Technologies, Coca-Cola and McDonald’s will also report.

In Asia, MSCI’s broadest regional index outside Japan (.MIAPJ0000PUS) had bounced 0.5%.

Chinese stocks had surged after reports the country would set up a fund of up to $44 billion to help property developers.

Hong Kong’s Hang Seng Index (.HSI) finished 1.7% higher on the Alibaba news (.CSI300) although the Japanese Nikkei (.N225) fell 0.16%.

In currencies, the dollar remained flat, not too far below recent milestone highs, as uncertainty around interest rates and the economic outlook continued to swirl. /FRX

The euro has fluctuated at $1,0215 but has been curbed by uncertainty over Europe’s energy security, unaided by an impending cut in the westward flow of Russian gas.

The yen stabilized at 136.54 per dollar. The US dollar index, which reached its 20-year high this month, fell slightly to 106,380.

Oil prices rose further on expectations. Russia’s cut in natural gas supplies to Europe could encourage a crude oil switch, with Brent futures rising 1.3% to $106.45 a barrel and US crude oil up 1.25% to $97.92 a barrel.

Ten-year government bond yields in the benchmark fell to 2.875% and German ten-year government bond yields fell to a two-month low of just below 1% as growth concerns bolstered bond yields.

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