Financial Markets Daily Report

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Italian politics and European natural gas developments centered the stage in yesterday’s session. On the one hand, Draghi’s coalition government failed to pass the confidence vote, increasing the odds of snap elections this autumn.

Investors' sentiment continued to improve yesterday following reports that Russia is willing to restart natural gas exports tomorrow, after the maintenance break. On monetary policy, a report suggesting that the ECB might consider a 50bp hike on Thursday pushed interest rates higher in the euro area.

In the first session of the week, investors' sentiment improved slightly and preference for riskier assets increased.

In the last session of the week, investors' sentiment improved as the odds for a 100bp hike in the next US Federal Reserve meeting decreased.

In yesterday's session, investors traded with a risk-off mood following the downward revision of the European Commission forecasts. While 2022 GDP for the euro are was barely revised to 2.6%, 2023's changed from 2.3% to 1.4%. The EC revised its inflation forecasts from 6.1% and 2.7% to 7.6% and 4.0% for 2022 and 2023, respectively.

A shocking inflation release in the US centered the stage yesterday in financial markets. Headline CPI rose in June by 9.1% y/y and 1.3 m/m, reinforcing the Federal Reserve intention to raise rates by 75bp again at its July meeting. Additionally, investors have started to price in a 100bp hike, in line with yesterday's decision of the Bank of Canada.

In yesterday’s session, investors’ concerns of a decelerating economy spiked after worse-than-expected sentiment data in Germany and the euro area and comments from Richmond Federal Reserve President Thomas Barkin.

In the first session of the week, investors searched for catalysts as they positioned ahead of a key CPI data in the US on Wednesday and the start of the earnings season.

In the last session of the week, the stronger-than-expected US labor market indicators for June eased investors' recession fears. Non-farm payrolls increased by 372k (from 384k in May), the unemployment rate stood at 3.6% and wages rose by 5.1% y/y, which all together fuels the Fed's intention to raise rates by 75bp at its next meeting.

Risk appetite extended across markets on Thursday, as fears about inflation and monetary tightening eased following soft labour data in the US (weekly jobless claims rose to the highest level since January). Meanwhile, news reported that China’s government is considering more fiscal support by raising by $220bn the issuance of special bonds.

Investors continued to trade with cautious on Wednesday, taking on board mixed economic data and the hawkish signals in the minutes of the last meeting by the Federal Reserve. European natural gas prices continued to edge higher, despite the intervention by Norway’s government to end an energy workers’ strike.

Risk aversion returned to the fore during a volatile session on Tuesday, as investors reassessed the risk of a global recession amid ongoing disruptions in gas supply in Europe and reports of new COVID cases in some regions in China.