European Midday Briefing : China Turmoil, Higher Rates Weigh on Mood

MARKET WRAPS

Stocks:

European stocks extended their losses on Friday on lingering worries about the health of the Chinese economy.

News that ailing Chinese property developer Evergrande has filed for bankruptcy protection in the U.S. added to concerns about China's real estate sector and weighed on sentiment.

"Asian markets slipped lower, with no end to the selling in sight. Poor earnings from Chinese tech firms have not helped performance," IG said.

Also continuing to weigh on sentiment was the recent sell-off on global bonds, causing investors to question how long interest rates are likely to stay at their high levels.

"In the last few days, the frames of reference have started to shift from how high rates are likely to go, towards how long they are likely to stay at current levels if inflation continues to be on the sticky side," CMC Markets said.

U.S. Markets:

Stock futures were slipping following the S&P 500 's third-consecutive losing session.

The 10-year Treasury yield fell back below 4.3%, after settling at the highest since November 2007. Longer-dated U.S. Treasurys also rallied. Despite the bond reversal, stock futures remained under pressure.

Stocks to Watch

Applied Materials's third quarter earnings topped Wall Street expectations as did its fourth-quarter outlook, sending shares up 2.8% in premarket trading.

Keysight Technologies issued a weaker-than-expected fiscal fourth-quarter outlook and the stock was falling 11%.

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Forex:

The euro is currently stuck in a range against the dollar around $1.09 but risk aversion, rising U.S. bond yields and a strengthening U.S. economy should cause the dollar to rise, Danske Bank said.

"We still think the mix of U.S. outperformance, rising U.S. yields and declining equities seem to be a good cocktail for further dollar appreciation."

ING said the euro has proved resilient, despite growing concerns about China's economy, which should enable it to keep within a range against the dollar.

"After a week that has brought to the table some serious concerns about China's near and medium-term outlook, it is quite a success for EUR/USD to be trading around 1.0900."

The euro should "weather this Chinese turmoil without taking much damage, " although these worries will also delay any substantial rally against the dollar, ING said.

"EUR/USD may keep trading in narrow ranges for now, with a modestly bearish bias to the 1.0850 level."

Read Riksbank Might Need Raise Rates to Protect Krona

Bonds:

Eurozone government bond yields fell, coming down from recent highs, following U.S. Treasury yields lower.

Duration in eurozone bond markets is outperforming in sell-offs but it is underperforming in broader global rallies, Barclays said.

Barclays sees domestic dynamics remaining "constructive"--or supportive--for EUR rates, while most bearish pressures are coming from global factors.

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Gilt yields dropped after the U.K. retail sales data came in weaker than expected, potentially easing the pressure for more Bank of England interest-rate rises to tackle inflation.

"We expect some retracement of the latest moves in gilts as a result of the report," Mizuho said.

Read UK Retail Sales Fell in July After Rain Hit Footfall

Energy:

Oil prices edged higher in early trading, though set to lose more than 3% this week as weak demand helped pressure commodities across the board.

Tightening supply from OPEC+ have kept a floor under prices, according to BMI, but for now there is also limited upside.

"Global economic growth is slowing, the U.S. looks set to enter a recession next year and the Mainland Chinese economic recovery is under strain," BMI said, adding that the market is unlikely to rally unless there is significant supply side disruption.

Metals:

Base metals prices held steady while gold was higher, as weak demand, especially from the Chinese property sector, diminishes sentiment.

"Weak manufacturing activity is dragging down metals. Softening demand is evident in that the future price is more than spot price across the sector," ANZ Research said.

It added that the Chinese property sector in particular is looking bleak. "Despite easing monetary policy, credit growth remains lackluster. Investments in real estate is faltering due to slumping property sales and prices."

DOW JONES NEWSPLUS

EMEA HEADLINES

UK Retail Sales Fell in July After Rain Hit Footfall - Update

U.K. retail sales fell more than expected in July, as unseasonably wet weather in the month kept shoppers away despite the summer sales season.

Retail-sales volumes ticked down 1.2% on month, a swing from the 0.6% increase in June, data from the Office for National Statistics showed Friday, weaker than expectations of a 0.4% decline in volumes from a consensus of economists polled by The Wall Street Journal.

U.K. to Put Magnifying Glass on Crypto Transfers

Digital asset companies will have to collect and transmit data on cryptocurrency transfers under new rules from the U.K.'s financial regulator, as the country implements a law intended to stop the movement of digital assets for illicit activity.

U.K. crypto operators will be expected from Sept. 1 to comply with what is known as the Travel Rule, a multicountry push aimed at thwarting criminal uses of digital assets such as money laundering and terrorist financing, the U.K.'s Financial Conduct Authority said Thursday.

Higher Interest Rates and Sluggish Economy Fuel European Bankruptcies

BERLIN-A sluggish economy, higher interest rates and the expiration of pandemic-era life support for ailing companies is forcing more businesses in Europe to declare bankruptcy.

A new report also showed that new business creation in Europe is slowing, as the Biden administration's support for green tech continues to draw new investment abroad.

GLOBAL NEWS

Traders brace for explosion of volatility Friday as $2.2 trillion in stock options expire

It's that time again: monthly stock-market options for August are set to expire on Friday, potentially spurring more volatility in stocks after a bruising three-week run.

U.S. stock option contracts with a notional value of $2.2 trillion are set to expire, according to Rocky Fishman, founder of newly formed strategy firm Asym 500 and a former head of index derivatives strategy at Goldman Sachs Group. Notional value measures the market value of the stocks, indexes and exchange-traded funds controlled by the options, although the premiums paid by holders of the options are worth much less.

Is China's Data Manipulated, or Flawed? Maybe Both

The unemployment rate for China's youth reached an all time record of 21.3% in June. China's National Bureau of Statistics responded by ceasing publication of the rate.

The move calls attention to the lengths to which Beijing will go to suppress unflattering information, in this case the economic distress facing China's young people.

Get Ready for a Weaker Yuan

A darkening economy probably means a weaker Chinese yuan, but don't expect a plunge.

The fundamental case for a weaker Chinese currency is quite clear. The country's trade surplus, while still massive, has begun to erode as exports weaken. Its central bank is easing more aggressively as growth hits the skids. Meanwhile, U.S. rates remain high, and rising expectations of a "soft landing" for the U.S. economy mean they could stay that way well into next year.

Bitcoin remains under pressure following flash-crash of $2,000

Bitcoin prices were under pressure on Friday, hours after a mini flash-crash sent the cryptocurrency tumbling by more than $2,000 within minutes.

The sharp fall occurred around 6 p.m. Eastern on Thursday, taking the No. 1 digital currency BTCUSD down to under $26,000, from over $28,400 earlier in the session, a fall of more than 9%. Early Friday, bitcoin was trading at $26,497, a drop of 4%.

Donald Trump's Lawyers Ask for April 2026 Trial Date for Federal Jan. 6 Case

WASHINGTON-Lawyers for former President Donald Trump asked a judge Thursday not to hold his federal trial on charges that he tried to overturn the 2020 election until April 2026, nearly a year and a half after the 2024 race in which he is the Republican front-runner.

In requesting the long delay, Trump's lawyers cited the large volume of evidence they will have to examine-as much as 11.5 million pages of materials and testimony from hundreds of witnesses-as well as the historic nature of the case. Trump is the first president in American history accused of blocking the peaceful transfer of power to his successor.

Maui Emergency-Management Chief Resigns

A Maui County official criticized for his handling of the wildfire disaster that tore through historic Lahaina resigned Thursday, citing health reasons, officials said.

Maui Emergency Management Agency administrator Herman Andaya tendered his resignation effective immediately, according to Maui County Mayor Richard Bissen.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

08-18-23 0557ET