EUROPEAN MIDDAY BRIEFING: Stocks Slip as China Crackdown Casts Shadow

MARKET WRAPS

Stocks:

Stocks slipped Tuesday with a Chinese regulatory crackdown casting an overhang over the market.

Hong Kong's Hang Seng Index slumped as a selloff of tech stocks deepened, driven by concerns about China's regulatory crackdown in recent days.

The meltdown in China is weighing on investors' appetite for stocks in other markets, but the contagion effect is likely to be limited, according to Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe.

"The drag on sentiment will be there because China has been the engine of global growth for years now and seeing its stock market suffer like this is going to put a question mark on global growth," Mr. Kassam said.

"Anything that weighs on global growth is going to have an effect on markets, but it is going to be a second-order story for global markets."

Social-media giant Tencent Holdings fell 9% while Hong Kong-listed shares of Alibaba Group, China's biggest e-commerce company, shed more than 6% by the close of trading.

"A sense of caution is likely to linger across markets as investors adopt a guarded approach due to the Asian volatility and Federal Reserve policy meeting on Wednesday," said Lukman Otunuga, senior research analyst at FXTM.

In Europe, sentiment among German exporters has worsened, the Ifo Institute said. Ifo's export expectations fell to 24.5 points in July from 25.0 points in June.

"Overall, however, German exports continue to perform very well," Clemens Fuest, president of the Ifo Institute, said. Almost all industries expect exports to increase, he said.

U.S. Markets:

Stock futures ticked lower as investors awaited earnings reports from the biggest technology giants and data on the manufacturing sector.

U.S. stocks have been grinding higher as investors cheered strong corporate results and upbeat guidance from some of the largest American businesses. At the same time, concerns are lingering over the Delta-variant of Covid-19, supply- chain problems, a spike in inflation and cooling economic growth.

"We've been characterizing this market as a jetliner that has lifted off and is coming out of the Covid-19 air pocket, but is still trying to find an appropriate cruising altitude," said Kara Murphy, chief investment officer at Kestra Holdings. "We are seeing economic data going from great levels to good levels: that is still indicative of economic growth."

Earnings reports from behemoths including Microsoft, Apple and Google-parent Alphabet after markets close Tuesday could offer insights into how those companies are faring as lockdowns end and supply constraints for key products persist. Visa and Starbucks are also among the companies that will publish results, making it a blockbuster day in the earnings season.

Other blue chip firms set to post results before markets open include United Parcel Service, General Electric, 3M and Raytheon Technologies.

"We have seen earnings expectations continue to be ratcheted up quite significantly, but lots of companies are still beating expectations," said Ms. Murphy.

Investors will be able to parse data indicating the strength of the economic rebound later on Tuesday. U.S. durable goods orders for June, due at 8:30 a.m. ET, are forecast to rise for a second consecutive month as demand remains strong. Still, manufacturers have struggled to keep up amid supply bottlenecks and difficulties finding workers. Data on consumer confidence is also due to be released at 10 a.m. ET.

The Federal Reserve kicks off its two-day meeting, and the economics calendar for Tuesday includes durable-goods orders data for June, consumer confidence index for July and the latest Case-Shiller home price index.

Forex:

The dollar isn't set for any "meaningful moves" against other major currencies ahead of the conclusion of the Federal Reserve's policy meeting on Wednesday, but it may edge higher given Fed officials could offer more details about discussions on a possible scaling back of bond purchases, ING said.

"While no Federal Reserve policy changes are expected in July's meeting, we could hear more about the tapering discussions that started in June," it said.

ING says there is a growing "hawkishness"--or bias toward tightening monetary policy--among some Fed policy makers given the strong U.S. economy and the fact that inflation is running at more than double the central bank's 2% target.

The pound should rise through next year as an improving U.K. economic outlook brings the Bank of England closer towards withdrawing stimulus, MUFG Bank said.

While U.K. coronavirus cases are expected to increase after the final easing of England's restrictions last week, rising levels of immunity from vaccines and those who have already had Covid-19 will help slow the spread, MUFG currency analyst Lee Hardman said.

"The reduced risk of further Covid-related disruption would help to support the BOE's forecast for a robust recovery this year for the U.K. economy."

That means the BOE is inching towards tightening policy, although it will be a gradual process, Hardman said.

Bonds:

The yield on the benchmark 10-year U.S. Treasury note ticked down to 1.249% from 1.276% on Monday. Bond yields and prices move in opposite directions.

Any dip in economic activity will justify the stance of major central banks to keep their hugely accommodative policies in place longer, but many of these factors are already priced into U.S. Treasury markets, said Mark Holman, chief executive officer of TwentyFour Asset Management.

"Whilst this political kink in the road may create some further temporary inflationary pressure, it also serves to take some of the heat out of the growth, which should help keep Treasuries more stable, the disruption of which we think is key for risk markets in Q4," he said.

From a fixed-income credit risk perspective, this isn't expected to materially change the fundamental outlook, Holman said.

Commodities:

Oil prices waver around flat. Investors will be watching out for American Petroleum Institute data due later Tuesday and Department of Energy figures due out Wednesday.

The wild swings seen in oil prices over recent weeks may have calmed for the moment but natural gas prices in Asia remain firm, with hotter than usual weather in North-East Asia raising air conditioner usage, said ING's Warren Patterson.

In Europe, too, gas prices remain near record highs, though the return of the Nord Stream pipeline from maintenance should ease those pressures, he added.

Metals prices slipped as China's regulatory crackdown hits risk assets and boosts safe-havens like the dollar.

Three-month copper on the LME was down 1.7% at $9,692 a metric ton while aluminum fell 0.2% to $2,498.50 a ton and nickel dropped 2.2% to $19,280 a ton.

The ICE Dollar Index rose weighing on dollar-denominated commodities such as base metals and gold.

"The never ending mantra from Beijing of speculative activity is bad and unacceptable is hitting home," says Malcolm Freeman, CEO of metals brokerage Kingdom Futures.

EMEA HEADLINES

Reckitt Benckiser Swung to 1H Loss on Higher Costs

Reckitt Benckiser Group PLC reported on Tuesday a swing to pretax loss for the first half of the year on lower revenue and higher costs.

The consumer-goods company--which houses Dettol, Harpic and Durex among its brands--posted a pretax loss of 1.94 billion pounds ($2.68 billion) for the six months, including a hit of GBP3.20 billion from losses on assets held for sale and disposal of goodwill and brands. This compares with a profit of GBP1.44 billion in the year-earlier period.

Investor Cat Rock Urges Just Eat Takeaway to Explore Combinations, Sell Assets

U.S. investor Cat Rock Capital Management LP said Tuesday that Just Eat Takeaway.com NV should explore combinations with other global players and sell noncore assets, putting pressure on the Grubhub owner to address its share performance.

The investor--which owns 4.7% of the Amsterdam-based food-delivery company's shares and is one of its top ten shareholders--said Just Eat Takeaway should invest the money raised from asset sales in its growth and to buy back the shares used toward the Grubhub acquisition. Cat Rock also called on the company to improve transparency on the expected magnitude, composition and returns of its investments to boost its standing in capital markets.

Credit Suisse Taps Goldman Executive as Post-Archegos Chief Risk Officer

Credit Suisse Group AG hired a top executive from Goldman Sachs Group Inc. as its chief risk officer, part of an effort to get a better grip on risks after losing $5.5 billion from family investment firm Archegos Capital Management.

David Wildermuth, formerly deputy chief risk officer at Goldman, will join the executive board and take over from Joachim Oechslin, who held the role temporarily. Credit Suisse's former chief risk officer, Lara Warner, was pushed out in April after the Archegos loss and the separate collapse of a financing partner, Greensill Capital.

Randstad Swung to 2Q Net and Pretax Profit as Revenue Rose

Randstad NV reported Tuesday a swing to a net and a pretax profit for the second quarter of 2021, boosted by stronger- than-anticipated revenue for the period, and said it's confident for its full-year performance.

The Dutch staffing company reported a net profit of 174 million euros ($205.4 million) compared with a net loss of EUR59 million for the same period a year earlier.

LVMH Books Higher 1H Revenue, Profit as Fashion Sales Surge

LVMH Moet Hennessy Louis Vuitton SE's earnings rose sharply in the first half as sales jumped by more than half on the year, driven by the core soft-luxury division.

The French luxury-goods giant said Monday that it made an operating profit of 7.63 billion euros ($8.98 billion) in the six months to end-June, nearly fives times as much as the previous-year period, and some 44% higher than in the same period of 2019. Sales increased to EUR28.67 billion from EUR18.39 billion previously.

Aon, Willis Towers Scrap $30 Billion Merger Amid Antitrust Impasse

Aon PLC and Willis Towers Watson PLC abandoned a more than $30 billion tie-up to create the world's largest insurance broker, deciding it wasn't worth pursuing in the face of Justice Department opposition to the merger.

The DOJ filed a lawsuit against the deal last month, the first big test of the Biden administration's more muscular antitrust policy. The suit, filed in a federal court in Washington, said that the proposed merger would lead to higher prices and reduced innovation for U.S. businesses, employers and unions that rely on their services.

Covid-19 Vaccine Pioneer BioNTech Plans to Make New Malaria and Tuberculosis Shots in Africa

BioNTech SE said it would invest some of the profits from the Covid-19 vaccine it markets with Pfizer Inc. into developing shots for malaria and tuberculosis in Africa, part of the German company's plan to establish a large production hub for innovative medicines on the continent.

The biotech firm plans to build a factory in Africa and develop a manufacturing network with local partners to transfer its technology based on messenger RNA, a genetic molecule, to a continent that has suffered from a lack of access to vaccines and other lifesaving treatment, BioNTech Chief Executive Ugur Sahin said.

Barclays Overtakes Credit Suisse in Investment Banking

Barclays PLC recently overtook Credit Suisse Group AG in investment banking revenue, a sign that the U.K. bank's long, frustrated push to be a major player is making progress thanks in part to the troubles of its Swiss rival.

The London-based bank vaulted past its Zurich-based counterpart to be the largest investment bank outside the U.S. in the second quarter of this year with $1.26 billion of investment banking revenue, representing a 4.1% market share, according to Dealogic. JPMorgan Chase & Co. was the top investment bank during the quarter with $3.15 billion of revenue, a 10.1% market share.

GLOBAL NEWS

Stocks Keep Climbing, Avoiding Routine Pullbacks

The stock market has been relatively quiet lately.

The benchmark S&P 500 hasn't suffered a 5% pullback since October and has advanced 35% since the end of that month.

Chinese Tech Stock Selloff Deepens

HONG KONG-Chinese technology shares dropped Tuesday, extending steep declines in the previous session that were fueled by investor concerns about China's widening series of crackdowns on tech and other industries.

By early afternoon in Hong Kong, online gaming and social-media giant Tencent Holdings Ltd. had fallen 6.7%. The selloff pushed Tencent's market value down to about $563 billion, according to FactSet-meaning it has lost about $379 billion of market capitalization since peaking in mid-February.

Beijing Gives Tech Investors a Brutal New Tutorial

Anyone who bought into Chinese internet stocks hoping for a bounce following the dramatic fall from grace of ride- hailing giant Didi has been taught another painful lesson this week. Fighting the Fed, or Washington, is usually a losing game-but betting against Beijing's fast-moving, often opaque regulatory apparatus in Xi Jinping's new era of centralized control is suicidal.

Chinese tech stocks already punished by a widening antitrust and data-security crackdown have lost billions of dollars in market value over the past few days as a new selloff hit almost every single company in the sector. The immediate trigger: new rules that would basically wipe out much of the booming after-school tutoring sector. While tightening regulations have long been on the horizon, the scope and severity of the crackdown still caught investors by surprise. Goldman Sachs has cut its market-size forecast for after-school tutoring in 2025 by 85%. Shares of New Oriental Education have lost 70% since Friday, when the news was first leaked.

Big Pharma Quietly Pushes Back on Global Tax Deal, Citing Covid-19 Role

Big drug companies and their lobbyists have a message for Congress: Don't raise taxes on the industry that brought you fast-tracked Covid-19 vaccines.

Pharma executives, lobbyists and consultants are mobilizing to fight what has become a threat to drug companies' bottom lines: a sweeping agreement by many of the world's biggest economies to better harmonize corporate taxation around the globe. Earlier this month, 130 countries agreed to broad outlines of a deal that would, among other steps, establish a minimum corporate tax of 15% within their countries, reducing opportunities for international tax avoidance.

Bitcoin Jumps to a Six-Week High

The price of bitcoin jumped to a six-week high Monday, with some investors attributing the rally to short positions being liquidated and speculation that Amazon.com Inc. may be venturing into digital currencies.

Bitcoin soared as high as $40,501.70, according to Dow Jones Market Data, reaching its highest level since mid-June. It rose 9% from its 5 p.m. EDT level Sunday. Rival currency Ether jumped 4.8%.

Infrastructure-Bill Negotiators Try to Overcome Late Hurdles

WASHINGTON-A push to complete a roughly $1 trillion infrastructure agreement hit a series of hurdles Monday, as aides squabbled over funding for water infrastructure and how to apply a requirement that federal contractors pay their employees a locally prevailing wage, among other issues.

Lawmakers had previously set Monday as a target for closing out their talks and beginning floor consideration of the emerging agreement, though that timeline seemed to slip as the two sides sniped at each other.

China Industrial Profit Data for June Signal Relatively Strong, if Uneven, Recovery

China's industrial profit rose 20.0% from a year earlier in June, slowing from May's 36.4% expansion as favorable low- base effects faded.

The profitability of China's industrial companies looks relatively strong as more than 70% of those surveyed reported higher profits than what they earned before the coronavirus pandemic, said the National Bureau of Statistics.

Chinese Officials Blame U.S. for Stalemate in High-Level Talks

TAIPEI-Senior U.S. and Chinese officials sparred over Covid-19, human rights and cybersecurity during a tense exchange Monday in the highest-level meetings between the two countries on Chinese soil since Joe Biden became president.

Chinese Vice Foreign Minister Xie Feng, meeting with U.S. Deputy Secretary of State Wendy Sherman in the port city of Tianjin on Monday, said American perceptions of China as an "imagined enemy" were responsible for a stalemate in relations between the two powers.

Foreign Purchases of U.S. Homes Fall to New Low

Foreign purchases of U.S. homes declined for a fourth straight year as the Covid-19 pandemic sharply limited international travel.

Foreigners bought $54.4 billion in U.S. residential real estate in the year ended in March, down 27% from the prior year, according to a report released Monday by the National Association of Realtors. That is the lowest level on record since NAR began collecting the data in 2011.

Biden Administration Moves to Tilt Pay and Power Toward Workers

President Biden is advancing a series of regulatory changes aimed at increasing workers' pay and gaining them other benefits, moves that opponents say could burden businesses amid an uneven economic recovery.

The rule changes, most of which are still in progress, would affect workers such as federal contractors, tipped employees and workers who are jointly employed, such as those with jobs at franchised brands. In some cases, the changes seek to reverse Trump administration efforts. In others, the Labor Department is working to implement its own rules.

Vatican Tries Cardinal in Test of Pope's Transparency Drive

VATICAN CITY-Cardinal Giovanni Becciu, once one of the most powerful men in the Vatican, went on trial Tuesday for embezzlement and other alleged crimes, as a scandal that has posed one of the biggest tests of Pope Francis's pontificate spilled out into the open.

It is the first time that a cardinal has gone on trial in Vatican City's criminal court.

U.S. Moves to Assure India on Afghan Withdrawal, Regional Security

Secretary of State Antony Blinken is visiting India this week as the Biden administration seeks to reassure a key Asian partner over the U.S. and allied military withdrawal from Afghanistan and works to tighten security ties amid concern about Chinese influence in the region.

Mr. Blinken will meet Wednesday with Indian Prime Minister Narendra Modi and Minister of External Affairs Subrahmanyam Jaishankar, with a U.S. agenda that officials said includes Covid-19 response, security, defense and cyber issues as well as counterterrorism cooperation. An Indian official said trade, investment, healthcare and innovation also would be subjects of interest to New Delhi.

Tokyo Sets New Daily Record for Covid-19 Cases, With Olympics Under Way

TOKYO-Tokyo on Tuesday set a new daily record for Covid-19 cases, reporting 2,848 new infections on the fifth day of the Summer Olympics, which are taking place in the Japanese capital.

The number of new cases surpassed the previous daily record of 2,520 set in January. The latest tally included cases recorded early this week after a four-day holiday weekend ended Sunday.

Russia Holds Military Drills Off Japan's Mainland During Tokyo Olympics

TOKYO-Russia's military doesn't stand down for the Olympics.

On Tuesday, Moscow was set to begin military exercises on an island near Japan that it seized in 1945 and Tokyo still claims. A day earlier, Russia's prime minister visited islands in the same disputed group.

North Korea Reopens Communications Hotline With South Korea, Breaking a Year of Silence

SEOUL-North Korea reopened direct communication lines with South Korea, raising the prospect that the Kim Jong Un regime could be ready for engagement after a protracted period of diplomatic silence.

The cross-border phone line was activated at 10 a.m. Tuesday local time, the two Koreas said in separate announcements. Pyongyang had severed all communication with the Seoul government since June 2020, after Kim Yo Jong, the dictator's sister, condemned South Korean activists for sending antiregime leaflets over the border.

FDA Asks Covid-19 Vaccine Makers to Expand Number of Children in Tests

The Food and Drug Administration has raised the minimum number of young children that should be in Covid-19 vaccine trials to better detect any side effects, people familiar with the matter said.

A big reason for the change, one of the people said, was to look for side effects like the rare heart condition known as myocarditis that surfaced in small numbers of people who took one of the messenger RNA vaccines after they were authorized.

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  07-27-21 0616ET
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