UKX FTSE 100 Index

MARKET WRAPS

Watch For:

Eurozone, Germany, France, UK, Italy Services PMI; Eurozone Quarterly Balance of Payments, Sectoral Accounts; UK Car Registrations, Official Reserves, BOE Financial Stability Report; Italy General Govt Quarterly Accounts; OECD CPI; updates from Sainsbury's, Marks & Spencer

Opening Call:

The prospect of easing U.S.-China economic tensions should help lift European stocks early Tuesday. In Asia, most major benchmarks advanced, along with Treasury yields and commodities, while the dollar was little changed.

Equities:

European shares should open higher on Tuesday, with sentiment supported by news that the U.S. may announce a scaling back of some tariffs on Chinese goods.

According to the Wall Street Journal, Joe Biden is expected to roll back some tariffs on Chinese imports soon, a decision constrained by competing policy aims: addressing inflation and maintaining economic pressure on Beijing.

People familiar with the situation said what comes next has been pending with Biden in recent weeks and that he could announce his decision this week. It could include a pause on tariffs on consumer goods such as clothing and school supplies, as well as launching a broad framework to allow importers to request tariff waivers.

Economists said removing Chinese tariffs isn't likely to have a dramatic impact on inflation, however. Peterson Institute for International Economics analysts Megan Hogan and Yilin Wang estimate that removing tariffs on Chinese imports could lower consumer-price index inflation by a marginal 0.26 percentage point at first.

But "as U.S. corporations trim their markups to compete with imports," that might eventually lead to a 1-percentage-point reduction in inflation, they added.

Read: Biden Might Soon Ease Chinese Tariffs, in a Decision Fraught With Policy Tensions

Read: Chinese Vice Premier Liu, Treasury Secretary Yellen Discuss Economic Issues, Xinhua Reports

Stocks to Watch:

SAS is in a critical survival struggle as the pilot strike has started, said Sydbank.

Warnings of a strike a few weeks ago reduced traffic on the SAS website, with fewer prepayments on new tickets probably costing SAS up to SEK1.5 billion so far. Refunds of already purchased tickets also are not helping. In addition, the strike will probably cost SAS up to SEK100 million daily, Sydbank said.

In the worst case, Sydbank said the strike could cost up to half of the company's cash balance of over SEK8 billion in the first 4-5 weeks after the strike notice. The current situation "may push SAS further towards the economic abyss and advance a moratorium/bankruptcy protection process."

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SKF reports its second quarter results on July 20 and the company looks unlikely to replicate its solid 6.5% organic sales growth in the first quarter due to the Chinese lockdowns and its impact on industrial output, said Deutsche Bank.

In addition, new pricing that is lagging behind inflation could translate into some margin pressure and greater caution in the second half on free cashflow and profitability.

"In this uncertain environment and despite affordable valuation, we maintain a hold rating," Deutsche Bank said, but lowered its price target to SEK175 from SEK195.

Forex:

The dollar was steady in Asia, with the USD Index remaining above 105.00, while the yen lost out against other G-10 currencies on improving risk appetite spurred by the China tariff reports.

An easing of tariffs would be very much welcomed as another way of taming inflation, said IG. Any decision on that front will likely be seen as beneficial to the world's two largest economies and may help to improve overall risk sentiment in the near-term.

Bonds:

Bonds dropped in Asia, with the yield on the 10-year Treasury pushing above 2.950%.

Muzinich & Co said bond investors face the same risks in the second half of the year as they did in the first, with further policy tightening expected as inflationary pressures fail to recede in line with central bank expectations.

"Household purchasing power and company spirits are likely to be squeezed, leading to lower spending, hiring, and investing."

With a continued stalling of the Chinese economy and the war in Ukraine, "the likelihood of recession becomes the base case scenario for economists and investors over the course of the next 12 months," Muzinich said, adding that a stabilization of commodity prices is necessary for the recession to remain a tail scenario.

Energy:

Oil futures were higher in Asia on continued worries over tight supply.

"Supply uncertainty is high as Russia and several other OPEC+ producers experience disruptions linked to political and technical factors," said SPI Asset Management.

Protests in Libya and news that Norwegian workers are planning a strike due to an industrial dispute, signal that supply disruptions are mounting, ANZ said.

Metals:

Gold futures gained but bullion faces pressure from the stronger dollar.

Still, ANZ thinks gold could get some support from worries about the economic outlook, noting that "the [Fed's] aggressive tightening is creating concerns over a looming downturn, which is likely to see safe-haven demand remain elevated for the precious metal."

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Copper recovered some of its recent steep losses.

Huatai Futures has advised investors to avoid trading in the metal for now, as risk remains high with the easing supply shortage and uncertain demand outlook, especially in China, where production levels of many companies remain lower than usual due to sporadic pandemic outbreaks and weaker end-demand from consumers.

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Iron ore futures rose in line with a recovery in most commodities on Tuesday, after natural gas in Europe hit its highest level in almost four months on renewed supply fears from planned strikes in Norway.

While high energy prices typically give commodities some support, Galaxy Futures has warned of a possible further downside to iron ore, even though it has been weakening in recent weeks.

Galaxy has pointed to high uncertainties over steel demand in the coming months, as both the U.S. and Chinese economies remain under pressure.

TODAY'S TOP HEADLINES

Chinese Vice Premier Liu, Treasury Secretary Yellen Discuss Economic Issues, Xinhua Reports

Chinese Vice Premier Liu He held a video call Tuesday with U.S. Treasury Secretary Janet Yellen and exchanged views on economic issues, state-run Xinhua News Agency reported.

The two discussed matters including the macroeconomic situation and global industrial and supply chains, said Xinhua, characterizing the talks as "constructive."

Biden Might Soon Ease Chinese Tariffs, in a Decision Fraught With Policy Tensions

WASHINGTON-President Biden is expected to roll back some tariffs on Chinese imports soon, a decision constrained by competing policy aims: addressing inflation and maintaining economic pressure on Beijing.

People familiar with the situation say what comes next has been pending with Mr. Biden in recent weeks and that he could announce his decision this week. It could include a pause on tariffs on consumer goods such as clothing and school supplies, as well as launching a broad framework to allow importers to request tariff waivers.

China Service Sector Activity Rebounded in June

China's Caixin services purchasing managers index, a private gauge, rebounded in June as Covid-19 restrictions were eased in the world's second-largest economy.

The Caixin services PMI rose to 54.5 in June from 41.1 in May, Caixin Media Co. and research company S&P Global said Tuesday. That marked the quickest expansion recorded since July 2021.

U.S.-Stock Funds Fell 16.3% in Second-Quarter Rout

Keep repeating to yourself: Don't panic about short-term declines.

Easier said than done this time. Bruising inflation and rising interest rates bowled over markets in the second quarter-and fund investors weren't spared. The average U.S.-stock fund fell 16.3% in the quarter, according to Refinitiv Lipper data. The average fund is down 21.3% for the year to date. Only a handful of stock-fund managers have managed to stay in positive territory (see Winners' Circle).

South Korea Inflation Hits Over Two-Decade High

South Korea's inflation rate hit a more-than-two-decade high in June, raising the likelihood of a bigger-than-usual interest rate increase by the central bank to curb price increases.

The benchmark consumer-price index rose 6.0% from a year earlier-the fastest since November 1998-following a 5.4% increase in May, the statistical office said Tuesday. That beat a median market forecast for a 5.9% increase for June.

Ukraine's Allies Talk of Rebuilding as Russia Consolidates Gains in Donbas

Ukraine's President Volodymyr Zelensky said huge investments would be needed to rebuild the country, addressing Western officials in Switzerland as Russian forces continued to press their advance in the east.

Mr. Zelensky spoke during a conference Monday via video-link to discuss a road map for Ukraine's reconstruction, after Russian forces gained control Sunday over the eastern city of Lysychansk.

European Travel Just Got Harder After SAS Pilots Strike

LONDON-Pilots at Scandinavia's main airline walked out, starting a strike that the carrier said will hobble operations and add to a growing list of air travel woes on both sides of the Atlantic.

About 1,000 pilots at SAS AB, which has hubs in Denmark, Sweden and Norway, started the strike after talks with management fell through earlier on Monday. SAS said it would scrap about half of all scheduled flights each day of the strike, with cancellations already racking up. The airline warned that the financial fallout from the industrial action could jeopardize the company's survival.

Write to paul.larkins@dowjones.com

Expected Major Events for Tuesday

00:01/IRL: Jun Ireland Services PMI

06:45/FRA: May Industrial production index

07:00/ITA: 1Q General Govt Quarterly Accounts

07:15/SPN: Jun Spain Services PMI

07:45/ITA: Jun Italy Services PMI

07:50/FRA: Jun France Services PMI

07:55/GER: Jun Germany Services PMI

08:00/EU: Jun Eurozone Services PMI

08:00/UK: Jun UK monthly car registrations figures

08:30/UK: Jun UK Official Reserves

08:30/UK: Jun S&P Global / CIPS UK Services PMI

09:00/CYP: Jun Registered Unemployed

09:00/EU: 1Q Quarterly sectoral accounts

09:00/EU: 1Q Quarterly Balance of Payments

10:00/FRA: May OECD CPI

All times in GMT. Powered by Onclusive and Dow Jones.

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July 05, 2022 00:13 ET (04:13 GMT)

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