Relief Rally, Bank Earnings, Europe's Heatwave

© Reuters

By Geoffrey Smith

-- The global relief rally continues on rising hopes that the Fed won't get even more aggressive when it meets next week. China's regulators tell banks to open the credit taps to developers to head off the damage from a homebuyers' payment boycott. Bank of America, Goldman Sachs and IBM all report earnings. Europe's misery is compounded by wildfires and a debilitating heatwave, and oil prices rise as President Joe Biden's visit to Saudi Arabia fails to generate an immediate response. Here's what you need to know in financial markets on Monday, July 18.

1. Relief rally continues on conviction Fed will lift only 75 bps next week

The global risk rally continued after Friday’s economic data and a Wall Street Journal report strengthened belief that the Federal Reserve won’t tighten monetary policy any more aggressively than it already has.

U.S. markets had triggered a global rally on Friday after the University of Michigan’s consumer sentiment index suggested that the Fed is winning the battle to stop expectations of continued high inflation becoming entrenched. The WSJ, meanwhile, reported that Fed officials are leaning toward a rate hike of only 75 basis points next week, rather than 100 basis points that markets had started to price in after the shock of the June inflation report.

That improvement in risk sentiment is being felt both in world equity and bond markets and in cryptocurrency, where Bitcoin leaped back above $22,000 for the first time in nearly two weeks.

2. China orders banks to lend to developers

China’s authorities took measures to head off a revolt by homebuyers, who are refusing to pay their mortgages in protest of developers’ failure to deliver presold apartments.

China’s bank regulator ordered lenders to give credit to eligible property developers for the completion of unfinished homes, the biggest relaxation of lending restrictions that were imposed nearly a year ago. The central bank’s cap on real estate loans last year had been a major factor behind the ensuing wave of defaults in a sector that counts for 20% of Chinese GDP.

The mortgage boycott, which had spread like wildfire last week, threatens to dry up one of the last remaining sources of liquidity for the sector, with potentially severe consequences for banks that are heavily exposed to it.

3. Stocks set to open higher; bank earnings in focus again, IBM due late

U.S. stock markets are set to open higher, with the focus firmly on an earnings season that will gather momentum this week.

By 06:20 AM ET (1020 GMT), Dow Jones futures were up 261 points or 0.8%, while S&P 500 Futures were up 0.9%, and Nasdaq 100 futures were up 1.1%.

The big earnings numbers today will come from Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), and Charles Schwab (NYSE:SCHW) before the opening, while IBM (NYSE:IBM) headlines after the bell.

Elsewhere, the National Association of Homebuilders’ survey of the real estate market is due. The NAHB’s main index of activity fell to its lowest in nearly two years last month, a sign that one of the sectors that have caused the Fed most concern in recent months is cooling.

4. Heatwave adds to Europe's misery

Europe’s many crises show no sign of improving, and tempers aren’t likely to be improved by record temperatures around the continent. The U.K. will register 40 degrees Celsius for the first time ever, while wildfires have ravaged Portugal, Spain, France, and Greece over the weekend.

The extreme heat and the lack of water for hydroelectricity are adding fresh strains to electricity grids, while energy security more broadly remains in question as Russian gas supplies remain severely and artificially restricted.

German energy giant Uniper (ETR:UN01) said it had drawn down the last 2 billion euros of its emergency credit facility with state-backed development bank KfW, exhausting one of the sources of liquidity left to it as its talks over a full bailout continue. In Italy meanwhile, Prime Minister Mario Draghi appears no closer to resolving the standoff with the country’s political parties that led him to offer his resignation last week.

5. Oil rises as Saudi Arabia snubs Biden

Crude oil prices rose after President Joe Biden's visit to Saudi Arabia failed to bring about any immediate increase in oil supply from the Desert Kingdom - even though Saudi officials had flagged that this would be the case in advance.

The market was disappointed by comments from Saudi Arabia’s foreign minister, Prince Faisal bin Farhan Al Saud, who said a U.S.-Arab summit on Saturday hadn't discussed oil and that the OPEC+ forum was still the vehicle through which the kingdom carried out its oil output policy.

By 06:30 AM ET, U.S. crude prices were up 1.9% at $96.39 a barrel, while Brent was up 2.0% at $103.17 a barrel.

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