MARKET WRAPS
Stocks:
European shares were deep in the red Thursday, tracking selloffs
in the U.S. and Asia on heightened concerns that high inflation and
slowing growth raise the risk of a global downturn.
Some major U.S. retailers have this week reported lower
quarterly earnings due to rising costs, sluggish sales and
supply-chain disruptions, fanning concerns that the global economy
could be headed for a recession.
"Throw in monetary policy tightening into the mix, we've got a
recipe for volatility and investor jitteriness," said Clara Cheong,
a global market strategist at J.P. Morgan Asset Management.
Economic Insight:
The eurozone looks set for a year of stagflation, according to
Capital Economics.
Economists expect the economy to more or less flatline for much
of the year as high inflation and low confidence knock consumption,
uncertainty weighs on investment and weaker foreign demand reduces
export growth. Further increases in core and food inflation look
set to drive the headline rate above 8% soon, prompting the
European Central Bank into action, Capital Economics said.
It expects the ECB to end net asset purchases early in July and
then start hiking later that month, with the deposit rate ending
this year at 0.25% and next year at 1.5%.
---
With eurozone annual inflation having surged to 7.4% in April,
Berenberg expects it to rise modestly in May and stay close to
those levels until base effects from the energy-price surge of
late-2021 kicks in more forcefully in the fourth quarter.
"Inflation pressure is likely to stay elevated throughout the
forecast period due to expensive green transition measures and more
expansionary fiscal policy," said Berenberg.
The sooner the European Central Bank scales back its monetary
stimulus, the less inflation expectations may overshoot and the
less it will ultimately need to raise rates to bring inflation back
toward 2%, Berenberg said.
U.S. Markets:
Stock futures slumped following the worst slide in close to two
years for the S&P 500.
Target's earnings miss, a day after Walmart also missed
expectations, have clearly unnerved investors already rattled by
the Federal Reserve's interest-rate-hike campaign.
Analysts noted that Target's results showed consumers moving
away from stay-at-home goods like furniture and televisions.
Thursday's slate of economic data features the latest weekly
jobless claims report, as well as the Philadelphia Fed
manufacturing report, existing home sales, and leading
indicators.
Forex:
Realized volatility in the euro-sterling exchange rate is likely
to remain high given heightened uncertainty about the policy path
for both the Bank of England and the ECB, said ING.
"We happen to think that tightening cycles in both are
overpriced and one would probably think that the BOE cycle gets
repriced lower first."
EUR/GBP one-month realized volatility is around 8%, which is
"very high" for a European currency pair, ING said, adding that
EUR/GBP should continue to trade in a very wide 0.8400-0.8600
range.
---
The euro rates curve is pricing in more monetary policy
tightening than what is realistic, said ING,
"Front-end rates are too high, and more sedate tightening
expectations should eventually translate into lower rates
volatility."
Money markets are currently pricing in about 109 basis points of
interest rate rises by the European Central Bank in 2022, according
to Refinitiv data.
Separately, and putting the current market expectations into
context, markets Wednesday were pricing in ECB rate rises of a new
high of 108 bps, or equivalent to at least four hikes of 25 bps by
year-end, Deutsche Bank said.
Bonds:
The release of the ECB's monetary policy accounts will be in
focus for eurozone government bond investors, partly due to an
empty data calendar and partly because of increasing signals of a
first interest rate rise in July.
"Focus will be on any discussion about the timing and pace of
upcoming rate hikes and the Governing Council's concerns about
de-anchoring inflation expectations," said Danske Bank.
Government bond issuance will come from Spain, offering EUR5
billion-EUR6 billion in conventional and green bonds, and from
France, auctioning EUR10 billion-EUR11.5 billion in conventional
bonds and EUR1 billion-EUR1.5 billion in inflation-linked
bonds.
---
The 10-year Italian BTP-German Bund yield spread--currently at
around 196 bps--is likely to widen, according to ING, announcing a
trade idea to sell 10-year BTPs against German peers. "Central bank
tightening and a deteriorating growth outlook are a toxic mix for
peripheral bonds."
The end of ECB asset purchases and the additional cost of debt
for Italy's budget should push yields higher. ING has entered the
trade idea at a spread of 194 bps, targeted a widening to 250 bps,
with a stop-loss level at 150 bps.
---
Ahead of Moody's review of Portugal's credit rating on Friday,
Citi believes the country's high debt is going to be an impediment
for any rating upgrade in the near term amid rising funding costs
and the withdrawal of monetary policy support. Therefore, Citi
doesn't expect any change in Portugal's current rating--Baa2 with
stable outlook--in the near term.
Energy:
Oil prices moved higher, with the threat of more sanctions on
Russian supply still the main driver for crude's gains.
Around 2.5 million barrels of Russian oil a day will be affected
by EU's proposed embargo, said ANZ. "Russia will struggle to find
alternative buyers due to constraints on shipping and
infrastructure. OPEC is unlikely to fill the gap, with the group
struggling to raise output in line with its higher quotas."
Metals:
Gold futures continued to soften with the dollar and 10-year
Treasurys remaining more attractive safe-havens.
A lack of liquidity was noted by SPI Asset Management's Stephen
Innes, who said "futures volumes are tracking at around 50% of the
10-day average. The strategic gold buyer continues to offer support
possibly on recession risk."
---
Base metals managed to recover some losses as signs of lockdowns
easing in China helped relieve recent pressure on prices.
Some Shanghai residents have been able to shop according to
reports, hinting that lockdown restrictions may start to ease and
consumption rates could lift.
ANZ Research said "fiscal stimulus measures and ongoing supply
side issues should see metals markets tighten in the second half of
2022," and help support prices in the medium term.
---
UBS trimmed its outlook for silver this year, as Fed rate hikes
and a strong dollar keep the pressure on prices.
UBS said prices should fall to $20 a troy ounce by the end of
the year, compared with its $22 forecast previously. It said in
June, prices should fall to $22 from a previous expectation of $25,
and in September to $21 from a previous $23 forecast.
The support to precious metals from the Ukraine war was shorter
than expected, UBS said, adding that the prospect of more
aggressive rate hikes and rising bond yields create further
headwinds for silver. UBS noted that it doesn't advise further
silver long positions.
DOW JONES NEWSPLUS
EMEA HEADLINES
EDF Lowers 2022 Nuclear Output Estimates; Sees $19.4 Bln
Earnings Hit
Electricite de France SA late Wednesday said that it expects an
earnings hit of around 18.5 billion euros ($19.36 billion) in the
year after lowering its French nuclear output estimates due to
inspections for stress corrosion at some of its reactors.
The state-controlled utility said it now estimates French
nuclear output of 280 to 300 terawatt hours in 2022 compared with
295TWh-315TWh previously. Estimates for 2023 are unchanged at
300TWh-330TWh.
EasyJet Bookings in Past 10 Wks 6% Above 2019; 1H 2022 Pretax
Loss Narrowed
easyJet PLC said Thursday that bookings in the past 10 weeks
have been 6% above the same period in 2019, as it reported a
narrowed pretax loss for the first half of fiscal 2022 while
revenue rose because of increased capacity.
The U.K. budget airline said it had sold 76% of forward bookings
for the third quarter and 36% for the fourth.
Generali Beat 1Q Expectations Despite EUR136 Mln Russia
Impairment
Assicurazioni Generali SpA said Thursday that first-quarter net
profit fell on Russia impairments but otherwise beat expectations
as premiums rose at both its main insurance segments.
Italy's largest insurer reported net profit of 727 million euros
($760.8 million), down from EUR802 million in the same period of
last year.
Julius Baer Sets Out 2023-25 Strategy; On Track for 2022
Targets
Julius Baer Gruppe AG on Thursday set out its mid-term strategy
and said it is on track to meet its targets for the current year
despite reporting a decline in assets under management in the first
four months of 2022.
The Swiss private banking group said it targets adjusted
cost-to-income ratio below 64% and adjusted pretax margin of 28 to
31 basis points by 2025.
Investec FY 2022 Pretax Profit, Funds Under Management Rose
Investec PLC said Thursday that pretax profit and funds under
management increased in fiscal 2022, driven by the postpandemic
economic recovery, and raised its dividend payout.
The financial-services company made a pretax profit for the year
ended March 31 of 697.3 million pounds ($860.7 million) compared
with GBP331.6 million the previous year.
High Inflation, Slowing Growth Raise Risk of Global Downturn
The global economy is in danger of entering a period of
so-called stagflation, or high inflation and weak growth, policy
makers and corporate leaders say, which could erode living
standards around the world.
Treasury Secretary Janet Yellen on Wednesday became the latest
leader to warn of turbulence for the global economy. "Certainly the
economic outlook globally is challenging and uncertain," Ms. Yellen
said in Bonn, Germany, ahead of a meeting of leaders of seven
wealthy nations. "Higher food and energy prices are having
stagflationary effects, namely, depressing output and spending and
raising inflation all around the world."
European Union Sets Out Plan to End Russian Energy Imports
The European Union released a $317 billion plan aimed at ending
its dependence on Russian energy within five years, testing the
bloc's political will to overhaul its energy policy and
infrastructure in response to the invasion of Ukraine.
The plan envisions European countries cooperating in the near
term to negotiate gas supply deals from producers in the U.S., the
Middle East and Africa to replace energy from Russia. Meantime, the
bloc would launch a massive expansion of renewable energy
construction by boosting funding for projects and streamlining
regulations that slow them down.
EU Proposes Up to $9.5 Billion in Short-Term Funding for
Ukraine
The European Union's executive body has proposed for the first
time offering up to EUR9 billion, equivalent to $9.5 billion, to
help Ukraine pay its bills through the rest of 2022, matching U.S.
plans to provide immediate short-term aid.
The money, which will need to be signed off by EU member states
and the European Parliament, comes on top of a EUR1.2 billion loan
this spring, as Europe and its Western allies seek to help
President Volodymyr Zelensky's government pay debts and keep
providing basic services for Ukrainians amid the Russian
invasion.
Russia Weighs Fate of Ukrainian Defenders in Mariupol
Hundreds more Ukrainian soldiers were evacuated from Mariupol's
Azovstal steel plant after laying down their arms and were taken as
prisoners to Russian-held areas of Ukraine, Moscow said Wednesday,
as Russian prosecutors called for the regiment that was holed up
there to be declared a terrorist organization.
With peace talks on hold, Ukraine is staging a counteroffensive
against Russian forces in the main battlefront in the east, and
pinning its hopes on the continued supply of weapons from the
West.
GLOBAL NEWS
Fed's Patrick Harker Supports Half-Point Rate Rises in June and
July
Federal Reserve Bank of Philadelphia leader Patrick Harker said
he supports the central bank doing more big rate increases at its
coming meetings as it seeks to lower inflation.
"If there are no significant changes in the data in the coming
weeks, I expect two additional 50-basis-point rate hikes in June
and July," Mr. Harker said Wednesday in a speech text. "After that,
I anticipate a sequence of increases in the funds rate at a
measured pace until we are confident that inflation is moving
toward the [Federal Open Market] Committee's inflation target."
More Crypto Market Turmoil Is Predicted by SEC Chairman Gary
Gensler
WASHINGTON-Securities and Exchange Commission Chairman Gary
Gensler said Wednesday he worries that more investors will be
harmed in cryptocurrency markets, after this month's implosion of
the stablecoin known as TerraUSD.
"I think a lot of these tokens will fail," Mr. Gensler told
reporters after a House Appropriations Committee panel hearing
Wednesday. "I fear that in crypto...there's going to be a lot of
people hurt, and that will undermine some of the confidence in
markets and trust in markets writ large."
Treasury Likely to Prevent U.S. Investors From Receiving Russian
Debt Payments
BONN, Germany-Treasury Secretary Janet Yellen said the U.S.
would likely prevent U.S. investors from receiving payments on
Russian debt, a decision that could push Russia toward default.
Currently, the U.S. has carved out an exemption, set to expire
on May 25, in its sanctions campaign against Russia to allow for
sovereign debt payments. Without it in place, banks and investors
won't be able to process and receive bond payments made by the
Kremlin, likely prompting Russia's first default on its foreign
debts since 1918.
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(END) Dow Jones Newswires
May 19, 2022 05:37 ET (09:37 GMT)
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