MARKET WRAPS
Stocks:
European stocks fell sharply Tuesday after a profit and revenue
warning from social media company Snap sent futures of U.S.
technology shares and the broader market tumbling.
The warning from Snap "stopped all the 'worst is over' pundits
in their tracks," said Jeffrey Halley, a senior market analyst at
OANDA. "It highlights how fleeting swings in sentiment are now and
also that investors are running at the first sign of trouble."
"The market continues to turn itself inside out and back to
front as it tries to decide if it has priced all of the impending
rate hikes, soft landing or recession, inflation or stagflation,
China, Ukraine, U.S. summer driving season, supply chains, the list
goes on," Halley added. "The result is a day-to-day chop-fest, and
it seems clear that volatility is the winner."
That volatility could continue and run through the week as
investors digest the release Wednesday of minutes from the latest
Federal Reserve meeting.
Economic Insight:
The European Central Bank won't be in a rush to raise interest
rates because the current inflation spike is fuelled by the
supply-side of the economy and inflation expectations remain well
anchored, Christine Lagarde said in an interview with Bloomberg at
the World Economic Forum in Davos.
"I don't think we're on the situation of surging demand at the
moment...In this situation, we have to move in the right direction,
obviously, but we don't have to rush and we don't have to
panic."
An economic recession isn't the baseline scenario for the ECB,
although an interruption of Russian gas supplies would have a
significant impact on the eurozone's economy, Lagarde added.
U.S. Markets:
The technology sector was poised to drag Wall Street down, with
Nasdaq-100 index futures tumbling after the Snap warning.
Snap shares slumped 30% overnight after the social-media company
warned Monday it would likely miss quarterly estimates as the
economy has "deteriorated further and faster than anticipated."
The Wall Street Journal reported late Monday that Snap told
employees that it will slow the pace of hiring and look for more
cost savings in the remainder of its 2022 budget. Still, 2022
remains "a significant investment year," the company said in an
internal memo, the Journal reported, and it still plans on adding
500 more employees by year's end.
The warning weighed on other tech companies that rely on
advertising as a revenue stream, with Meta Platforms losing nearly
9% in the late session, Pinterest down 16%, and Twitter off around
4%.
Forex:
The euro pared gains against the dollar but only marginally
after data showed growth in eurozone manufacturing and services
activity slowed by more than expected in May.
The S&P eurozone manufacturing purchasing managers' index
fell to 54.4 in May from 55.5 in April and the services PMI dropped
to 56.3 from 57.7. The euro remained buoyant, however, after
Christine Lagarde's comments Monday.
---
The dollar's upward momentum could ease but the currency is
unlikely to turn weaker just yet, as the Fed will continue to take
a more aggressive approach to tightening policy than other central
banks, said Swissquote Bank.
"It's just that the others will also stop turning a blind eye on
the inflation problem. And that should slow the dollar
appreciation."
---
Sterling could weaken as U.K.-EU tensions over the Northern
Ireland protocol that forms part of the Brexit deal look set to
escalate, said MUFG Bank.
Noting that Northern Ireland Secretary Brandon Lewis has
signalled that the U.K. plans to introduce legislation to override
parts of the Brexit deal in the next three weeks, MUFG said such
action could create elevated uncertainty that will weigh on
sterling.
The EU could threaten scrapping the entire Brexit trade
agreement or suspend parts of the deal.
"The pound will get hit if these options are even mentioned as
considerations by the EU."
Bonds:
Eurozone government bonds were little changed after Christine
Lagarde's blog comments on Monday.
"The message in her blog seems crystal clear: lift-off in July,
the end of negative rates in September and a progressive further
normalisation towards the neutral rate depending on the outlook for
inflation," said Commerzbank.
"This sets the ECB on auto-pilot for a series of hikes starting
in July and we think it will require an active decision and
noticeably weaker data to stop it."
Other News:
Italy's new March 2038 BTP is expected to price about 8 basis
points above the yield of the 0.95% March 2037 BTP, said Mizuho's
rates strategists.
They expect the March 2038 BTP to end up trading around 6.5 bps
above the March 2037 BTP in the secondary market, but some new
issue premium would take the pricing closer to a yield of 8 bps
above the peer.
"This sort of NIP [new issue premium] is probably needed given
how BTPs have been trading lately, but the smallish size on the
bond could even see pricing a touch richer."
Italy's treasury plans to sell a maximum of EUR5 billion.
Energy:
Oil futures extended losses in Europe as Chinese stimulus
measures have so far failed to alleviate concerns about slowing
growth.
Adding to concerns is continued Hungarian opposition to the EU's
plan to ban imports of Russian oil. "The EU is increasingly
unlikely to approve a ban," said DNB Markets.
Other News:
Ukrainian officials have descended on Davos to make sure the
world doesn't forget about the war while contending with inflation
and other challenges, said Andrii Zhupanyn, head of the
parliament's subcommittee on gas policy.
On Europe's ongoing reliance on Russian natural gas, Zhupanyn
said "something needs to be done." A full embargo on Russian gas in
the EU is off the table for now but Ukraine is suggesting
alternatives that would deprive Moscow of revenue, Zhupanyn
said.
They include a tariff on Russian fuel or a requirement that
payments go into an escrow account that cannot be accessed for
general purposes--a workaround previously used for purchases of
Iranian oil.
---
Spanish Prime Minister Pedro Sanchez said in an interview with
CNBC at Davos that it's important to build more connections
allowing the transportation of natural gas and other forms of
energy between the Iberian Peninsula and the rest of Europe.
Spain represents 37% of the EU's regasification capacity, while
Iberia concentrates nearly half of the EU's liquefied natural gas
storage capacity, Sanchez said. The region could also export
renewable energy, such as green hydrogen.
"Spain and, I would say, Southern Europe, will have a chance to
provide an answer to this energy dependence of Russia fossil
energy...the only problem that we have is the interconnection."
The European Commission wants to increase Iberia's connectivity
to Europe's energy markets, Sanchez added.
Metals:
Base metal prices were lower after data from Australia and Japan
signaled dips in manufacturing growth.
While both readings were expansionary, the data confirmed
manufacturing took a significant hit as inflation worries, China
lockdowns and supply-chain issues added pressure to global
industry.
DOW JONES NEWSPLUS
EMEA HEADLINES
Eurozone Growth Remains Robust in May Thanks to Booming Service
Sector, PMIs Show
Eurozone economic growth remained robust in May despite
headwinds associated with the Ukraine war, Covid-19 pandemic supply
constraints and the rising cost of living, S&P Global said.
The eurozone composite purchasing managers index edged down to
54.9 in May from 55.8 in April, according to the preliminary
reading. This figure indicates an expansion of economic activity
for the 15th successive month, with the rate of growth easing only
modestly.
German Export Sentiment Improves in May
Sentiment among German exporters has brightened despite the
climate of uncertainty due to Russia's invasion of Ukraine, the Ifo
Institute said.
The Ifo export expectations index rose to 4.5 points in May from
3.0 in April.
Air France-KLM Launches $2.4 Bln Capital Increase to Repay State
Aid, Strengthen Equity
Air France-KLM on Tuesday said that it has launched a capital
increase through the issuance of 1.93 billion shares to raise gross
proceeds of 2.26 billion euros ($2.42 billion).
The Franco-Dutch carrier said proceeds will be used to repay the
deeply subordinated bonds held by the French state and to
strengthen its balance sheet.
Smallpox Vaccine Enters Wider Production Amid Monkeypox
Outbreak
Danish vaccine maker Bavarian Nordic A/S is making more of a
smallpox vaccine typically stockpiled in case of biological
warfare, as governments seek doses that also offer protection
against monkeypox amid an unusual outbreak around the world.
Monkeypox, a viral illness that is only rarely detected outside
of Africa, has been reported in recent weeks in at least 17
countries including the U.S., U.K., Spain, Portugal and Australia,
according to nonprofit data platform Global.health. In the U.S., a
case was confirmed in Massachusetts and at least five more are
suspected-one each in Florida, New York and Washington and two in
Utah, state officials and the Centers for Disease Control and
Prevention said Monday.
At Davos Confab, CEOs Fret Over Economy, Start to Plan for a
Downturn
DAVOS, Switzerland-Fears of an economic downturn have lately
gathered steam. Corporate executives at the World Economic Forum
here struck a mostly gloomy tone to match.
"There is a cycle of mood," said Alex Karp, chief executive of
Palantir Technologies Inc. "You walk around and everyone thinks
it's going to be bad, so it's going to be bad." Mr. Karp isn't
alone, but the pessimism he says he's picking up among other CEOs
also isn't uniform.
Egypt's Bread Crisis Awakens Old Fears of Political Unrest
CAIRO-For decades, vendors sold subsidized Egyptian baladi bread
for almost nothing in Al-Sayeda Zeinab market, a bustling hub for
this city's working class. One day last month, there was suddenly
no baladi.
Customers started shouting at Khalil Mohamed, a municipal
bakery-shop worker. "You should have seen the fight," said Mr.
Mohamed, 25 years old. "It was like a hunger crisis."
Siemens Energy Picks a Good Moment to Take Wind Turbines
Private
Long-suffering shareholders in Siemens Gamesa Renewable Energy
will likely be spared the decision of whether to quit or wait
patiently for the renewable-energy revolution.
Shares in Siemens Gamesa Renewable Energy rose 6.2% Monday after
its majority shareholder, Siemens Energy, on Saturday confirmed
longstanding expectations that it wanted to take the wind-turbine
business private. It said it would pay EUR18.05 a share, equivalent
to $19.25, for the outstanding 32.9% of its subsidiary. Cost and
revenue synergies are expected eventually, but the primary reason
it gave for the buyout was to accelerate the continuing
turnaround.
Lagarde Signals End to ECB's Negative Interest Rates
Experiment
FRANKFURT-The European Central Bank is likely to increase its
key interest rate, currently negative, to zero by September and
could continue raising rates after that, President Christine
Lagarde said, signaling the end of the ECB's eight-year experiment
with negative rates amid record-high inflation and concerns about
the weakness of the euro currency.
The policy shift, outlined in an ECB blog post on Monday,
follows robust actions by the Federal Reserve and other major
central banks to phase out easy-money policies as inflation heats
up around the globe. It is part of a sharp pivot by the eurozone
central bank, which had until recently signaled it would increase
interest rates only gradually, diverging from the Fed.
GLOBAL NEWS
Fed Officials Weigh Future Rate Policy Shift
Some Federal Reserve officials are starting to talk about a
possible shift in the central bank's interest-rate policy.
Federal Reserve Bank of St. Louis President James Bullard, who
spoke Friday on the Fox Business Network, and Atlanta Fed President
Raphael Bostic, who spoke Monday, both weighed in on the path for
rates.
China Central Bank Urges Lenders to Rev Up Support for Real
Economy
China's central bank urged the nation's lenders to step up
support for the real economy and meet credit demand, as the world's
second largest economy faces increased downward pressure.
In a meeting with 24 financial institutions, the People's Bank
of China and China's banking regulator urged lenders to "go all out
to stabilize the fundamentals of the economy," the PBOC said in a
statement Tuesday.
Biden Exploring Release of Diesel Fuel Reserves Amid High
Prices
WASHINGTON-The Biden administration is considering a release of
diesel fuel from federal reserves to address skyrocketing prices
and the threat of supply outages on the East Coast.
Officials have drafted an emergency declaration as prices have
soared to record highs in recent weeks, White House spokeswoman
Emilie Simons said on Twitter on Monday. Such a declaration would
allow for the quick release of some of the 1 million barrels of
diesel in the Northeast Home Heating Oil Reserve "if necessary,"
she said.
JPMorgan Says U.S. Consumers Are Doing Just Fine
Recession fears have markets in a panic, but the leaders of
America's biggest bank said U.S. consumers appear to be in good
financial health.
JPMorgan Chase & Co. expects credit losses to remain
abnormally low through much of 2023, because customers haven't yet
drained cash balances that grew fatter during the pandemic,
executives said at the bank's investor day on Monday.
Biden Says His Taiwan Policy Hasn't Changed
TOKYO-President Biden said he would maintain longstanding U.S.
policy toward Taiwan, a day after triggering global confusion when
he said the U.S. would respond militarily to any effort by China to
take the island by force.
"My policy has not changed at all. I stated that when I made my
statement yesterday," he told reporters here when asked whether he
would send U.S. troops to Taiwan if China invaded.
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(END) Dow Jones Newswires
May 24, 2022 05:30 ET (09:30 GMT)
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