MARKET WRAPS

Stocks:

European stocks dipped on Friday as investors continued to absorb a hawkish turn by the Federal Reserve. Banks and energy companies led the decliners.

On the data front, U.K. retail sales fell 1.4% in May, driven by decreases at food stores and on the heels of a sharp rise in the previous month, the Office for National Statistics said Friday. Economists polled by The Wall Street Journal expected retail sales to increase 1.6%.

Shares of Tesco fell more than 2%, after the British grocer reported a 1% rise in retail sales 1% on the year on a comparable basis and said that its profit outlook for the full year remains unchanged.

"Tesco's first quarter numbers look sluggish, but that's because they're lapping the unprecedented demand triggered by the pandemic this time last year," said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, in a note to clients.

As reflation trades unwound, bank stocks came under pressure, with HSBC down 0.4% and BNP Paribas slumping 2.3%. Energy stocks fell as TotalEnergies and BP each lost close to 1%, while Royal Dutch Shell was 1.3% down.

Shares of Kerry Group surged 3% after the Ireland based food company said late Thursday that it will sell its consumer foods' meats and meals business in the U.K. and Ireland to Pilgrim's Pride for 819 million euros ($975.1 million).

U.S. Markets:

Stock futures wobbled, leaving the Dow on track for its worst weekly performance since the end of January.

Futures tied to the Dow Jones Industrial Average wavered between gains and losses. The index of blue-chip stocks had dropped 1.9% this week through Thursday, leaving it poised for its worst showing since it fell almost 3.3% in the last week of January.

Investors have gained some confidence that the Federal Reserve will act to curb rising inflation after policy makers signaled Wednesday that they expect to raise interest rates by late 2023.

That has started to take the steam out of a recent rally in stocks linked to a broad economic recovery, leading to a retreat in banking and energy shares this week. It is also reviving appetite for technology stocks and other assets that could benefit from lower inflation and higher rates.

"If the Fed tapers bond purchases and it raises rates, then all of a sudden the inflation dragon gets tamed," said Gregory Perdon, co-chief investment officer at private bank Arbuthnot Latham. "If inflation gets tamed, you want to buy the long-duration assets," or investments that are sensitive to interest rates, he added.

In the near term, Mr. Perdon expects inflation to creep higher, due to supply-chain bottlenecks, chip shortages, strong demand for goods and services and easing pandemic restrictions. Stocks are still likely to advance, he said.

"The Fed hasn't done anything yet. All they've done is signal, and they're a long way off from doing anything," Mr. Perdon said. "Markets are supported by the trifecta of monetary and fiscal policy and the vaccine rollout. Markets may face a reckoning, but that won't happen in 2021."

Some investors are also booking profits after a strong monthslong rally that has left the S&P 500 off just 0.78% from its record close on June 14.

"Given that a lot of investors are sitting on huge gains, the temptation is to reduce risk," said Luca Paolini, chief strategist at Pictet Asset Management. "When you have the combination of expensive valuations and changes in Fed policies, it's better to lock in gains."

Forex:

The dollar extended its rise, hitting a two-month high against a basket of currencies, after the Fed this week unexpectedly forecast a first interest-rate rise in 2023, with two increases during that year.

Positioning data indicate that the market had been running substantial short dollar positions, which are now being unwound, MUFG said. However, given that longer-term U.S. bond yields have dropped back, perhaps reflecting the Fed's much tamer message on prospects of tapering asset purchases, a "sustained move stronger for the dollar might not materialize," MUFG's Derek Halpenny said.

The Swiss franc and the Japanese yen's correlation with risk appetite has fallen since the pandemic took hold and the dollar is now the favored safe haven but this isn't sustainable, RBC Capital Markets said.

"The U.S. has some of the properties one would expect to see in a haven (a large, relatively closed economy and light exposure to commodities) but lacks others (it is a net debtor)," RBC's Adam Cole said.

Markets have probably taken yield as a proxy for riskiness recently, lifting the dollar, he said. But as yields normalize, the dollar will turn more risk-neutral and the yen and the franc will re-assume their roles as key havens, he said.

The pound fell, hitting a six-week low of 1.3855 against the dollar after U.K. data showed retail sales fell, raising concerns about a slowing economic recovery.

The currency is also vulnerable to trade tensions between the U.K. and the EU, with the former threatening to unilaterally extend a grace period for processed meat exports to Northern Ireland, ING said.

The next few weeks "could be a vulnerable period" for GBP/USD, which risks falling to 1.3800, ING said.

The European Central Bank's monetary policy divergence with the Fed will likely limit any euro gains against the dollar, ING said.

ECB Chief Economist Philip Lane on Thursday said it is premature to discuss ending pandemic bond purchases, while the Fed on Wednesday brought forward its interest-rate-rise expectations into 2023. By inserting this wedge with the Fed, the ECB will try to encourage a weaker euro, ING analysts said.

"We doubt now EUR/USD can make it much above the 1.1950/80 area on any intra-day correction and momentum may well carry EUR/USD towards the 1.1835 area and potentially 1.1700 should any data/Fed commentary add to tightening fears this summer."

Bonds:

In bond markets, the yield on the 10-year Treasury note ticked down to 1.489%, from 1.509% Thursday.

Treasuries continue to look attractive to foreign investors on a currency adjusted basis, despite the recent decline in yields, as extraordinary policy actions by global central banks have kept global bond yields low, said U.S. rates strategists Subadra Rajappa and Shakeeb Hulikatti of Societe Generale.

They say foreigners' demand was evident in recnet three- and 10-year UST auctions despite the recent rally which brought the 10-year UST yield below 1.50%.

"Strong demand from Japanese and European investors is also likely to persist in a low interest rate regime," they said.

Commodities:

Oil was lower in Europe, with the firmer dollar continuing to weigh on prices. DNB Markets' Helge Andre Martinsen points to the dollar's move as being responsible for oil's slip in the past day or so.

Separately, Iran's presidential election takes place today. While that vote might see a hard-liner oust moderate Hassan Rouhani, the backing of Iran's supreme leader means "a change in president is not expected to derail [nuclear] talks," Martinsen added.

Gold futures rose, recovering some of their losses from Thursday, when they suffered their largest drop in over 10 months. The price of the precious metal tends to decline when investors anticipate rates rising and yield-bearing investments becoming more attractive.

Copper prices also rebounded somewhat but the gains did little to erase the sharp losses the red-metal has seen this week. Three-month copper on the LME was up 0.6% at $9,246.50 a metric ton, but is set to close the week 7.5% lower.

That would be its worst weekly loss since the pandemic first roiled markets in March 2020. The red-metal has been hit by a combination of Chinese plans to offload stockpiles and a hawkish turn by the Fed.

"Less liquidity from the U.S. and a firmer dollar, plus prospects of a slowdown in China as the top consumer tries to rein in overheated markets weighed on sentiment," said Anna Stablum at brokerage Marex.

   
 
 

EMEA HEADLINES

Tesco 1Q Retail Sales Growth Slowed, Backs FY 2022 Profit Outlook

Tesco PLC said Friday that first-quarter retail sales grew on year on a comparable basis, but at a slower pace as the boost from the coronavirus pandemic began to fade, and said its profit outlook for the full year remains unchanged.

   
 
 

UK Retail Sales Fell in May as Spending Broadened

Retail sales in the U.K. fell in May after increasing sharply the previous month as the further easing of restrictions across the country gave consumers more opportunities to spend aside from goods.

Sales fell 1.4% on the month, the Office for National Statistics said Friday, driven by decreases at food stores. Economists polled by The Wall Street Journal expected retail sales to increase 1.6%.

   
 
 

ArcelorMittal Launches $750 Mln Buyback Following Cleveland-Cliffs Stake Sale

ArcelorMittal said Friday that it has concluded the sale of its remaining stake in Cleveland-Cliffs Inc. and that the proceeds will be returned to shareholders via a share buyback.

The steelmaker's subsidiary ArcelorMittal North America Holding completed the sale of 38.2 million common shares in Cleveland-Cliffs, held as part of a sale of ArcelorMittal USA to the miner agreed last year. The proceeds will be returned to shareholders in a buyback worth $750 million, beginning immediately, ArcelorMittal said.

   
 
 

Europe's Chief Prosecutor Has 300 Cases on Her Plate Already

The European Union this month launched a regionwide prosecutor's office to investigate crimes such as corruption, value-added tax fraud and the misuse of Covid-19 recovery funds.

Tasked with policing the use of EU funds, the European Public Prosecutor's Office will prosecute companies and individuals by using the laws and judicial systems of the 22 member-states that have opted to participate. How it will work in practice remains to be seen.

   
 
 

Canada Vaccine Panel Recommends Against AstraZeneca for Second Dose

A Canadian vaccine panel said Thursday that people who received a first dose of AstraZeneca PLC's vaccine against Covid-19 should get a different vaccine for their second dose.

Canada's national advisory panel on immunization said earlier this month that authorized Covid-19 vaccines could be mixed, and noted some people might prefer to get a messenger RNA vaccine for their second shot. The panel has previously said mRNA vaccines, such as the ones produced by Pfizer Inc. in partnership with BioNTech SE, as well as Moderna Inc., are preferable to viral vector vaccines, such as those developed by AstraZeneca and Johnson & Johnson.

   
 
 

Supreme Court Rules Cargill, Nestle Can't Be Sued in Child-Labor Case

WASHINGTON-The Supreme Court ruled Thursday that Nestlé USA and Cargill Inc. can't be sued in U.S. courts for abuses allegedly committed in Ivory Coast, where plaintiffs accused the food-processing giants of obtaining cocoa from plantations that relied on the forced labor of children.

The court, in a decision by Justice Clarence Thomas, said the plaintiffs' case didn't have enough of a connection to the U.S. to proceed.

   
 
 

Israel Strikes Militant Targets in Gaza After More Arson Attacks

JERUSALEM-The Israeli military hit the Gaza Strip with a series of airstrikes Thursday night, rattling a shaky month-old cease-fire between the two sides that mediators are trying to keep from falling apart.

Soon after, for the first time in nearly a month, air raid sirens sounded the alarm in southern Israel when Gaza militants used heavy machine guns to fire across the border, the Israeli military said.

   
 
 

Turkey Commits to Securing Afghan Airport After Americans Leave, U.S. Says

WASHINGTON-The U.S. and Turkey have agreed to a plan for the Turks to continue providing security at the airport in Kabul, U.S. officials said, ensuring the U.S. and other nations can maintain a diplomatic presence in Afghanistan following the withdrawal of troops, expected by next month.

Jake Sullivan, President Biden's national security adviser, told reporters Thursday that both sides had made a "clear commitment" on the security of Hamid Karzai International Airport in Kabul.

   
 
 

CureVac Value Halves in Reminder of Vaccine Research Risks

CureVac NV's market value nearly halved Thursday after the Nasdaq-listed German company reported disappointing results for its experimental Covid-19 vaccine, even as executives voiced hope that the shot could still find a use in certain groups.

Investors wiped up to $9 billion off CureVac's value after the company said its vaccine was just 47% effective against the disease in an interim analysis of a large trial, one of the poorest results for any prospective Covid-19 shot. By midday, shares in the company were trading down 40%.

   
 
 
   
 
 

GLOBAL NEWS

BOJ Introduces Lending Facility for Climate Change

TOKYO-The Bank of Japan on Friday said it would introduce a lending facility to help banks finance projects connected to climate change.

The central bank said climate change would have an "extremely large impact" over the long term on the economy, prices and financial conditions.

   
 
 

Glynn's Take: RBA Gov. Increasingly Likely to Raise Rates Before Stepping Out the Door

A career devoted to the understanding and implementation of monetary policy has left the governor of the Reserve Bank of Australia, Philip Lowe, a tad unfulfilled.

He hasn't had to raise interest rates while in the top job, and if current policy guidance plays out, his term will expire before he gets a chance.

   
 
 

Bipartisan $1 Trillion Infrastructure Package Gains Steam

WASHINGTON-A growing bipartisan group of lawmakers and the White House haggled over how to finance a roughly $1 trillion infrastructure proposal, awaiting feedback from President Biden as Democrats began discussions on a separate economic package that could cost up to $6 trillion.

Since negotiations between Mr. Biden and a group of Senate Republicans collapsed last week, an alternative set of Republican and Democratic senators have held talks on a infrastructure plan that would spend $973 billion over five years, with $579 billion of that funding above expected baseline levels. Initially a group of five Democrats and five Republicans, the group expanded to include 11 Republicans and 10 members of the Democratic caucus on Wednesday.

   
 
 

Yellen Declines to Offer Position on State-Tax Deduction Cap

WASHINGTON-Treasury Secretary Janet Yellen repeatedly declined to offer a clear administration position on the deduction for state and local taxes during a House hearing, leaving vagueness on an issue that will be the subject of tense negotiations among Democrats considering President Biden's fiscal agenda.

Under pressure from House Democrats and Republicans on Thursday to take a position, Ms. Yellen wouldn't say whether the Biden administration favors repealing the $10,000 cap on the deduction. Eliminating that limit would cut taxes for high-income households and disproportionately benefit residents of high-tax Democratic-leaning states such as New York, New Jersey and California.

   
 
 

Jobless Claims Rose Last Week, Pausing Downward Trend

Worker filings for initial unemployment benefits rose last week for the first time since late April but remained near a pandemic low as the labor market continues to heal from the impact of Covid-19.

Initial jobless claims rose by 37,000 to 412,000 in the week ended June 12. Despite the increase, the four-week moving average, which smooths out week-to-week volatility, reached a new pandemic low of 395,000. This was the lowest average level since March 2020, when the pandemic first took hold in the U.S.

   
 
 

Floating-Rate Bonds Are Coming Back, Boosted by Bets on Rising Rates

Investors are snapping up bonds with yields that rise and fall with interest rates, spurring a wave of debt offerings by blue-chip companies.

Nonfinancial companies including Verizon Communications Inc. and 7-Eleven have sold more than $18 billion worth of investment-grade bonds with variable interest rates this year through June 14, according to data compiled by Dealogic. That is nearly four times the amount issued in the same period last year.

   
 
 

Lawmakers Urge Private Sector to Do More on Cybersecurity

The private sector in the U.S. must do more to defend against cyberattacks, lawmakers from both major parties stressed Thursday as several senators introduced legislation designed to target hackers.

The ransomware incident that brought operations at Colonial Pipeline Co. to a standstill for six days starting May 7, and resulted in fuel shortages across Southeastern states, shows that cybersecurity efforts must improve, said Sen. Sheldon Whitehouse (D., R.I.).

   
 
 

China Considers Lifting All Childbirth Restrictions by 2025

SINGAPORE-Chinese officials are drawing up plans to further loosen birth restrictions and transition toward policies that explicitly encourage childbirth, according to people familiar with the matter, reflecting increased urgency in Beijing as economic growth slows and China's population mix skews older.

Policy makers are discussing the possibility of fully doing away with birth restrictions by 2025, the end of the ruling Chinese Communist Party's current five-year economic plan, according to one of the people. According to that person, China will likely begin by eliminating birth restrictions in provinces where the birthrate is the lowest before enacting nationwide changes.

   
 
 

Israel Strikes Militant Targets in Gaza After More Arson Attacks

JERUSALEM-The Israeli military hit the Gaza Strip with a series of airstrikes Thursday night, rattling a shaky month-old cease-fire between the two sides that mediators are trying to keep from falling apart.

Soon after, for the first time in nearly a month, air raid sirens sounded the alarm in southern Israel when Gaza militants used heavy machine guns to fire across the border, the Israeli military said.

   
 
 

Turkey Commits to Securing Afghan Airport After Americans Leave, U.S. Says

WASHINGTON-The U.S. and Turkey have agreed to a plan for the Turks to continue providing security at the airport in Kabul, U.S. officials said, ensuring the U.S. and other nations can maintain a diplomatic presence in Afghanistan following the withdrawal of troops, expected by next month.

Jake Sullivan, President Biden's national security adviser, told reporters Thursday that both sides had made a "clear commitment" on the security of Hamid Karzai International Airport in Kabul.

   
 
 

U.S. FCC Proposes Fresh Ban on Equipment From Chinese Firms Including Huawei, ZTE

The U.S. Federal Communications Commission has proposed new rules that would prevent U.S. communications networks from using equipment made by a handful of Chinese companies deemed as national security threats, including telecom giants Huawei Technologies Co. and ZTE Corp.

The proposed regulation also seeks to revoke prior authorizations issued to five Chinese companies that allowed U.S. networks to use their equipment, the telecom regulator said in a statement Thursday.

   
 
 

Write to sarka.halas@wsj.com

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This article is a text version of a Wall Street Journal newsletter published earlier today.

 

(END) Dow Jones Newswires

June 18, 2021 06:24 ET (10:24 GMT)

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