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.


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.


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.


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."


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.




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.



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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