Stocks in Europe were slightly weaker on Tuesday as sentiment continued to be rattled by shifts in sentiment on the strength of the global economy and the likely trajectory of central banks and interest rates.
A big concern is that central banks could act too aggressively in fighting inflation and trigger slower economic growth or even a recession. On Tuesday, the Reserve Bank of Australia raised its key rate by 0.5 percentage points, more than expected.
“We’re still in this constant push and pull of where the inflation is going to be, where the growth is going to be and whether we’re going to be in a recession or not,” said Fahad Kamal, chief investment officer at Kleinwort Hambros.
“The Australian central bank’s decision is a reminder that central banks can surprise on the upside. What does that tell us about what the Fed will do, what the ECB will do?” Kamal said. “A more aggressive tightening directly equates to a higher likelihood of a recession.”
Barclays expects the European Central Bank to raise the deposit rate in increments of 25 basis points at each meeting from July to December, and once again in the first quarter of 2023, taking it to 0.75%.
Thereafter, Barclays expects a pause on the grounds that inflation in the first quarter of 2023 is expected to be on a downtrend, “with clear evidence that the Eurozone is in a slowdown phase.”
For now, however, inflation’s persistence and upside surprises are increasing pressure on the ECB to normalize key rates, Barclays said.
Stock futures fell slightly as investors awaited more data on the state of the economy.
Trade figures for April are due on Tuesday, while the key release this week is Friday’s consumer price index, which will be closely watched to detect whether inflation is weakening or not.
In other market moves, the yield on the benchmark 10-year Treasury rose to 3.060%, the highest level in nearly a month, before falling back to 3.031% from 3.037% on Monday.
“With yields at 3%, it shows that the market hasn’t decided if we’re going to have a recession or if we have one, how bad will it be,” said Julien Lafargue, chief market strategist at Barclays Private. Bank. . “It’s what you would want to own if you expect a recession.”
In premarket trade, Kohl’s jumped more than 13% after The Wall Street Journal reported the department store chain was in exclusive talks to be sold to retail holding company Franchise Group. The deal could value the company at around $8 billion.
Twitter fell 0.8%, extending Monday’s decline after Elon Musk threatened to end its acquisition of the social media platform, saying the company was not complying with data requests on spam accounts.
The dollar edged higher as stocks fell in Europe, and ING analysts expect the currency to remain supported by the prospect of further interest rate hikes by the Federal Reserve and evidence of a strong US economy.
“We believe the dollar will remain broadly supported overall, as underlying stories of Fed tightening and good US economic momentum continue to put a floor under the greenback.”
The pound was down after Monday’s tight no-confidence vote for Boris Johnson, which he survived by 211 votes to 148 to remain prime minister.
“The triggering of the vote of confidence itself as well as the fact that 41% of Tory MPs did not support it [Johnson] are both politically corrosive, hurting the Prime Minister,” said Victoria Scholar, chief investment officer at Interactive Investor.
The pound “suffered from a lack of international investor confidence in the UK, both economically and politically”.
Evidence of improving sentiment on China’s economic outlook as the lockdowns end is positive for the euro, MUFG Bank said.
“A sustained rebound in activity in China will play a key role in shaping global sentiment and could bolster arguments among hawks within the ECB Governing Council on the need to act more aggressively and to increase [interest rates] by 50 basis points at the July meeting,” wrote MUFG analyst Derek Halpenny.
This will add to the “hawkish” tone Christine Lagarde is likely to convey when signaling monetary policy tightening at Thursday’s meeting, Halpenny said.
Eurozone government bonds barely moved in early trading as investors awaited the ECB’s meeting this week and likely confirmation of an end to the asset purchase program and a first hike in interest rate in July.
Societe Generale said uncertainty about the ECB’s key rate is likely to ensure continued volatility in eurozone government bonds.
The ECB’s recent unusual ‘pre-commitment’, in which it set out milestones for the next three months, is ‘clearly aimed at limiting EGB [eurozone government bond] yield volatility,” Societe Generale rates strategists said, adding that the market is already questioning this smooth normalization roadmap.
The ECB’s vague approach to a backstop on spreads means the EGB market must first go into crisis mode and widen unnecessarily before the central bank takes action, the strategists added.
Eurozone inflation-linked sovereign bonds continue to outperform the broader market, but their year-to-date outperformance declined in May as inflation expectations weakened, senior analyst Elmar Voelker said. fixed income securities at LBBW.
Eurozone linkers’ year-to-date outperformance fell to around 7% in May after the phase of “breathtaking relative strength” in the first four months of 2022, Voelker said.
“While conventional sovereign bonds have slowed their price decline somewhat, linkers have encountered a strong headwind for the first time this year with a monthly decline of around 4%.”
According to the iBoxx EUR Sovereigns Inflation-Linked index, linkers have achieved a performance of minus 3.4% since the start of the year compared to minus 10.9% for the entire sovereign bond market.
Oil prices rose slightly in Europe on doubts that OPEC will be able to meet its increased production targets
While OPEC+ has agreed to increase its collective production, potentially easing market tensions, many cartel members are unlikely to meet their quotas, leaving a gap between what the group targets and ultimately produces.
“While the new increased monthly targets continue to be driven by proportional contributions from all participants (including Russia), it is unrealistic to expect an increase close to the overall figure,” writes SPI Asset Management.
Global natural gas and LNG prices are expected to rise as China’s exit from its Covid-19 lockdowns boosts demand, Goldman Sachs said. “We believe that the recent increase in LNG purchases in Asia will be the next bullish catalyst for global gas markets.”
Other factors such as extreme heat in India and Pakistan and maintenance of nuclear power plants in Japan are also supporting prices, Goldman Sachs said. With diesel prices now higher than gasoline prices, Asian consumers also have an incentive to choose gasoline over other fuels.
Venezuela is gradually returning to international oil markets after Eni and Repsol received the green light from Washington to resume oil supplies to the sanctioned South American country, tanker owners told the WSJ at the Posidonia shipping conference. in Athens. Washington’s blessing comes as Europe attempts to reduce its energy dependence on Moscow.
“Imports will be limited at first but could take off by the end of the summer,” said one owner who operates more than two dozen tankers.
Washington is also considering a Chevron request to resume shipments from Venezuela, two years after the United States tightened oil sanctions against Caracas that effectively banned oil shipments to Western markets.
Base metals weakened, under pressure from a stronger dollar, as investors also awaited further signs that the easing of pandemic lockdowns in China was increasing economic activity.
Jefferies is cautiously optimistic about a gradual recovery in Chinese demand for commodities, as it raised its price forecast for iron ore and coal and upgraded miners such as BHP, Rio Tinto, Anglo American, Vale and South32 to buy pending.
Jefferies believes that a stimulus-induced shift in China should partly offset weaker demand elsewhere. Of course, there are a number of threats to commodity demand and mining stocks will be volatile as a result, he said.
“Macro risks are still clearly elevated as an economic hurricane could be upon us, but we would buy the miners to ride out the storm and maximize leverage for the subsequent recovery.”
Commonwealth Bank of Australia analyst Vivek Dhar said China’s target to cut steel output again in 2022 will likely weigh on the country’s output later this year, although the measure in which its production is to drop before the end of the year should be milder than in 2021.
“This should therefore lead to a smaller decline in iron ore prices” compared to the end of 2021.
Dhar forecast iron ore to fall to $100 per metric ton in the fourth quarter. Ultimately, “iron ore prices remain in China’s hands,” Dhar said.
DOW JONES NEWSPLUS
German factory orders fell unexpectedly in April
German manufacturing orders plunged in April as the war in Ukraine continued to weigh on the sector.
Factory orders fell 2.7% on the month in adjusted terms, according to data from the German economy ministry released on Tuesday.
MFE raises bid for remaining Mediaset Espana stake
MFE-MediaForEurope NV is increasing its offer to take all remaining shares of Spanish subsidiary Mediaset Espana Comunicacion SA, whose board of directors has agreed to recommend the new offer, the Italian broadcaster announced on Monday.
MFE increases the cash portion of the offer to 2.16 euros ($2.31) per share from 1.86 EUR previously, as it aims to take control of the remaining approximately 44% stake in Mediaset Espana which she doesn’t already have.
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