European Midday Briefing : Mood Improves Post ECB; U.S. Banks Eyed

MARKET WRAPS

Stocks:

European stocks traded higher on Friday as sentiment gained a lift after the European Central Bank signaled that interest rates would likely be cut in June.

Meanwhile, the start of the U.S. earnings season with big banks reporting could impact market direction, IG said.

Stocks to Watch

Taylor Wimpey seems well-positioned to be the first in its sector to capitalize on improving market conditions, as well as the first large cap to meet its medium-term goals, RBC Capital Markets said, raising its stock rating to outperform from sector perform.

U.S. Markets:

Stock futures traded mixed ahead of earnings reports due from three of the biggest U.S. banks.

Earnings are due from JPMorgan Chase, Wells Fargo and Citigroup. BlackRock and State Street will also release updates.

Government bonds rose, pulling yields on 10-year Treasury notes just below 4.55%.

Stocks to Watch

Apple edged slightly lower in premarket trading after it rose 4.3% on Thursday to $175.04.

Morgan Stanley was little changed after falling 5.3% on Thursday following a report from WSJ that said federal regulators were probing the investment bank over how it handles wealth management clients "who are at risk of laundering money.

Forex:

The euro has fallen to a five-month low against the dollar and could weaken further in the short term, Capital Economics said.

Implied volatility is close to lows that have tended to precede falls in the euro over the past decade or so, it added.

Speculative positioning in the euro is still significantly net long, so any shift in this trend could also weigh on the currency. A fall in EUR/USD below parity is unlikely, however, Capital Economics said.

Brown Brothers Harriman said higher U.S. yields and U.S. economic outperformance will continue to underpin the dollar's uptrend.

Federal Reserve officials are reacting to 'sticky' U.S. inflation by urging more patience before they start cutting rates, it added.

AllianceBernstein said divergence between the interest-rate outlooks in the eurozone and U.S. could weigh further on a weak euro.

As it stands, the ECB will not only be cutting before the Fed, but probably also by more even in the most conservative scenario, AllianceBernstein said.

A weaker euro will mean higher imported inflation, which will be reflected in the ECB's June projections but shouldn't prevent inflation from slowing nor derail plans to cut rates.

Pepperstone said the path of least resistance for the euro should continue to lead lower, at least against the dollar, as the policy outlook between the ECB and the Fed is set to diverge.

"Risks to the ECB outlook tilt in an increasingly dovish direction, and risks to the FOMC outlook become increasingly hawkish," especially after the above-forecast U.S. CPI figures, Pepperstone said.

A continued grind lower in EUR/USD over coming quarters seems a reasonable expectation, it said.

Sterling rose against the euro as resilience in the U.K. economy might mean that the Bank of England will embark very cautiously when it comes to decisions on cutting interest rates.

The U.K. economy is on track to recover quickly from its end-2023 technical recession, Brown Brothers Harriman said, after data showed the economy grew by 0.1% in February while January's growth was revised up.

Bonds:

Eurozone government bond yields traded lower after the European Central Bank made a step forward toward a first interest-rate cut in June.

"Lagarde delivered and further opened the door for a rate cut in June. However, the market is unconvinced, as the U.S. inflation concerns are resonating," Commerzbank Research said.

It also affirmed its view of a first cut to come in June "but feel equally affirmed in our view that the ECB will deliver less than the market expects next year."

The ECB confirming the downward trend for inflation should lead to a decoupling of the European bond market from the U.S. market, Neuberger Berman said.

"Indeed, the market could expect the ECB to deliver at least three rate cuts this year, supporting the 10-year Bund which yield should stay below 2.5%."

The main uncertainty is more about the speed of the rate cuts than their magnitude, Neuberger Berman said.

The hot U.S. inflation print, third in a row, triggered a sharp selloff in Treasurys, led by the front end, but the room for a further selloff is capped, Societe Generale Research said.

"With yields near the highs for the year and the Fed biased towards easing, we do not see much room for a further selloff."

The longer policy rates are kept on hold, the greater the potential impact on growth and inflation.

"In our view, this limits the room for much higher long-end yields."

Energy:

Oil prices rose, as geopolitical risks remained high on rising Middle East tensions and the increased targeting of downstream infrastructure in the Russia-Ukraine war.

Iran has renewed threats to close the Strait of Hormuz--a vital global trade route--if any attempts are made to disrupt its oil operation in the region, BMI said.

Although it is unlikely it will close, the effect on oil markets would be severe and market participants are sensitive to any perceived threats to trade flows, BMI added.

BMI forecast brent crude prices to average $85 a barrel in 2024 and $82 a barrel in 2025.

Metals:

Gold's upward trajectory shows no signs of slacking over the near term, though the metal is likely to be weighed by real rates later in 2024, HSBC said.

HSBC notes that gold is historically sensitive to real rates, though there has been a notable disconnect in this relationship recently. It attributes the metal's recent resilience to factors such as strong China-based demand, geopolitical risks and record U.S. equity market valuations.

HSBC forecasts a wide 2024 trading range of $1,975/oz-$2,500/oz, and raises its average price forecast for this year to $2,160/oz from $1,947/oz.

Gold Chart

Comex gold futures are poised to rise beyond resistance at $2,400/oz, as the contract is riding on strong upward momentum, RHB Retail Research said.

On the daily chart, the contract has stayed on track with its bullish trajectory and its relative strength index is pointing upward, which suggest upward momentum is picking up speed, RHB said.

Given the bullish setup, the contract will probably see an upside breakout, with next resistance at $2,500/oz.

EMEA HEADLINES

Thyssenkrupp Steel to Cut Jobs, Production Capacity Amid Tough Market

Thyssenkrupp Steel plans to cut jobs and scale back production capacity in response to challenging market conditions, with weak demand, high energy costs and rising competition from Asia hurting the business.

The German steel maker said late Thursday that its plan to boost competitiveness and profitability will result in an as yet unknown number of job cuts.

Iranian Attack Expected on Israel in Next Two Days

TEL AVIV-Israel is preparing for a direct attack from Iran on southern or northern Israel as soon as Friday or Saturday, according to a person familiar with the matter. A person briefed by the Iranian leadership, however, said that while plans to attack are being discussed, no final decision has been made.

Iran has publicly threatened to retaliate for an attack last week in Damascus, Syria, that Tehran said was an Israeli airstrike on a diplomatic building. The strike killed top Iranian military officials, including a senior member of the Islamic Revolutionary Guard Corps' elite Quds Force.

Israel Wins Gaza Battles but Risks Losing the War

TEL AVIV-For six months, Israel's military has won battle after battle against Hamas. But as the fight loses momentum and postconflict plans fail to gel, Israel is facing the prospect of losing the war.

The invasion of the Gaza Strip is stalling. Most Israeli troops have gone home. And Hamas is returning to areas that previously had been cleared of militants.

GLOBAL NEWS

Gold Futures Hit New Record on Central Bank Buying, Safe-Haven Demand

Gold futures have set another record high, with the rally driven by central bank purchases, safe-haven demand and geopolitical tensions.

June futures on the New York Mercantile Exchange were recently up 1.7% at $2,413.5 a troy ounce, having hit a fresh all-time high of $2,416.5 earlier in the session. They have gained 4.6% over the last week and over 14% in the year to date.

IEA Expects Global Oil-Demand Growth to Slow Further in 2025

The International Energy Agency cut its forecast for oil-demand growth this year and said the pace of expansion is set to further decelerate in 2025 as the post-pandemic rebound runs its course and the electric-vehicle rollout weighs on consumption.

Oil-demand growth is now seen at 1.2 million barrels a day from previously 1.3 million barrels a day, the Paris-based organization said in its latest monthly report. Total demand is still expected to average 103.2 million barrels a day.

U.S. and Russia Pursue Secret Prisoner Swap Talks, Russian Diplomat Says

The U.S. and Russia are using a confidential channel to discuss the issue of exchanging prisoners that could include the release of jailed Wall Street Journal reporter Evan Gershkovich, a senior Russian diplomat said Thursday.

Russian Deputy Foreign Minister Sergei Ryabkov told reporters that "dialogue on this topic is being conducted through a specialized closed channel," but said he wasn't authorized to comment on the exchange of information or "the signals that pass through this channel," Russia's state news agency TASS reported.

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

(END) Dow Jones Newswires

04-12-24 0559ET