EMEA Morning Briefing: Caution Likely Ahead of Fed Powell's Remarks

MARKET WRAPS

Watch For:

EU new passenger car registrations; Germany Ifo economic forecast; UK CPI, PPI, public sector finances, UK house price index, CBI industrial trends survey; trading updates from Daimler Truck, Volkswagen, Volvo

Opening Call:

European stock futures were slightly higher early Wednesday. In Asia, stock benchmarks mostly tracked Wall Street lower; the dollar was steady; Treasury yields rose slightly; while oil and gold futures advanced.

Equities:

Caution may dominate in European stock markets ahead of Federal Reserve Chair Jerome Powell's congressional testimony starting later today as well as U.K. inflation data. Stock indexes had retreated Tuesday as investors awaited Powell's remarks.

"I think what happened is that investors are optimistic for the longer term, but believe that we have gotten ahead of ourselves in terms of market performance and sector leadership," said Sam Stovall, chief investment strategist at CFRA Research.

Investors may be thinking hard about whether the market's recent pushes higher are for real, according to Kent Engelke, chief economic strategist and managing director at Capitol Securities Management. "How do we substantiate this rally? ... In the immediacy, the market has rallied based on the belief of lower short-term interest rates by year end."

"Powell's comments may help shape how the market--and especially the tech sector, which has led this year's rally--reacts to Fed policy in the near term," said Chris Larkin, managing director, trading and investing, at E*TRADE from Morgan Stanley.

Forex:

The dollar was steady in Asia. There appears to be a cautious mood ahead of Powell's testimony, MUFG Bank said.

With the Fed projecting a total of 50bp of rate increases for the rest of this year and markets expecting only one hike, some volatility could be anticipated with a hawkish tone from Powell, MUFG added.

Bonds:

Treasury yields rose early Wednesday after falling overnight, as traders geared up for a big week of commentary by Fed policy makers.

Analysts expect Powell to reiterate the hawkish message shown in policy makers' rate projections last week.

"A skip by the Fed may seem favorable, but the magnitude of tightening is more important, as this tightening cycle has been one of the swiftest hiking campaigns in history," said Jason Pride, chief of investment strategy and research, and Michael Reynolds, vice president of investment strategy, at Glenmede.

"The Fed is expected to raise rates two more times this year, but markets appear skeptical," they said. "Investors should remain cautious in this environment, as past periods of significantly tight monetary policy have not been favorable to the economy, often preceding recessions with a lag."

Read: Why the 10-year Treasury yield touching 3.85% could mark a peak for the rest of this year

Energy:

Oil futures gained in Asia, reversing earlier losses.

More favorable trend signals in energy products, such as crude oil, have supported buying activity by algorithmic or automatic trading systems in recent sessions, said TD Securities.

TD continues to expect substantial supply shortages in coming months to support oil prices.

Metals:

Gold futures rose slightly early Wednesday falling moderately overnight. However, gains could be curbed ahead of Fed Chair Powell's congressional testimony that begins later in the day.

While market participants still expect the Fed to deliver one more 25bp rate increase, no one wants to be long on gold before a likely shortened week of hawkish comments from Fed officials, said Oanda.

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Chinese iron ore prices rose, given stronger demand in the short term from steel mills.

The output of hot metal from blast furnaces, which serves as a proxy for iron ore demand, is high, signaling that demand for the ore is strong, Donghai Futures said.

TODAY'S TOP HEADLINES

China ETFs tumble after PBOC's rate cut disappoints markets

China-related exchange-traded funds tumbled on Tuesday after China's central bank cut benchmark lending rates but spurred broader market disappointment that Beijing's monetary stimulus was not sufficient to support the nation's slowing post-pandemic economic recovery.

The iShares MSCI China ETF MCHI finished 4.1% lower on Tuesday, logging its worst day of 2023 and the biggest one-day percentage drop since October 2022, according to Dow Jones Market Data.

Russia Strikes Ukrainian Cities With Drones as Fighting Rages in the South

Russia launched 35 Iranian-made suicide drones at Kyiv and other Ukrainian cities overnight as Ukrainian forces engaged in heavy battles in the south of the country as part of their attempt to advance.

Russia, which intensified cruise missile and drone strikes on Kyiv over the past two months, lobbed the majority of the Iranian-made Shahed drones at the Ukrainian capital. While all the drones that headed to Kyiv were shot down, Ukraine's military said, three others managed to hit their targets elsewhere in the country.

Swedbank to Pay $3.4 Million to Settle U.S. Sanctions Violations

Swedbank has agreed to pay more than $3.4 million to settle allegations its subsidiary in Latvia processed transactions that violated U.S. sanctions on Crimea.

The settlement agreement with the U.S. Treasury Department's Office of Foreign Assets Control, which became public Tuesday, is one of the first resolutions Stockholm-based Swedbank has reached with U.S. regulators related to its anti-money-laundering shortcomings in the Baltic region, where the bank has a significant presence.

Elon Musk meets with India's Modi, hints at Tesla expansion

Tesla Inc. Chief Executive Elon Musk met Tuesday with India's Prime Minister Narenda Modi, and said Tesla will be in India "as soon as humanly possible."

Modi is on a two-day trip to the U.S., and met Musk in New York. The two had been expected to discuss possible plans for Tesla TSLA to build manufacturing plants there for its electric vehicles and batteries.

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Expected Major Events for Wednesday

04:30/NED: Jun Consumer confidence survey

06:00/EU: May New Passenger Car Registrations in Europe statistics (EU27 + EFTA3)

06:00/UK: May UK producer prices

06:00/UK: May UK monthly inflation figures

06:00/SWE: May Labour Force Survey

06:00/UK: May Public sector finances

07:00/SPN: Apr Industrial Orders & Turnover

08:00/GER: Ifo Economic Forecast

08:00/POL: May Average gross wages

08:00/POL: May PPI

08:00/POL: May Industrial Production Index

08:00/POL: May Agricultural prices

08:00/ICE: May Labour Force Survey

08:30/UK: Apr UK House Price Index

09:00/MLT: May RPI

09:00/BEL: Jun Consumer Confidence Survey

09:00/LUX: 1Q Balance of Payments

10:00/UK: Jun CBI Industrial Trends Survey

12:30/CZE: Czech interest rate decision

22:00/NED: May House Price Index

All times in GMT. Powered by Onclusive and Dow Jones.

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

(END) Dow Jones Newswires

06-21-23 0016ET