MARKET WRAPS
Watch For:
EU flash estimate GDP, foreign trade, flash estimate employment for EU and euro area; Germany indicator of economic sentiment; France new home sales; Italy CPI; UK unemployment; trading updates from Bouygues, Vodafone, Imperial Brands, Land Securities, DCC, Euronext
Opening Call:
Shares could open mixed in Europe on Tuesday, with investors waiting for the next U.S. debt ceiling update. In Asia, stock benchmarks were mixed; Treasury yields fell, following previous gains; the dollar eased; oil advanced, while gold declined.
Equities:
European shares are off to a mixed start on Tuesday, as investors monitor U.S. debt ceiling developments and digest economic data.
Investors are in wait-and-see mode on whether President Joe Biden and Republican lawmakers could make progress on the U.S. debt ceiling at a scheduled meeting later in the day.
"Until we have Republicans and Democrats move a little on tax increases, increasing the debt ceiling, or federal spending, any optimism is premature," Oanda said.
"Everyone is on tenterhooks with regard to the debt ceiling," said Jon Maier, chief investment officer at Global X ETFs. "There seems to be rays of hope, but there's still no clear path to avoid technical default."
Meanwhile, the risk of stagflation -- weak growth combined with high inflation -- has returned after the New York Federal Reserve Empire State manufacturing survey showed prices paid rose but factory activity plunged in May, Oanda said.
Capital Advisors in New York remains "bullish on the market" on the view that "once we get through June and into July, we will have a debt-ceiling resolution one way or another and the data will be obvious for the Fed that CPI [consumer-price index] and PPI [producer-price index] inflation are coming down."
In addition, "we believe the fundamentally flawed Fed is going to figure out inflation has peaked and will tone down its hawkish rhetoric," it said.
Forex:
The dollar weakened in Asia ahead of a meeting between President Biden and congressional leaders over the U.S. debt ceiling later in the day.
Focus remains on the negotiations and market participants await breakthroughs, said MUFG Bank.
Signals from Biden and House Speaker McCarthy have been mixed and inconclusive, while Treasury Secretary Yellen has reiterated her department could run out of cash as soon as June 1 unless Congress raises or suspends the federal debt limit, it added.
Meanwhile, the latest Empire State Manufacturing Survey shows inflation pressures remain, while conditions are significantly worsening, Oanda said.
Wall Street has more reminders on how hard it will probably be to get inflation anywhere close to the Fed's target. A recession seems like the only way pricing pressures will get closer to 3%," said Oanda.
Forces that were previously supporting the dollar, particularly the Fed's aggressive interest rate rise cycle, are fading, but the pre-conditions for a significant decline will be slow to gather pace, Insight Investment said.
The Fed is very close to ending rate hikes, but expected rate cuts this year are unlikely to materialize, which may prevent the dollar from falling meaningfully, Insight Investment said.
Meanwhile, recent banking jitters could hit the U.S. more than Europe but regions like Asia will benefit from improved Chinese growth, it said. "This suggests that although USD valuations remain excessive, the move lower in the USD is likely to be a gradual and jagged one."
Bonds:
Treasury yields lost ground after earlier gains on hopes for a U.S. debt-ceiling agreement, which softened demand for government bonds.
With debt-ceiling talks scheduled for Tuesday, "there is renewed optimism as to the prospects for a resolution - albeit one of a nature yet to be revealed or digested by the U.S. rates market," said BMO Capital Markets.
"One aspect of the near-term outlook that appears consistent is that a technical default by the U.S. Treasury Department is generally viewed as a bond bullish event with a flight-to-quality bid seen overshadowing any implied credit concerns," they wrote. "Embedded within this observation is the notion that a debt-ceiling deal should be bond bearish and result in marginally higher yields."
Bank of America said market pricing indicates that debt-ceiling risks are rising. "Currently, the yield spread for bills maturing in June has reached about 190 bps relative to bills maturing in May. That implies U.S. default concerns are about four to six [times] higher than in 2011 and 2013," it said.
To hedge against the worst-case scenario of a U.S. sovereign default, Bank of America suggests "rotating out of large global banks and into Yankee industrial bonds."
Markets are pricing in a 75.3% probability that the Fed will leave interest rates unchanged at between 5%-5.25% on June 14, as well as a 24.7% chance of a quarter-of-a-percentage-point rate hike next month, according to the CME FedWatch tool.
The central bank is mostly expected to take its fed-funds rate target back down to between 4.25%-4.5% by December, according to 30-day Fed Funds futures.
Energy:
Crude oil prices gained in Asia amid continued supply-side issues.
The threat of supply disruptions in Canada is continuing to rise, as the number of wildfires in its main producing region increases, ANZ said.
Iran has also seized a foreign-flagged tanker in the Persian Gulf, which is its third in a month, ANZ said.
The U.S. debt-ceiling negotiations stand out as a significant risk for global crude prices, both due to the potential for broader economic consequences as well as the importance of the U.S. dollar's value on crude pricing," said Schneider Electric.
Still, optimism over a debt-ceiling deal, as well as the potential repurchase of oil for the U.S. Strategic Petroleum Reserve provided support for oil.
Metals:
Gold was a tad lower. However, gold prices could rise if U.S. debt ceiling talks start to hit several major roadblocks, said Oanda.
"Gold might be ready to make another run to record high territory as investors should be prepared for debt limit talks to hit several major roadblocks," it said.
"The prospect of the world's largest economy defaulting is keeping demand for gold and its safe-haven appeal very healthy," said Kinesis Money." Add in a Federal Reserve that looks to have come to the end of its hiking cycle and the medium-term outlook for gold looks supportive."
The U.S. economy is also showing signs that it has started to feel the impact of the U.S. Fed's rate increases after the Empire Manufacturing survey showed business activity plunged, said Oanda.
---
Copper edged higher, but gains may be curbed by signs of waning demand.
Copper prices remain most vulnerable, TD Securities said, noting factors such as swiftly rising Peruvian exports of the metal.
Also, given the brokerage's estimate that the premium related to China's reopening optimism earlier this year has yet to be priced out, TD Securities sees scope for macro forces to help push copper prices below the $8,000/ton level.
---
Iron-ore prices were higher in China trade, despite some weaker-than-expected economic data for April released this morning.
GF Futures pointed out that steel production activity has been improving, likely boosting investor sentiment and buying interest.
But it cautioned that it is unclear if the output recovery trend will continue and keep supporting iron-ore demand.
Still, the brokerage sees limited further downside to the steel-making commodity at its current price levels, as steep losses since March have likely priced in most demand concerns.
TODAY'S TOP HEADLINES
Debt-Ceiling Talks' Late Start Amps Up Pressure on Congress
Time isn't on Washington's side.
With the U.S. facing a potentially economy-shaking default as soon as next month, logistical hurdles, disagreements on the scope of any talks, a tight legislative calendar and a late start are complicating negotiations over raising the debt ceiling.
Emmanuel Macron Courts Elon Musk Amid Duel With U.S. for Battery Supremacy
PARIS-French President Emmanuel Macron held talks with Elon Musk Monday as part of his drive to counter U.S. subsidies and tax incentives that European officials say risk luring away investment in batteries and other technologies pivotal to the energy transition.
Mr. Musk-head of companies including Tesla, Twitter and SpaceX-met with Mr. Macron inside the Élysée Palace. He then attended a lunch at the Palace of Versailles, the historic home of French kings, with dozens of other foreign CEOs as part of an investment conference organized by Mr. Macron.
Microsoft's $75 Billion Activision Blizzard Deal Gets EU Approval
BRUSSELS-The European Union's antitrust watchdog approved Microsoft's planned $75 billion acquisition of Activision Blizzard, giving the two companies a win after the deal hit a regulatory roadblock in the U.K.
The European Commission, the bloc's competition enforcer, said it cleared the deal based on commitments by Microsoft to make Activision's games, including those from its popular Call of Duty franchise, available on rival cloud-streaming platforms. The companies still need approval from other major competition authorities to close the transaction, legal experts say.
Write to singaporeeditors@dowjones.com
Expected Major Events for Tuesday
06:00/ROM: 1Q Evolution of GDP (estimated data)
06:00/UK: Apr UK monthly unemployment figures
06:30/HUN: 1Q Preliminary GDP
06:45/FRA: 1Q New home sales
07:00/SVK: Mar New orders in industry
07:00/SVK: 1Q Flash estimate of GDP
07:00/SVK: 1Q Flash estimate of total employment
07:30/NED: 1Q GDP - 1st estimate
07:30/NED: Mar International trade
07:30/NED: Mar Consumer Spending
08:00/FRA: May IEA Oil Market Report
08:00/POL: 1Q Flash estimate GDP
08:00/POL: Mar Merchandise trade
08:00/ITA: Apr CPI
08:00/BUL: Apr CPI
08:00/BUL: 1Q Flash Estimate GDP
(MORE TO FOLLOW) Dow Jones Newswires
05-16-23 0016ET
