MARKET WRAPS
Stocks:
European equities were sharply lower on Wednesday, as worries deepened about the stalled debt ceiling talks and after U.K. inflation data raised the prospect of even tighter monetary policy in the months ahead.
Many investors believe that Washington will produce an 11th-hour agreement to avoid a breach of the debt ceiling. But the growing potential of a default may also entice some stock traders to unload holdings in a bet the "black-swan event" shakes up markets, Patrumin Investors said.
"It's an outside risk that this could happen, and there could be downside volatility in stocks. But the past is present, and they've gotten deals done before."
In the U.K., headline inflation eased less than forecast to 8.7% in April, while the core print unexpectedly accelerated to 6.8%. Read more here .
"This puts further pressure on the BOE to remain skewed to a monetary tightening stance," GAM Investments said.
Track the market, analyst reactions to the inflation data.
Stocks to Watch
Air France-KLM can reach healthy margins ahead after successfully slashing its cost base, Bernstein said, upgrading the stock to market-perform from underperform and lifting its target price to EUR1.60 from EUR1.25.
The airline previously struggled to earn its cost of capital, with labor costs notably high, but it has managed to restructure and trim employee numbers, Bernstein noted.
Resurgent demand will level out as airlines return to full capacity, and staff numbers will need to rise in line, but AF-KLM can nonetheless reach operating margins of 7%-8%, closer to peers, Bernstein said.
Read Legrand Is Lagging Behind the Market, But Business Model Is Proving Resilient
U.S. Markets: Markets:
Stock futures fell slightly as worries mounted over the progress of the debt ceiling talks and ahead of minutes from the Federal Reserve's last meeting.
Investors will be looking out for more signals from the Fed about how policy makers plan to simultaneously stabilize the financial system and fight inflation.
U.S. bond yields wavered. The benchmark 10-year Treasury yield stood at 3.698%, versus 3.696% at the previous close.
Regional bank stocks remained volatile, with some jumping premarket. PacWest rose 8% offhours after it struck a deal to sell a real-estate lending unit. Metropolitan Bank added 2%.
Follow WSJ markets coverage here .
Forex:
The dollar was flat ahead of the latest FOMC meeting minutes, but could strengthen after their release, as there is "little to gain" from the Fed emphasising a pause in rate rises, let alone the prospect of future cuts, ING said.
"Like many central bankers around the world, the Fed's biggest challenge is to get inflation under control."
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Sterling gained after U.K. inflation data exceeded forecasts, fuelling expectations for further Bank of England interest rate rises.
"With inflation proving stickier than the BOE expected, it now seems all-but certain that the BOE will raise interest rates from 4.50% to 4.75% in June and perhaps a bit further in the months after," Capital Economics said.
MUFG Bank said the BOE will inevitably raise interest rates again in June and potentially in August after the inflation data, but sterling's gains may be limited.
Higher rates should support sterling but the "scale of divergence on the inflation path risks undermining policy credibility and forced rate hikes into weakening U.K. and global growth is a possible scenario that could also undermine GBP performance," MUFG said.
It said April's "terrible" inflation print sets the U.K. apart from other major economies in having a more serious inflation problem.
Read Sterling's Gains After Inflation Data Prove Brief as Economy Concerns Weigh
Bonds:
Investors were buying Bunds after the German May Ifo business sentiment index came in at 91.7, down from 93.4 in April and below the 93.0 forecast in a WSJ poll of analysts.
Track the analysts' views on the Ifo surprise.
For investors who started building some long duration positions around yield levels of 2.50% for the 10-year Bund yield and 3.75% for 10-year Treasurys, Jefferies recommends keeping those positions over the summer months.
"A small move higher in rates would be expected on a debt deal, but that would be short-lived and pave the path for lower rates over summer," Jefferies said.
Valuations are getting attractive for a long position, seasonality turns favourable fixed income from the second half of June onwards and central banks are close to or have already reached the end of their rate hiking cycle, it said
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Greek government bond yields are expected to trade consistently below Italian bond yields by the end of 2023 given strong macro and fiscal fundamentals and the high probability of Greece achieving investment grade rating by early 2024, J.P.Morgan said.
"In Greece...we remain broadly constructive on GGBs over the medium term, " JPM said.
In the near term, however, it remains neutral on Greek bonds given strong outperformance recently and also on risks of potential political noise until there is clarity on a new government. For investors looking to overweight Greece, JPM finds the 8-10-year maturity sector attractive as bonds in that segment trade at their highest yield pick-up relative to other periphery.
Energy:
Oil prices posted more solid gain after the latest API data showed U.S. crude stocks fell by 6.8 million barrels last week, while gasoline stocks dropped by 6.4 million barrels. That would be a third consecutive weekly decline, if Department of Energy data later Wednesday confirms the figures.
Meanwhile, comments from Saudi Arabia's energy minister that oil short-sellers should "watch out" were interpreted as an implicit threat that the cartel might cut production, adding support to prices.
Metals:
Base metals were mixed, with gold flat, as investors awaited the release of the latest Fed meeting minutes.
Goldman Sachs said it expected short-term price weakness for industrial metals due to the weakness in western economies. However, it added that a recovery in Chinese imports should boost prices later in the year, with local inventories being run down.
"That inevitably is feeding a mounting incentive for imports," Goldman Sachs said. It added that its three-month price target for copper is $7,750 a ton but this rises to $9,200 a ton in six months
Lithium
A slide in lithium spot prices seen as the global economy took hits from inflation and bank failures is expected to soon turn around, Morningstar said.
It forecast that heightened electric vehicle demand may lead to significantly higher lithium production--with as much as 2.5 million metric tons of lithium being produced in 2030, as opposed to 800,000 tons in 2022.
DOW JONES NEWSPLUS
EMEA HEADLINES
It Just Had an Energy Crisis, Now Europe Faces a Food Shock
LONDON-Fresh out of an energy crisis, Europeans are facing a food-price explosion that is changing diets and forcing consumers across the region to tighten their belts-literally.
This is happening even though inflation as a whole is falling thanks to lower energy prices, presenting a new policy challenge for governments that deployed billions in aid last year to keep businesses and households afloat through the worst energy crisis in decades.
UK Inflation Fell Less Than Expected in April as Core Prices Jumped
The U.K.'s inflation rate fell less than expected in April, propped up by soaring food prices, while the closely watched core rate unexpectedly rose, indicating that the Bank of England will likely choose to raise interest rates again as it tries to tackle persistently high prices.
Consumer prices increased 8.7% in April compared with the same month a year earlier, down from March's 10.1% on-year rise, mainly due to on easing energy prices, data from the Office for National Statistics showed Wednesday.
German Business Sentiment Fell in May on Bleak Outlook for Manufacturing
Business sentiment in Germany fell in May for the first time in seven months, hampered by bleaker expectations among companies, especially in the country's key manufacturing sector.
The Ifo business-climate index dipped to 91.7 in May from 93.4 in April, according to data from the Ifo Institute published Monday.
Marks & Spencer FY 2023 Profit Rose; To Reintroduce Dividends in November - Update
Marks & Spencer Group reported Wednesday a rise in fiscal 2023 pretax profit and said it will reintroduce dividends at the time of its half-year results.
The British retailer posted a pretax profit of 475.7 million pounds ($590.6 million) for the year ended April 1 compared with GBP391.7 million for the same period a year earlier. It said it achieved the results despite significant inflationary cost headwinds hitting margins, reflecting the benefits of its program to reshape for growth.
Aviva 1Q General Insurance Sales Rose; Backs Targets
Aviva on Wednesday said its general insurance sales rose 11% in the first quarter of 2023 and backed its targets and dividend guidance.
The FTSE 100-listed insurer and asset manager's general insurance gross written premiums reached 2.38 billion pounds ($2.95 billion) for the three months to March 31 from GBP2.10 billion a year earlier.
Kingfisher 1Q Sales Hurt by Poor Weather; Comfortable With Consensus Forecast
Kingfisher said Wednesday that first-quarter comparable sales fell 3.3% on a constant currency basis as poor weather in the U.K. and France hurt its performance, but the board is comfortable with full-year adjusted pretax profit consensus market forecasts.
The home-improvement retailer generated sales for the quarter ended April 30 of 3.27 billion pounds ($4.06 billion), up 0.8% on a total reported basis and down 2.0% at constant currency.
LVMH and Other Luxury Stocks Fall, Wiping Out Billions. It's a Concern for Europe.
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05-24-23 0551ET
