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European Midday Briefing: Euro Spikes, Bund Yields Gain on ECB Rate Rise Report

07/19/2022 | 05:34am EDT

MARKET WRAPS

Stocks:

European shares were weaker on Tuesday in reaction to Wall Street's late selloff, following a report that Apple planned to slow hiring and spending next year.

IBM added to the tech-related gloom, with its strong second-quarter results overshadowed by a muted outlook. Both Apple and IBM were lower in premarket New York trading, but other tech giants were rising modestly.

The losses for European markets were largely contained, however, helped by a strong performances from EDF shares.

The nuclear power supplier's stock rose more than 15% on news the French government planned to take it private in a EUR9.7 billion buyout.

Citi said the offer looked attractive and expected it to go through.

Stocks to Watch:

Richemont's position at the high end of the luxury business should help inure the group against uncertainty in the key China market, said Deutsche Bank.

The Cartier owner should be more resilient to a broad-based consumer downturn globally, Deutsche argues. Further potential lockdowns in China are a risk for the group, but would provide a softer comparable for 2023 and help cushion any slowdown in European and U.S. demand.

Following last week's first-half results, Deutsche Bank trimmed its target price on Richemont to CHF145 from CHF155, but kept its buy rating on the stock.

Economic Insight:

A majority of the European Central Bank's Governing Council probably still favors the concept of gradually normalizing policy, but further upside surprises in inflation "might swing the pendulum toward more aggressive moves on policy rates and could solicit discussing around balance sheet normalization," said Pimco.

Pimco doesn't expect the ECB to provide a lot of guidance regarding the potential destination of interest rates at this stage.

"We think the GC will make clear that a gradual approach might not be appropriate in all conditions, particularly if faced with high spot inflation threatening to de-anchor medium-term inflation expectations."

---

A rise in inflation to 12% later this year is expected to cause a recession in the U.K., Capital Economics said.

Higher price growth is set to exacerbate the current squeeze in household incomes and this will very likely prompt consumer spending to fall.

"This recession, though, will be mild by historical standards as the balance sheets of households and businesses are relatively healthy," Capital Economics said.

Despite a decline in economic activity, inflation isn't likely to fall back to its 2% target on its own, so Capital Economics expects the Bank of England to increase rates to 3% next year from the current 1.25%.

U.S. Markets:

Stock futures edged up as investors awaited a fresh batch of earnings for insight into the state of the economy.

Investors are parsing earnings for signs of how decades-high inflation is impacting companies and consumer spending. Economists are upping the chances of a U.S. recession within the next 12 months, worried that interest-rate increases to tame inflation will weigh on growth. Focus is now turning to how companies are responding to those expectations, particularly if they plan to cut back on hiring or other investments.

"If the corporate sector starts to cut back on investment spending, that to me is the nail in the coffin," said Luca Paolini, chief strategist at Pictet Asset Management.

Earnings are due ahead of the market open from Johnson & Johnson, Halliburton and Lockheed Martin. Netflix will report after the market close. Some technology companies have already slowed hiring or cut jobs.

In bond markets, the yield on the benchmark 10-year Treasury note ticked up to 2.995% from 2.959% Monday.

Forex:

The euro hit a near two-week high versus the dollar and sterling following a report the European Central Bank will discuss raising interest rates by more than previously indicated at Thursday's meeting.

The ECB will discuss whether to lift rates by 25 basis points, as signalled at its last meeting, or 50 basis points, Reuters reported earlier. The report said the ECB will also look at a deal to provide help for indebted eurozone countries.

"We do not rule out a 50bp rate hike at this week's meeting," said Ebury.

---

The dollar continued to weaken, extending Monday's fall due to the paring back of expectations that the Fed will raise interest rates by 100 basis points at its next meeting.

"The U.S. rate market is currently pricing in around 80bps of hikes," said MUFG Bank.

However, MUFG continues to favor a stronger dollar in the near-term as the Fed's focus remains on dampening upside inflation risks.

MUFG said it's premature to expect the Fed to pivot towards a loose policy stance even if evidence of a economic slowdown builds through the rest of 2022.

---

Sterling rose against the dollar but fell versus the euro as investors digested the latest U.K. employment data.

The U.K. unemployment rate held at 3.8% in the three months to May and the number of people in employment rose 296,000, the biggest increase since the middle of 2021.

"Although positive for sterling, markets will be looking ahead to inflation and retail sales data releases later this week before adjusting any long term forecasts," said Silicon Valley Bank.

Bonds:

Idiosyncratic political developments in Italy are ill-timed, and could keep government bond yield spreads wide despite the European Central Bank's planned anti-fragmentation tool, said MFS Investment Management.

Prime Minister Mario Draghi, whose resignation last week was rejected by President Sergio Mattarella, will address parliament on Wednesday. On Thursday, the ECB is expected to unveil the anti-fragmentation tool, although it is unlikely to provide too many details just yet.

BNP Paribas Markets 360 sees risks as skewed toward a widening of the 10-year BTP-Bund spread, which could return to 240 basis points, if political uncertainty persists.

If an early election is called, the 10-year BTP-Bund spread could widen toward BNP Paribas Markets 360's year-end target of 260bps, amplified by illiquidity, the risk of disappointment around the ECB's anti-fragmentation tool, and interest-rate rises.

Aegon Asset Management said that despite the political uncertainty in Italy, the country's political landscape isn't what it was with the Salvini-DiMaio coalition.

The domestic and Eurozone-wide politics has moved on, with the days of anti-immigration populism behind, while the people in charge has also changed. Following this logic, the political risk premium seen previously in Italian government bonds should be smaller, although it could be replaced by the risk of the unwind of the ECB's balance sheet.

---

Details about the ECB's new antifragmentation tool at this week's policy meeting hold more prominence for market movements than the interest-rate rises flagged by the ECB for July and September, said MFS Investment Management.

A 25-basis-point interest-rate rise this week and another rise in September, potentially a bigger one, are "all largely known and priced."

MFS said it is plausible that a full-blown antifragmentation tool may not be operational yet, but Christine Lagarde is highly likely to provide some details regarding its mechanics and applicability.

Energy:

Oil prices ticked higher, with the focus back on supply tightness and limited spare capacity, after Joe Biden's visit to Saudi Arabia didn't result in a concrete pledge from the Saudis to increase output.

"Oil prices may have peaked, but they certainly don't look like they're going materially lower from here unless we get a huge surprise from OPEC+," said OANDA.

Metals:

Base metals were lower, with worries over housing demand in the U.S. and China growing.

The U.S. National Association of Home Builders index fell much more than expected in July, while protests in China over mortgage payments on construction projects have affected building projects.

"Rising cost pressures and interest rates will continue to dampen housing construction in our view," said Commonwealth Bank of Australia.

DOW JONES NEWSPLUS


EMEA HEADLINES

France to Pay $9.8Bln to Take EDF Private

The French government said Tuesday that it plans to pay about 9.7 billion euros ($9.84 billion) to take full control of Electricite de France SA, a step it says is needed to manage the transition away from fossil fuels at a time of energy crisis and the war in Ukraine.


Novartis 2Q Earnings, Sales Fell

Novartis AG said its sales and profit fell in the second quarter and the group backed its 2022 guidance.

The Swiss pharmaceutical company on Tuesday posted net profit of $1.69 billion, down from $2.89 billion a year earlier.


Alstom 1Q Sales Rose, but Inflation, Components Shortages Expected to Weigh

Alstom SA said Tuesday that its first-quarter sales rose but orders fell, as it flagged headwinds from inflation and possible components shortages.

The French train maker's sales increased 8% on a reported basis to 4.00 billion euros ($4.06 billion), though orders dropped 13% to EUR5.60 billion, it said.


UK Unemployment Rate Stabilized in Three Months to May

The unemployment rate in the U.K. remained unchanged in the three months to May, signaling that the country's labor market remained tight even as economic growth slowed.

The U.K.'s unemployment rate stood at 3.8% in the three months through May, unchanged from the preceding three-month period, according to data from the Office for National Statistics published Tuesday.


Volvo 2Q Net Profit Beat Forecasts Amid Strong Truck Demand

Volvo AB on Tuesday posted higher-than-expected second-quarter earnings as truck demand remained strong in Europe and North America on the back of high freight volumes and freight rates.

The Swedish truck maker reported net profit of 10.44 billion kronor ($1 billion), compared with SEK8.9 billion a year earlier, beating a FactSet consensus forecast of SEK8.94 billion.


Swedbank 2Q Net Interest Income Offset by Costs, Portfolio Revaluation

(MORE TO FOLLOW) Dow Jones Newswires

07-19-22 0533ET

Stocks mentioned in the article
ChangeLast1st jan.
AB VOLVO 0.41% 165.6 Delayed Quote.-21.34%
AEGON N.V. -1.03% 4.244 Real-time Quote.-2.39%
ALSTOM -0.60% 17.505 Real-time Quote.-43.59%
APPLE INC. -0.24% 146.08 Delayed Quote.-17.72%
AUSTRALIAN DOLLAR / EURO (AUD/EUR) -0.41% 0.65425 Delayed Quote.2.15%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) -1.50% 0.64156 Delayed Quote.-10.29%
BNP PARIBAS -1.09% 43.635 Real-time Quote.-27.41%
BRITISH POUND / EURO (GBP/EUR) -0.72% 1.13718 Delayed Quote.-3.60%
BRITISH POUND / US DOLLAR (GBP/USD) -1.81% 1.11502 Delayed Quote.-15.37%
CANADIAN DOLLAR / EURO (CAD/EUR) 0.06% 0.742479 Delayed Quote.6.49%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) -1.02% 0.72773 Delayed Quote.-6.41%
COMMONWEALTH BANK OF AUSTRALIA -0.42% 96.88 Delayed Quote.-3.67%
COMPAGNIE FINANCIÈRE RICHEMONT SA -0.20% 99.74 Delayed Quote.-27.02%
DEUTSCHE BANK AG -0.84% 7.867 Delayed Quote.-27.99%
ELECTRICITÉ DE FRANCE 0.21% 11.95 Real-time Quote.20.74%
EURO / US DOLLAR (EUR/USD) -1.09% 0.9802 Delayed Quote.-12.82%
INDIAN RUPEE / EURO (INR/EUR) 0.32% 0.012425 Delayed Quote.4.22%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.52% 0.012186 Delayed Quote.-8.58%
LOCKHEED MARTIN CORPORATION -0.49% 400.8 Delayed Quote.14.27%
LONDON BRENT OIL 0.43% 94.09 Delayed Quote.17.76%
NETFLIX, INC. 0.86% 238.71 Delayed Quote.-60.70%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -2.06% 0.56579 Delayed Quote.-16.09%
NOVARTIS AG -1.06% 75.54 Delayed Quote.-4.90%
SWEDBANK AB -1.50% 144.75 Delayed Quote.-19.30%
US DOLLAR / EURO (USD/EUR) 1.11% 1.019971 Delayed Quote.13.88%
WTI 0.26% 88.287 Delayed Quote.16.82%
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