European Midday Briefing : Stocks Slide on Rates Push Back

MARKET WRAPS

Stocks:

European stocks tumbled on Friday, tracking Wall Street's losses, after two Federal Reserve officials suggested interest rate cuts might not be imminent.

Friday is also U.S. jobs-report day and that means stakes are high for a stock-market rally that's faltered this week. Economists predict the report will show 200,000 jobs were added in March, down from 275,000 in February. The unemployment rate is seen edging down to 3.8%.

Earlier this week, Jerome Powell said there were signs that labor market conditions weren't as tight as in recent years. The Fed still expects declining inflation will allow for interest-rate cuts in 2024, he said.

Stocks to Watch

BMW management are pretty upbeat after last month's solid full-year numbers, Deutsche Bank said after the bank last week hosted a roadshow in the U.S. for BMW's CFO and heads of treasury and investor relations.

Deutsche Bank said a main takeaway was that BMW's full-year guidance is probably less back-end-weighted than for the other three German makers. Profit is unlikely to be skewed towards the end of the year as BMW doesn't suffer from major product delays and will also avoid the corresponding fixed-cost absorption.

Deutsche Bank rates BMW at buy with a EUR120 target price.

Deutsche Bank said Mercedes-Benz is likely to see lower unit sales in 1Q, but full-year guidance should remain unchanged as momentum is expected to build through the year.

It said the unit sales decline, especially in the core segment, will be driven by the ongoing shortage of 48V batteries and will likely lead to worse fixed-cost absorption. Combined with fairly stable pricing, the adjusted cars EBIT margin is expected at the lower end of the company's full-year guidance.

However, van sales should stay at a record-high level in 1Q and the bank expects to see decent cash generation of close to EUR2 billion.

Deutsche Bank rates Mercedes at buy with a EUR125 target price.

U.S. Markets:

Stock futures edged higher after the three major indexes all fell more than 1% on Thursday.

"Investors are on edge the Fed may delay rate cuts from June until later in the summer [or late in 2024] if we get another hot employment report, " Sevens Report Research said.

"If that occurs, expect a partial repeat of Tuesday," when the Dow fell nearly 400 points, or 1%, while the S&P 500 lost 0.7% and Nasdaq declined 1%.

Forex:

The euro could extend its gains against the dollar if U.S. payrolls data show a rise of below 200,000, ING said.

This would add to recent signs that the U.S. jobs market is softening, leaving the Federal Reserve "in a comfortable position to start cutting [interest rates] in the summer."

A sub-200k U.S. payrolls print should pave the way for the euro to rise back towards the 100-day moving average around $1.0875, ING said.

The dollar was firmer on concerns that the Israel-Hamas war could spread to Iran-and a consequent rise in oil prices-and after Federal Reserve officials cast doubt on rate-cut prospects.

In particular, Neel Kashkari said if inflation continued to move sideways he could question whether rate cuts were needed at all. This comment was notable given the latest oil-price rise, Deutsche Bank said.

Focus turns to U.S. jobs data which could add to the rate-cut debate, although "substantial surprises" may be needed to impact Fed policy, Deutsche Bank said.

Bonds:

Following higher-than-expected 2023 Italian and French budget deficits, focus on eurozone government bond fundamentals and fears of negative rating actions have put pressure on country spreads, Societe Generale Research said.

"While risk sentiment remains positive and credit spreads are broadly stable, markets' attention seems turning to EGB fundamentals ahead of some key rating reviews in 2Q."

A continued focus on fiscal metrics could push 10-year Italian BTP-Bund yield spread to 150 basis points, "but hardly above," while the 10-year French OAT-Bund yield spread could be trading in the 55-60bps range, Societe Generale Research said.

SEB Research said 10-year Treasury yields are expected to trade rangebound at 4%-4.5% in the second quarter with focus on the upper half of the range unless softer signals emerge from the Federal Reserve. The 10-year Bund yield, meanwhile, is expected to trade in a 2.2%-2.5% range, it said.

For the 10-year Bund yield to decline towards 2%, European Central Bank expectations would need to soften dramatically, "which we regard with 170bp of rate cuts already discounted for the coming two years."

Germany's new May 2041-dated Bund , which will be launched at an auction next Wednesday, "may price rather on the cheap side given the off-benchmark tenor," Commerzbank Research said.

Commerzbank Research also said modest volumes and focus on intermediate maturities at next week's eurozone government bond auctions could open the door for syndicated transactions.

Energy:

Brent crude hit $91 a barrel as worries of a wider regional conflict in the Middle East and intensifying attacks against energy facilities in Russia and Ukraine have raised concerns over global supplies, at a time when the physical market is already showing signs of tightness.

Gas

The EU target of filling gas storage facilities to 90% of capacity by the beginning of November to prepare for the next winter season should be met comfortably, according to BMI. Europe exited the heating season with storage at 58.8%, over 20% higher than the 10-year average.

"The markedly higher availability of natural gas will temper price gains in the coming quarters, as importers will slow inflows to avoid breaching regional storage capacity," BMI said, adding it's likely to lower its estimates for benchmark Dutch TTF in the coming weeks from EUR40 a megawatt hour on average for 2024.

TTF prices were trading 0.3% higher at EUR26.29 a megawatt hour.

Metals:

Base metals and gold were weaker as the market mood sours ahead of U.S. jobs data, with Swissquote Bank saying higher-than-expected nonfarm payrolls and hotter-than-expected wages growth could potentially delay the Federal Reserve's plan for interest-rate cuts.

EMEA HEADLINES

Shell Expects Gas Production to Beat Guidance

Shell expects first quarter gas production to beat its previous guidance after a strong start to the year but for earnings to be lower than the prior quarter.

The British energy giant said Friday that it expects to report integrated gas production of 960,000 to 1 million barrels of oil-equivalent a day for the first quarter, above its guided range of 930,000-990,000 barrels a day and compared with 901,000 barrels in the fourth quarter of last year.

German Factory Orders Rose Slightly in February

German manufacturing orders edged up in February, reflecting only a moderate rebound as demand for goods remains sluggish.

Orders were 0.2% higher than the prior month, German statistics office Destatis said Friday, a little lower than the 0.5% uptick expected by a consensus of economists polled by The Wall Street Journal.

Telecom Italia Gets $1.6 Bln in Bridge Financing Until Close of Network Sale

Telecom Italia said it signed an agreement for 1.5 billion euros ($1.63 billion) in bridge financing to cover its needs until completion of a planned sale of its fixed-network unit.

The Italian telecommunications company said Friday that the deal, with a maturity of up to 18 months, strengthens its liquidity structure and seeks to cover its refinancing needs until the network deal is completed.

Europe Is Itching to Cut Interest Rates, Unlike the Fed. Why It Matters.

While Federal Reserve officials say they are in no rush to cut interest rates, central bankers in Europe seem eager to get the rate-cutting started.

There are good reasons for U.S. investors to pay attention: If European central banks cut rates sooner and more aggressively than the Fed, that could reinforce the dollar's strength.

GLOBAL NEWS

China Shock 2.0 Sparks Global Backlash Against Flood of Cheap Goods

To revive its economic fortunes, China is flooding the world with cheap goods, a multitrillion-dollar sequel to the China shock that hit global manufacturing more than two decades ago.

This time around, the world is fighting back.

Japanese Government Watching Currency Movements Closely, Prime Minister Says

TOKYO-Japanese Prime Minister Fumio Kishida said his government wouldn't rule out any measures in dealing with foreign-exchange rates, responding to a question about the yen's recent weakness.

In a group interview with Western media organizations Friday, Kishida said his government was watching foreign-exchange moves closely and believed that excessive moves were undesirable.

Israel to Allow More Aid Into Gaza After Biden Warning Over U.S. Support

Israel will allow more aid to enter Gaza and reopen a major border crossing after a warning by President Biden that support for Israel's war effort against Hamas hinges on doing more to help ease the humanitarian crisis in the strip.

The decision to increase aid comes after weeks of U.S. calls for Israel to do more to help civilians and ahead of the publication Friday of the Israeli military's findings about the deaths of seven aid workers killed in Israeli strikes earlier this week.

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

(END) Dow Jones Newswires

04-05-24 0548ET