MARKET WRAPS

Stocks:

European stocks struggled for traction on Wednesday after higher-than-expected U.K. inflation data fueled expectations of further Bank of England rate rises and as investors awaited testimony from Jerome Powell.

Consumer prices in the U.K. were 8.7% higher in May, unchanged from April but above expectations, while core prices also rose, a troubling development for the BOE in its efforts to curb inflation.

"The U.K.'s May inflation report is certainly ugly enough to keep the debate live about a 50bps hike from the Bank of England tomorrow," abrdn said, though it still thinks a 25bps move is more likely.

Track the reactions to the inflation data.

Meantime, financial markets will get another opportunity to absorb the prospect of further Federal Reserve rate hikes this year when Powell steps before Congressional lawmakers, starting on Wednesday.

"Powell has another chance to flesh things out," Monetary Policy Analytics in Washington said.

While the Fed's decision on rates last Wednesday reflected a consensus among voting members of the FOMC, the market came away from Powell's press conference "a little confused about why the Fed didn't hike in June, even though officials saw the need for two more rate hikes."

Stocks to Watch

BASF is likely to remain under pressure in the second quarter as it is among others in Europe with industrial end markets facing weak demand and destocking, Jefferies said.

Europe will be the most-challenged region for the company, North America will be relatively resilient, while China will perform below expectations, Jefferies said. It forecasts a 10% decline to 2Q volumes and a continued sequential deterioration of BASF's margin.

"Robust end markets across agriculture and automotive are unlikely to offset weakness across other end markets," Jefferies said, adding that they expect BASF to make EUR876 million in adjusted EBIT compared with consensus of EUR1.15 billion.

U.S. Markets:

Stock futures declined modestly after the S&P 500 closed lower for the second day in a row and as attention turned to Powell's testimony.

Treasury yields advanced. The yield on the benchmark 10-year note climbed to 3.750%, from 3.726% on Tuesday.

The schedule for data and earnings is light on Wednesday. In addition to Powell's testimony, investors await comments from Chicago Fed President Austan Goolsbee and Cleveland Fed President Loretta Mester.

Stocks to Watch

FedEx was falling 3.1% in premarket trading after it reported fiscal fourth-quarter earnings that beat analysts' estimates but issued guidance that disappointed.

Tesla was up 1.4%. Elon Musk met with India's prime minister on Tuesday and said he was confident the electric-vehicle maker "will be in India and will do so as soon as humanly possible."

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Forex:

Sterling turned lower following brief gains after the U.K. inflation report, as the data are "bad news" for the economy, ActivTrades said.

"The markets' initial reaction led to sterling gains, as investors, anticipating interest rate rises, drove demand for sterling," ActivTrades said.

However, the pound quickly gave up those gains as the wider picture is negative for the currency, it added.

Further potential rate rises are likely to hinder economic activity and ultimately cause a contraction, generating currency weakness, ActivTrades said.

ING said sterling's reaction probably suggests that the room for markets to price in further rate rises is limited, hence the positive implications of data surprises for the currency are also limited.

The chances of a 50bp rate rise at Thursday's BOE meeting still look low but the data might encourage the central bank to not to push back against rate rise expectations, ING said.

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The dollar was higher on safe-haven flows as investors turned risk averse ahead of Powell's testimony.

UniCredit Research said the foreign-exchange market's reaction to Powell's remarks will depend on how assertive he sounds about signalling further interest-rate rises.

"A repetition of the tones used in his press conference last week is unlikely to spark additional volatility among majors and will probably not strengthen the USD further."

Bonds:

Eurozone government bond yields rose, tracking sharp gains for gilt yields on the higher-than-expected U.K. inflation data, which makes further BOE rate increases more likely, feeding through into European bond moves.

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The 10-year Greek-German government bond yield spread could tighten to 120 basis points if Sunday's Greek election delivers an absolute majority for the New Democracy party, Citi said.

"This result might drive another round of tightening for 10-year GGB-Bund by around 10 basis points as an upgrade to investment grade appears closer," Citi said.

A first inclusion in a major investment grade index requires two upgrades into investment grade territory, Citi said.

The 10-year Greek-German yield spread, measured between the January 2033 Greek and February 2033 German bonds, is around 129 basis points, according to Tradeweb.

Energy:

Oil prices edged up, continuing a stretch of sideways trading as the market is caught between conflicting demand drivers.

"Oil indicators are showing mixed signals. Short-term demand looks weak while supplies are healthy, but longer-term demand from China appears strong and OPEC production cuts promise to tighten the market later this year," ANZ Bank said.

Metals:

Base metals and gold prices struggled as macroeconomic weakness traded off against tightening fundamentals.

"Commodity markets are in the grip of lackluster demand, as manufacturing slows in China and the U.S.," ANZ Research said.

However, it expects demand to pick up in the second half of this year, as inventories of industrial metals deplete, especially in Chinese warehouses.

"Copper's spot premium rose despite strong production in China, but aluminum production there remains challenged by lower hydro-power generation."

Read Gold to Remain Elevated in 2023 and 2024 as Fed Nears End of Hiking Cycle

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EMEA HEADLINES

UK Inflation Higher Than Expected in May as Core Rate Rose - Update

The U.K.'s inflation rate was unchanged in May, against expectations of a fall, and with the closely watched core rate rising to its highest rate in more than 30 years-a troubling development for the Bank of England in its efforts to curb inflation.

Consumer prices were 8.7% higher in May than the same month a year earlier, equal to April's on-year rise, the Office for National Statistics said Wednesday. Economists polled by The Wall Street Journal expected inflation to decline to 8.4%.


Europe New Car Sales Rose 18.5% in May, Electric Vehicles Take Larger Share

New car registrations in Europe jumped in May with battery-electric vehicles taking a bigger market share than a year ago, the European Automobile Manufacturers' Association said Wednesday.

Registrations, which reflect sales, totaled almost 1 million, an 18.5% jump from last May, according to the European car industry group known as ACEA. Fully electric vehicle sales rose 71% year over year to around 130,000. That equates to 14% of all European Union car sales, up from 9.6% a year ago, ACEA said.


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The German carrier group said the sale follows the recent divestment of its remaining catering business and will allow it to focus on its core business going forward. Lufthansa expects the deal to have a positive effect on its adjusted operating margin and on its adjusted return on capital employed, it said.


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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.


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06-21-23 0536ET