Written by 9:39 am EU Investment

European Midday Briefing: Hopes Inflation Has Peaked Lifts Mood

MARKET WRAPS

Stocks:

European shares made solid gains early Monday, tracking Asia’s rally on hopes that the latest U.S. inflation data will show price pressures have eased further.

While the U.S. CPI is likely to have dipped in August, peak inflation hasn’t been reached yet in the eurozone or the U.K., UBS Global Wealth Management said.

“And we believe the Federal Reserve will require at least three months of reassuring inflation data–along with evidence of a cooling labor market–before considering softening its tone.”

Stocks to Watch:

CaixaBank has outperformed its sector peers by 50% this year, and the lender is likely to continue doing so, Berenberg said.

A simple business model, net-interest-income tailwinds from higher interest rates, and levers to contain loan losses have all supported the bank’s performance, Berenberg added.

While the stock is trading at a 30% premium to the sector, the shares don’t fully capture CaixaBank’s full potential, Berenberg said, increasing its price target on the stock to EUR4.10 from EUR3.50.

Tate & Lyle’s exposure to European sales could be at risk from the second half and beyond amid mounting cost pressures, Jefferies said.

In order to curb inflationary pressures, the company could have to increase pricing of full-year 2023 contracts to above 20%.

“Tate have demonstrated impressive pricing power so far, 75% of Europe sales are specialties & EU sugar prices are rising, which should lift isoglucose. But there are limits to what customers will bear,” Jefferies said.

It has downgraded its recommendation on the stock to hold from buy.

U.S. Markets:

Stocks rallied last week to snap three consecutive weeks of losses, and the momentum looked to be carrying through into Monday with what would be the fourth straight day of gains.

Notable economic events this week include Tuesday’s report from the Bureau of Labor Statistics on the Consumer Price Index for August, and the National Federation of Independent Businesses will release the Small Business Optimism Index for August.

This week’s earnings include Oracle on Monday, and Adobe on Thursday. Starbucks and Corteva host investor meetings on Tuesday, and Danaher and Humana hold events on Thursday.

Twitter shareholders will vote Tuesday on Elon Musk’s proposed $44 billion acquisition of the social-media company, a purchase the company is trying to force and that Musk is trying to exit.

Forex:

The DXY Dollar Index fell to a two-and-a-half-week low in early trading, and MUFG Bank said a narrowing of the monetary policy divergence between Europe and the U.S. was weighing on the dollar, although declines are likely to be limited.

Europe-U.S. interest rate rise expectations narrowed after the European Central Bank lifted rates 75 basis points last Thursday that won’t be sufficient on its own to trigger sustained dollar weakness, MUFG Bank said.

“The U.S. rate market is still confident that the Federal Reserve will continue to front-load policy tightening through the remainder of this year by delivering a third consecutive 75bp hike on September 21.”

The euro, Norwegian krone and Swedish krona look set to reverse their recent gains due to Europe’s energy crisis, Danske Bank said.

“With public balance sheets seemingly set to cushion Europe from the energy shock–and hence keep real rates [interest rates adjusted for inflation] relatively depressed–the EUR FX will remain the pressure relief valve,” Danske Bank said.

The eurozone growth outlook remains bleak and with central banks still front-loading monetary policy tightening, that’s rarely an environment where EUR, NOK and SEK rallies can be sustained, Danske Bank added.

The pound was mixed after data showed U.K. GDP expanded less than expected in July, with ING saying Tuesday’s U.K. jobs figures will be more significant.

“The adjustment for the June bank holiday makes the [GDP] figures a little difficult to read and we think the Bank of England will take more notice of tomorrow’s August jobs data for insight into how tight the U.K. labor market really is.”

Read: Bets Against Pound Rise Amid Fears Over UK Growth, Fiscal Policy

Read: U.K. Economy Picked Up Modestly in July

Bonds:

Morgan Stanley expects a peak in Bund yields in the early part of the fourth quarter after the seasonality for bearish duration–possibly in the second half of October.

By then, the 10-year Bund yield could rise above 2%, perhaps to 2.25%, before stabilizing at 2%, it said.

With net positioning in Bunds still above 0%, “we continue to believe the risk of a short squeeze is very limited while Bunds remain exposed to negative news.”

ING said long-term investors might want to use spikes in 10-year Bund yields toward 2% as a buying opportunity. The 2% level for the 10-year yield is now within sight, with supply still weighing on nervous markets, ING said.

After the ECB’s unprecedented 75 basis-point interest-rate rise last week, ING thinks the projections of the ECB and of the market “are premised on too optimistic a growth outlook, but this might not register in the market’s consciousness until later this year.”

Ten-year U.K. gilt yields could reach 3.75%-4% by mid-2023 as energy bailouts mean higher BOE interest rates for longer, Citi said.

At the next meeting, Citi expects the BOE to raise the bank rate by 50 basis points from the current 1.75%, and to go ahead with quantitative tightening.

Portuguese government bonds were weaker, but aligned with the market, after S&P upgraded the country’s credit rating to ‘BBB+’ from ‘BBB’, with stable outlook, in a scheduled review on Friday.

S&P said Portugal has continued to post strong growth, labor market and fiscal outcomes despite higher energy costs and rising interest rates. Investment is set to surge on the back of an expected EUR61.2 billion in EU funding between 2022 and 2027.

Energy:

Oil futures were close to flat as investors balanced tight supplies with concerns about Chinese lockdowns crimping demand.

Brent has tumbled over 14% so far this month and WTI remains firmly below $100, as demand concerns have dominated investors’ attention. Still, supply risks from OPEC+ cuts to a failure to achieve a nuclear deal with Iran are being overlooked, TD Securities said.

Some analysts also said EU steps to cap Russian oil prices could prompt Russia to withhold supplies, while the continent’s efforts to move away from gas also promise additional demand for oil.

“Energy markets are entirely ignoring the broad scope of supply risks,” TD Securities said.

Metals:

Base metals and gold started the week higher on expectations that U.S. consumer price inflation data, due on Tuesday, will fall.

“The recent slump in commodities, with WTI firmly below $100 throughout the month, is likely to put downward pressure on the headline number, as are gas prices being down 12% over the month,” Deutsche Bank said.

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

Electrolux to Cut Costs After Warning on Weak 3Q Earnings

Electrolux AB is launching a cost-reduction program on the back of weaker-than-expected market demand and weak earnings in the third quarter, it said Monday.

The Swedish home-appliance manufacturer said demand for its core appliances in Europe and the U.S. so far in the third quarter has fallen at a significantly faster pace than in the second quarter, driven by the impact of high inflation on consumer purchases and low consumer confidence and high retailer inventory levels.

   
 
 

Australia’s Financial-Intelligence Agency Investigates Entain

Australia’s financial-intelligence agency said it has begun an investigation into a unit of U.K.-listed Entain PLC, which will consider whether the betting company breached anti-money laundering laws.

The Australian Transaction Reports and Analysis Centre, known by its shortened name Austrac, said on Monday that the investigation into Entain Group Pty Ltd. followed an extensive supervisory campaign that looked at companies within the corporate bookmakers sector.

   
 
 

U.K. Economy Picked Up Modestly in July

The U.K. economy returned to growth in July after contracting the previous month, driven by a rebound in the services sector despite intensifying cost-of-living pressures.

Gross domestic product expanded by 0.2% on month, swinging from a 0.6% contraction in June, according to data from the Office for National Statistics released Monday.

   
 
 

Lufthansa, Pilot Union Agree on Salary Increase; Strikes Averted Until June 2023

Deutsche Lufthansa AG said Monday that it has agreed with union Vereinigung Cockpit on a pay increase for pilots and on a peace obligation excluding strikes.

The German carrier said cockpit crews at Lufthansa and Lufthansa Cargo will get a total increase of 980 euros ($984.7) in their basic monthly pay. The raise will be received in two stages, with retroactive effect from Aug. 1 and as of April 1, 2023.

   
 
 

European Manufacturers Reel From Russian Gas Shutoff

European industry thrived for decades on a steady supply of cheap Russian gas, which flowed uninterrupted throughout the Cold War and other times of tension between Moscow and the West.

Since invading Ukraine, Russian President Vladimir Putin has weaponized the country’s vast stores of energy to undermine support for Kyiv. He turned off the taps to the biggest natural-gas pipeline, Nord Stream, completely this month.

   
 
 

Global Drought Saps Hydropower, Complicating Clean-Energy Push

Record drought across the globe this year dried up rivers and reservoirs and sapped the world’s largest source of renewable electricity: hydropower.

The dip in electricity generated by the flow of water across dams in China, Europe and the U.S. stifled power production. In some places, it has caused factories and smelters to shut down for weeks on end.

   
 
 

Sweden’s Right-Wing Opposition Takes Narrow Election Lead

(MORE TO FOLLOW) Dow Jones Newswires

September 12, 2022 05:39 ET (09:39 GMT)

Copyright (c) 2022 Dow Jones & Company, Inc.

Source link

Close