MARKET WRAPS
Stocks:
European stocks recovered some of their recent losses early Tuesday, although gains were limited given the sharp falls of late and concerns that high inflation could push economies into recession--alongside war in Ukraine and lockdowns in China--will continue to weigh on sentiment.
"Nerves seem to have steadied this morning...with a broad spread of sectors making progress, from automotives to specialist financials," said Steve Clayton, fund manager at HL Select.
Stocks to Watch:
The first-quarter reporting season turned out to be weak for most mining companies and the sector is facing production misses and higher costs in the near term, said Citi analyst Ephrem Ravi.
In addition, investors are becoming concerned over the possibility of an economic recession, lockdowns in China and monetary tightening in the U.S. and Europe leading to lower demand, he said. However, weak production and higher costs will continue to support commodity prices.
Citi has cut its 2022 Ebitda forecast for the European mining sector by 1.4%, but raised it by 4.6% for 2023 and by 7.8% for 2024 after upgrading its price outlook for iron ore and metallurgical coal.
Economic Insight:
The war in Ukraine and the resulting spike in energy and food prices are keeping the eurozone in stagflation, said Berenberg.
"While growth has stalled, eurozone inflation now exceeds our pre-war estimate by almost three percentage points," Berenberg said.
It expects stagflation to give way to renewed growth in the third quarter, boosted by an easing of supply chain constraints and a bumper summer tourist season. However, the war continues to pose a major risk to the near-term outlook, adding to separate risks emanating from China and the U.S..
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Pantheon Macroeconomics expects German GDP growth to pick up in the second quarter as services activity improves, benefiting from the easing of coronavirus restrictions. But the economy will probably fall into recession in the second half, Pantheon said.
European governments are moving toward an embargo on oil and gas from Russia, and Germany will bear the brunt of the cost of this shift, among the major eurozone economies. Germany's economy will slide into recession in the third and fourth quarters, with GDP falling by 0.6% and 0.2%, respectively, according to Pantheon's estimates.
Pantheon has forecast full-year growth in 2022 of between 1.5% and 1.6%, with the same pace likely in 2023.
U.S. Markets:
Stock futures rose, suggesting major indexes could recover some ground after selling off sharply in the previous session.
Investors will get a fresh read on U.S. inflation Wednesday, with the release of the consumer-price index for April.
The yield on the benchmark 10-year Treasury note stood at 3.053%, having climbed nearly 1.6 percentage points since the end of 2021.
Forex:
The euro is at risk in the coming weeks, with investors potentially running ahead with expectations of interest rate rises by the ECB, said Standard Chartered Bank.
While investors expect the ECB to raise the deposit rate by 50 bps in the third quarter, Standard Chartered expects no rate rise in July and a 25 bps increase in September. Meanwhile, the Fed will meet market expectations of a 50bp rate rise at the June meeting.
"Barring a surprise downshift in U.S. rates expectations over the next month, the euro may continue to face downward pressure," said Standard Chartered.
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A moderate recovery in equities after recent steep selloffs might help riskier currencies recoup some of their recent losses, but any falls in the dollar will be slim, said ING.
"Given the general instability in the global risk environment, some interest in buying the dip in the dollar should remain high and we do not expect any sustained dollar underperformance in the near term." It is unsurprising to see a strong dollar amid fears of an economic slowdown as central banks raise rates, ING said.
The commodity-linked Australian and New Zealand dollars, along with emerging-market currencies, edged slightly higher against the dollar in European trading.
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J.P.Morgan has kept its long dollar view intact despite the Federal Reserve's pushback on the possibility of 75 basis-point rate increases in a single meeting.
Recent dollar strength not only reflects prospects of swift interest-rate rises and balance-sheet reduction from the Fed, but also slowing growth outside of the U.S.
"Recent dollar strengthening has been about pricing in a slowdown in overall growth outside the U.S., more specifically a broadening in vulnerabilities from Eurozone to China."
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Morgan Stanley Wealth Management sees a plethora of risk factors in the market, advising caution in the face of the dollar strength and pending interest-rate increases by the Fed.
The Fed's unprecedented feat--simultaneously raising interest rates and implementing balance-sheet runoff--is a scenario that is expected by June. "The dollar's 20-year high and geopolitical-related volatility offer further complications."
While expectations for a hawkish Fed remain priced in, the bigger threat to soft landing prospects than inflation may be central bank execution risk, Morgan Stanley said. It added that over the past 70 years, there have been 14 episodes of Fed tightening and 11 recessions, with soft landings on only three occasions.
Bonds:
Eurozone government bond yields were little changed in early European trade, torn between fears of inflation and growth risks, said analysts.
Bond auctions will come from the Netherlands, Austria and Germany on Tuesday. The 10-year Bund yield is up 0.4 basis point at 1.100%, while the 10-year French OAT yield is up 0.2 bp to 1.637%, and the Italian BTP yield is up 0.8 bp at 3.156%, according to Tradeweb. (emese.bartha@wsj.com)
Energy:
Oil was slightly lower in Europe, as growth worries continued to weigh on sentiment, but prices managed to pare heavier Asian losses.
Heightened concerns that tightening monetary policy and soaring inflation threaten to dampen economic growth have hurt markets but losses for oil are showing signs of moderating.
"There has been some respite but markets remain very shaky. There has been growing scepticism in markets as to whether the Fed and other central banks will actually be able to achieve a soft landing without a recession as they seek to bring down inflation," said Deutsche Bank.
Commodities:
Gold prices were steady in Europe, with a slightly lower 10-year Treasury yield helping to provide some relief. Overall though, Treasurys are still being favored by investors looking for haven assets.
"This is likely to remain a headwind for gold, although this may be offset by heightened geopolitical risks which should continue to see strong safe haven demand," said ANZ Research.
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Copper and zinc prices rose around 1% in early London trading as the dollar retreated.
Demand weakness for copper still persists in Asia, but the slight bounce early Tuesday comes after five consecutive weeks of losses for the red metal.
"As to whether this is a sign whereby physical guys will step in to support the market, it remains uncertain even if base metals have come off from their March highs and thus alleviating cost pressures, given high metal prices were seen earlier to have inhibited downstream demand earlier in the first quarter," analysts at Marex's Asian metals team said.
DOW JONES NEWSPLUS
EMEA HEADLINES
German Economic Expectations Increase Slightly, But Remain at Low Level
Economic expectations in Germany rose slightly in May, as experts are a bit less pessimistic about the outlook for the German economy, the ZEW economic research institute said Tuesday.
The index of economic expectations increased to minus 34.3 in May from minus 41.0 in April, above the minus 44.5 forecast by economists in a poll by The Wall Street Journal.
Bayer 1Q Profit Rose, Backs 2022 Outlook
Bayer AG said Tuesday that profit rose in the first quarter as performance was driven by its crop science and consumer health divisions, and backed guidance for the full year.
The German pharmaceutical and chemical conglomerate posted net profit of 3.29 billion euros ($3.47 billion) from EUR2.09 billion in the previous-year period.
Centrica Sees 2022 Earnings at Top End of Analyst Views
Centrica PLC said Tuesday that it expects 2022 adjusted earnings per share to be around the top end of the analyst expectations range following a strong first four months of the year.
The U.K. energy group said that supply-chain disruptions and higher inflation are hurting its cost base and customer demand. However, nuclear and gas production remains strong, and the company's marketing and trading arm has secured increased volumes of gas and renewable energy, it said.
Munich Re 1Q Profit Rose on Lower Losses, Despite EUR100M Ukraine Hit
Muenchener Rueckversicherungs-Gesellschaft AG said Tuesday that first-quarter profit rose slightly on lower-than-average catastrophe losses, though it took a more-than 100 million euro ($105.8 million) hit from the effects of the war in Ukraine.
The German reinsurer said major losses in its property-casualty reinsurance segment were EUR667 million, down from EUR892 million last year.
Schaeffler Expects Lower Profitability in 2022
Schaeffler AG said late Monday that it expects operating profitability to decline this year, as first-quarter adjusted earnings fell despite higher revenue.
The German auto-parts supplier's quarterly earnings before interest, taxes and special items fell to 258 million euros ($272.5 million) compared with EUR397 million a year ago. The three-month EBIT margin before special items was 6.9% down from 11.2% the year prior.
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05-10-22 0548ET
