MARKET WRAPS
Stocks:
European shares opened higher on Monday on renewed hopes the Federal Reserve will start cutting interest rates and as investors anticipate easing measures by the European Central Bank this week.
The more upbeat mood was further helped by data that showed Asian manufacturers seem to be on firmer ground, with the latest survey releases signaling stronger output and orders.
"We saw the Caixin manufacturing PMI metric push further into expansion, lifting sentiment around the Chinese recovery," Scope Markets said.
"That theme looks set to continue into the U.S. session, with all eyes fixed on the ISM manufacturing PMI metric."
However, Commerzbank Research said market sentiment was hardly upbeat, given persistent and broad-based momentum in services prices.
"While the majority of ECB council members already pre-committed to a June cut early on, latest inflation data further undermines the case for lasting policy easing, in line with our view."
Commerzbank said the ECB will have to come up with good arguments to justify the first rate cut in almost five years, expecting the central bank to point to its updated staff projections, which show a return to the 2% inflation target in the third quarter of next year.
Stocks to Watch
Citi said Commerzbank faces risks from deposit migration and possible M&A activity, cutting its rating on the stock to neutral from buy but raising its target price to EUR15.80 from EUR14.70.
"We think that 'higher for longer' interest rates, while positive for CBK's [net interest income], may cause greater deposit migration in the medium term in Germany [also given its fragmented banking market]," Citi said, adding that it is cautious on the lender's revenue for the 2025 to 2027 period.
A potential takeover by peers Deutsche Bank or UniCredit would be broadly neutral to the buyer's earnings per share so a deal seems unattractive from a financial perspective given execution risk, Citi said.
GSK shares dropped 10% after a ruling by the Delaware State Court that will allow jury trials in cases brought by cancer sufferers who say the heartburn drug Zantac caused their condition. GSK said it's going to appeal the decision.
"Following the 16 epidemiological studies looking at human data regarding the use of ranitidine, the scientific consensus is that there is no consistent or reliable evidence that ranitidine increases the risk of any cancer," GSK said, adding that the ruling has no impact on its investment plans or capital allocation.
European Central Bank
The ECB is expected to cut interest rates by 25 basis points on Thursday but it is unlikely to provide a lot of guidance beyond the June meeting, Pimco said. "We think it unlikely that the ECB will commit to any particular rate path."
Pimco expects the ECB to re-emphasize its meeting-by-meeting approach based on the data flow over the coming months.
"Once the ECB starts to cut rates, we expect it will proceed cautiously in conventional 25 basis point steps," Pimco said, seeing risks skewed toward fewer rate cuts, mainly due to sticky services inflation, a resilient labor market, loose financial conditions and ECB risk management considerations.
Mediolanum International Funds said the ECB is expected to cut interest rates by 25 basis points but it is unlikely to guide toward a further cut in July, so attention will be concentrated on the wording on any changes to its inflation outlook.
"The ECB will likely highlight the bumpy nature of upcoming CPI releases."
Comments on service price inflation will be given the closest scrutiny as this has remained quite elevated recently, Mediolanum said.
"All in all, we expect ECB rhetoric to be on the dovish side relative to market expectations as we believe inflation pressures are easing more than is being priced in."
U.S. Markets:
Stock futures were higher and Treasury yields slightly lower, after settling Friday at 4.52%.
Meme stocks were rallying, after another cryptic tweet from the "Roaring Kitty" account.
GameStop and AMC Entertainment were up roughly 80% and 30%, respectively, in premarket trading.
Forex:
The euro could get some support following a choppy end to May if the ECB sounds cautious considering the rising upside risks to price stability, Swissquote Bank, adding that this is its base-case scenario.
"The latest CPI update didn't bring much confusion regarding the ECB cut expectations this week, but somehow killed hope regarding a possible, second rate cut in July."
In light of the latest developments, the ECB's communication on what it is planning to do next amid signs of quickening inflation will matter more than the cut itself.
The dollar was steady in early European action and Friday's nonfarm payrolls report will be key in determining whether the currency's recent selloff extends further, MUFG said.
Bonds:
French government bonds traded slightly higher after S&P lowered France's credit rating by one notch to AA- from AA, with a stable outlook, in a move that markets had seen as a possibility.
"Contrary to our previous expectations, we project France's general government debt will increase to about 112% of GDP by 2027 from about 109% in 2023," S&P said, also forecasting that the budget deficit will remain above 3% of GDP in 2027.
Jefferies said the S&P downgrade "should put an upward pressure on French spreads."
It said the downgrade wasn't a massive surprise as a short France view had been the consensus since the start of the year.
"We have been playing a short France trade vs the EU and continue to like the trade," Jefferies said.
France's fiscal picture appears weak and Jefferies doesn't see much room for a significant improvement in the near term.
Energy:
Oil prices were broadly steady after OPEC+ agreed to extend all production curbs into next year but also provided guidance on how it plans to unwind some of these over the coming months.
"Whilst it was always the strategy of the 8 OPEC+ members to gradually return the 2.2 million barrels a day of extra voluntary cuts to markets given elevated spare capacity, we view the detailed timeline for unwinding them as incrementally bearish for oil prices," MUFG said.
Gains were also limited by hopes for a ceasefire in Gaza after the U.S. unveiled a three-phase plan.
UBS said crude should be supported by falling global inventories over the summer as seasonal demand increases.
It said OPEC+'s decision to phase out its voluntary cuts from October could cause some price volatility in the near term as some market participants think the cartel and its allies may flood the market with extra barrels.
But "the group would likely only produce more if it believes those extra barrels will be absorbed by the market," UBS said.
"We retain a modestly positive outlook for crude prices, expecting larger oil inventory draws over the coming weeks to support prices."
Metals:
Gold futures were trading sideways after Friday's PCE data showed U.S. inflation had stabilized, slightly boosting hopes for an earlier cut in interest rates by the Federal Reserve.
For base matels, JPMorgan said aluminum could be set to slip in the near-term, as prices appear to be running hot compared with market fundamentals.
Iron Ore
Miners are seeking to upgrade their iron ore to access the growing market for direct reduction iron, but Morgan Stanley is wary on the current value of doing so.
While there is future potential, recent price projections from producers look optimistic for at least this decade, Morgan Stanley said, pointing to estimated spreads in the range of $12-$20/ton versus actual spreads of $5-$8/ton over the past three years.
It said is "cautious that a recent widening of DR [direct reduction] spreads marks the starts of a structural trend, at least while the BF [blast furnace] market remains dominant."
Miners
Global miners could nearly double their economic value added, or EVA, in 2024 after a mediocre year last year, Citi said.
It estimates the global mining sector would generate an EVA of around $44 billion this year, versus $23 billion in 2023, and an economic spread of 3.8%, versus 2%."
While a large part of the return to value-creation phase is led by strength in commodity prices and cost control, Citi believes miners deserve credit for maintaining capital and supply discipline.
EMEA HEADLINES
Atos Receives Two Revised Restructuring Proposals
Atos said it received two revised financial restructuring proposals as part of its refinancing process, aimed to cut debt and restore profitability.
The French I.T. firm said Monday that it agreed on an interim financing of 450 million euros ($488.1 million) with creditors.
GLOBAL NEWS
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06-03-24 0535ET
