European Midday Briefing : Mood Remains Cautious with U.S. Jobs Data in View

MARKET WRAPS

Stocks:

European stocks extended their retreat on Friday as investors continued to recalibrate interest-rate expectations and looked ahead to the key U.S. jobs report.

"The too-strong ADP report hinted at a too-resilient U.S. jobs market to the Fed's very aggressive rate hikes, further fueling the Fed rate hike expectations," Swissquote Bank said.

Stocks to Watch

Anglo American's has likely had a difficult first half with revenue and earnings set to fall on year, along with a quarterly decline in most production for the second quarter, Berenberg said, which rates the stock at hold with at price target of 2,600 pence. Read more.

Economic Insight

The major central banks are expected to converge to a pause in the second half of the year, Citi said.

"This seems uncontroversial, except for the [Bank of England] where the market prices 88% chance of a 25 basis point hike in December," Citi said.

The European Central Bank raised interest rates by 25bps in mid-June, promising another for the July meeting, the Federal Reserve skipped and the BOE jumped back to a 50bp rise, it added.

"The different speeds [and divergent pricing in the forwards for the coming months] feel like a significant moment following the largely synchronized cycle to date. This may be a false sense of divergence, however."

Read Market Expectations For BOE Rate Appear Unjustified

U.S. Markets:

Stock futures were modestly lower, while bond yields were little changed, after ending Thursday at their highest levels since early March.

The yield on the 10-year Treasury note was at 4.042%, versus 4.04% on Thursday and the yield on the two-year note slipped back below 5%.

Stocks to Watch

Same-store sales at Costco in June declined by 1.4%. The warehouse retailer estimated that a drop in gasoline prices dragged down total-store comparable sales by 4 percentage points. The stock fell 0.8%.

Levi Strauss cut its revenue outlook for the fiscal year and the stock fell more than 8% in premarket trading.

Follow WSJ markets coverage here .

Forex:

The dollar was steady as traders awaited key monthly U.S. jobs data at 1230 GMT.

The currency rose on Thursday after stronger-than-expected ADP private payrolls and ISM services PMI data, which pointed to further U.S. interest-rate rises, but UniCredit Research said Friday's data might not be so strong.

"Despite the strong ADP survey, we and markets expect fewer net jobs were created in June than May's 339k. Softer-than-expected labor data in the U.S. might therefore spark some short-covering against the greenback."

A strong reading would push it higher, however.

U.S. nonfarm payrolls are expected to rise by 240,000, according to a WSJ poll.

Bonds:

Macroeconomic fundamentals, issuance volumes and quantitative tightening flows shouldn't be a concern for eurozone government bond yield spreads in the second half of the year but the market focus is likely to turn from duration to credit risk, as the end of the tightening cycle draws nearer, Societe Generale said.

"We expect a mild widening in country spreads until year-end, driven by a widening in credit spreads and rising risk aversion impacting lower credit sovereigns more," SocGen said.

It has targeted the 10-year BTP-Bund spread at 185 basis points in the fourth quarter; the 10-year OAT-Bund spread at 57bps; and the 10-year Spanish-German spread at 105bps.

SocGen also said the market's hawkish repricing of the ECB's policy rates may overshoot even higher, in line with past cycles, offering good entry points.

"At this stage of the cycle, we view current levels as attractive to progressively buy duration and add to longs on dips."

Global bond markets have recalibrated to a hawkish interest-rate rise path in a rush, triggering a meaningful selloff and pushing the 10-year Bund yield above 2.60% and the 10-year Treasury yield above 4%, SocGen said.

Energy:

Crude futures made solid gains, with supply cuts from Saudi Arabia and Russia at the start of the week starting to have an impact on prices.

"The fundamentals look increasingly bullish for Q3, with OPEC+ cutbacks and seasonally strong demand set to tighten the market and draw down on inventories," BMI said. "We hold to our current forecast for Brent crude to average $80 a barrel in 2023."

Read Oil & Gas Recovery Playing out Unevenly Across Sectors

Metals:

A strong dollar was keeping metal prices in check, with weak demand and uncertain economic outlook adding further headwinds, said BMI.

"The twin headwinds of a still strong dollar and downbeat PMI data from Mainland China in June continue to pressure metal prices," BMI said.

However, it added that low inventories of base metals and stimulus in the Chinese property sector should eventually help lift prices during the second half of the year.

DOW JONES NEWSPLUS

EMEA HEADLINES

Shell to Book Up to $3 Bln of 2Q Impairments, Upstream Production Fell on Quarter

Shell said Friday that it expects to book after-tax impairments of up to $3 billion for the second quarter of 2023, and that upstream production declined from the first three months of the year.

The energy major said it expects to pay post-tax impairments of up to $3 billion, largely due to a 1% increase in the discount rate used for impairment testing.

German Industrial Production Dipped Unexpectedly in May

Industrial production in Germany fell unexpectedly in May, a sign that the country's key manufacturing base could be struggling as global demand slows.

Industrial output-comprising production in manufacturing, energy and construction-dipped 0.2% in May compared with the previous month on a price, seasonally and calendar-adjusted basis, from a 0.3% rise in April, data from the German statistics office Destatis showed Friday.

Clariant Lowers 2023 Guidance on Weaker 2Q

Clariant said Friday that it has lowered its full-year guidance as preliminary results for the second quarter show weaker demand due to macroeconomic challenges.

The Swiss specialty-chemicals company said sales are expected at between 4.55 billion and 4.65 billion Swiss francs ($5.07 billion-$5.18 billion) in the year, compared with previous guidance of CHF5 billion.

GLOBAL NEWS

Tech Stocks Have Recovered, But That Hasn't Helped Startups

Renewed vitality among large technology firms has yet to re-energize tech startups and their investors, who in recent months continued to put funding deals on hold and push back public-market debuts, according to the latest market data.

Over the past year, venture-capital investors, company founders and analysts said the prolonged slump across the startup world would start to ease once public tech companies regained their footing, putting behind the market declines, budget cuts and layoffs of 2022.

U.S. Oil Boom Blunts OPEC's Pricing Power

U.S. petroleum production is on pace for a record-breaking year, helping to keep energy prices stable despite the efforts of Saudi Arabia and other major oil exporters to drive them higher.

China-Led Infrastructure Bank Finds No Evidence of Communist Party Influence

SINGAPORE-The Beijing-backed Asian Infrastructure Investment Bank found no evidence of undue influence by China's Communist Party in its decision-making, according to an internal review released on Friday.

Last month, the China-led multilateral development bank's communications director, Bob Pickard, resigned and hurried out of China, accusing the bank's management in a series of Twitter posts of being "dominated by the Communist Party" and describing the work culture there as "spectacularly poisonous."

U.S. to Send Cluster Munitions to Bolster Ukraine's Fight Against Dug-In Russians

WASHINGTON-The Biden administration plans to send cluster munitions, which strew small bomblets over a wide area, to Ukraine to strengthen its hand in a high-stakes offensive against Russian forces, senior U.S. officials said.

The White House has agreed to grant a waiver under the U.S. arms export laws to send the weapons, formally known as dual-purpose improved conventional munitions, or DPICM.

Write to [e-mail]

Write to us at [e-mail]

We offer an enhanced version of this briefing that is optimized for viewing on mobile devices and sent directly to your email inbox. If you would like to sign up, please go to https://newsplus.wsj.com/subscriptions.

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

(END) Dow Jones Newswires

07-07-23 0538ET