European Midday Briefing : Stocks Steady For Now But Fed Easing Fears Persist

MARKET WRAPS

Stocks:

European stocks nudged into positive territory on Thursday as Treasury yields eased back from this year's highest levels.

The slight fall in yields was supported by comments from Federal Reserve of Atlanta President Raphael Bostic who said inflation was trending downwards, Mizuho said.

However, an overall cautious mood continued to dominate markets on Federal Reserve easing worries. And looming in the background is Friday's U.S. personal consumption expenditure data, the Fed's favored inflation gauge.

Ahead of that, markets are pricing in a 98.9% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on June 12th, and an 86.8% chance it will also stand pat in July.

The chances of at least a 25 basis point rate cut by the subsequent meeting in September is priced at 47%, down from 51.1% a week ago.

Stocks to Watch

Volkswagen has teased two ideas recently that signal movement in the right direction, supporting Citi's thesis that the carmaker should be valued much higher.

Managers imply that the group will sell shares in truck-and-bus subsidiary Traton to increase the free float, which could raise more than EUR2 billion, Citi said. It won't change forecasts, but it symbolizes improved decision-making, Citi added.

The decision to build a fully-electric car priced at less than EUR25,000 is also a good sign, though achieving that price is a challenge, and the nixed partnership with Renault on a cheap EV was a better idea, Citi said.

Still, it said VW remains undervalued for its earnings, and these decisions should help ease concerns.

Economic Insight

The European Central Bank is set to initiate monetary policy easing with a 25 basis point interest-rate cut on June 6 but it will wait until September before considering reducing rates again, given prevailing inflation risks, SEB Research said. "The message at the June meeting should support this."

The ECB is quite content with the current market pricing of rate cuts, and accordingly, will not seek to impact market pricing by its communication at Christine Lagarde's press conference, SEB said.

"We think such a message would confirm market pricing that discounts a high probability of the second cut for the September meeting."

U.S. Markets:

Stock futures were lower, with investors getting jitters again about the interest-rate outlook. Bond yields were lower too after the 10-year yield settled on Wednesday at its highest level since April 30.

Coming up Thursday, earnings are due from Best Buy, Costco, Dell and Dollar General. Investors also await the second estimate of first-quarter GDP and weekly jobless claims.

Forex:

The dollar has continued the progressive recovery as risk aversion prevails across markets and as U.S. interest-rate cuts look unlikely any time soon, lifting the DXY dollar index above 105, UniCredit Research said.

Japanese companies' increasing appetite for acquisitions overseas could push USD/JPY above 160, BofA said.

M&A flows can cause the currency of the target nation to strengthen relative to that of the acquiring country, in this case Japan. BofA now sees USD/JPY at 161 in end-September versus 157 previously, as Japanese firms ramp up overseas acquisitions.

The pace of M&A announcements this year has been the fastest since 2019, he adds. BofA maintains its year-end forecast for the pair at 155, expecting the Fed to start cutting rates in December, which may weigh on the dollar.

Bonds:

Bund yields hit a new year-to-date high early on Thursday, making the 10-year bonds appealing a week before the European Central Bank will likely cut interest rates, Commerzbank Research said.

That said, as major flows in recent weeks have failed to slow the bearish repricing and with 10-year Treasury yields still some 15 basis points below their year-to-date highs, markets remain vulnerable and a lasting trend reversal isn't in sight, Commerzbank said.

Energy:

Oil prices were slightly lower on a stronger dollar and as traders remained on edge ahead of U.S. inflation data and OPEC+'s meeting later this week.

"The ugly geopolitical situation in the Middle East does trigger short-term price spikes, but price rallies due to geopolitical tensions tend to remain short-lived," Swissquote Bank said.

Metals:

Base metals and gold weakened, weighed by a stronger dollar and rising Treasury yields.

Copper was down more than 2% as tightness eased in the market, offering investors a clearer view of potential future prices.

"Although prices are likely to remain high in the medium term due to underlying fundamental factors, we might see a slight correction soon to ease some of the recent market upside that took place in recent months," Sucden Financial said.

EMEA HEADLINES

UBS Splits Wealth Management Leadership in Executive Shake-Up

UBS Group said it would reshuffle its executive board, splitting leadership of its key wealth-management division in two and bidding farewell to the last chief of Credit Suisse, the troubled banking rival it took over last year.

The Swiss bank said Thursday that Ulrich Koerner, chief of Credit Suisse before the UBS takeover, would step down from the board at the end of June after a merger of UBS and Credit Suisse's key legal entities and retire later this year.

Italian Fashion Brand Golden Goose to List in Milan Next Month

Italy's Golden Goose said it intends to launch an initial public offering in Milan next month and raise 100 million euros ($108 million).

The Italian maker of luxury sneakers, apparel and accessories said as part of the IPO, it will issue new shares while current shareholder Astrum will also sell shares.

Telecom Italia Backs Its Full-Year Guidance After Strong Revenue

Telecom Italia confirmed its guidance for the year after posting higher revenue for the first quarter.

The Italian telecommunications company said late Wednesday that earnings before interest, taxes, depreciation, and amortization after leases at March 31 came to 1.2 billion euros ($1.30 billion), up 3% on year.

BHP-Anglo Deal Is Off-the Mining Land Grab Is Still On

Mining's big deal is officially off, but an expensive race to reshape mining portfolios for a new era may be just getting started.

Iron-ore giant BHP said Wednesday that it wouldn't mount a formal offer for U.K.-listed Anglo American following a five-week courtship. Under Britain's takeover rules, BHP is now barred from approaching the company for six months.

GLOBAL NEWS

This Record Stock Market Is Riding on Questionable AI Assumptions

Remember all the bulls earlier this year getting excited that the rally was broadening out beyond the "Magnificent Seven" stocks, and how wider gains were a sign that the market's rise was sustainable? Not so much.

This month, as indexes hit fresh records, just four giant technology stocks added more market value than the rest of the S&P 500 put together. A brief burst of outperformance by smaller stocks seems to have petered out again.

Tariffs Are More Than Just Taxes. They Are a Tool of Geopolitics.

When then-President Donald Trump began his trade wars in 2018, critics issued a three-word indictment: Tariffs are taxes.

With President Biden maintaining many of those tariffs and Trump promising more if re-elected, the criticism has grown. Two new studies show tariffs are regressive, meaning they fall more heavily on lower-income families who tend to spend more of their income on cheap imported goods.

Blinken Signals U.S. May Allow Ukraine to Strike Inside Russia With American Weapons

CHISINAU, Moldova-U.S. Secretary of State Antony Blinken signaled on Wednesday that the U.S. is weighing the idea of allowing Kyiv to strike Russian territory with American-provided weapons in light of the evolving battlefield situation in Ukraine.

It was the first time that a top Biden administration official has publicly indicated that the U.S. is considering the policy shift. Previously, the U.S. has said it wouldn't allow Ukraine to attack targets on Russian territory with ATACMS missiles or other U.S. weapons.

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

(END) Dow Jones Newswires

05-30-24 0527ET