EMEA Morning Briefing : Shares to Start off Mixed Ahead of BOE Decision

MARKET WRAPS

Watch For:

Balance of payments for EU euro area, Italy; Germany PPI; no major corporate updates expected

Opening Call:

Shares may be off to a mixed start in Europe on Tuesday. In Asia, stock benchmarks were mostly lower; Treasury yields rose; the dollar was mixed; while oil and gold declined

Equities:

European stocks are poised to open mixed on Tuesday, as investors take a breather with Wall Street closed overnight and ahead of the Bank of England's interest rate-setting decision Thursday.

"It's just the market taking a breather. It's a down day after a blistering few weeks," said Kleinwort Hambros.

Investors will also likely focus on a meeting in Beijing between U.S. Secretary of State Antony Blinken and China's foreign minister. "Any sign of collaboration or even friendship is certainly market positive. A big tail risk has been U.S.-China relations worsening," Kleinwort Hambros said.

The Bank of England is widely expected to raise interest rates again this week to combat persistently high inflation, and market pricing shows investors have shifted to expecting the central bank will have to keep rates higher for longer.

"Now it's up to the BOE to continue its firefighting mission; one that's at risk of getting out of control despite the MPC's efforts to contain it. Of all the major economies desperately trying to control inflation while providing a soft landing, the U.K. looks least likely to achieve it," Oanda said.

Forex:

The dollar was mixed in Asia amid risk-off sentiment spurred by losses across most regional equity markets.

The global equity rally has begun to falter, and market participants are worrying about global and regional economies, MUFG Bank said.

However, markets are quiet following the U.S. holiday and will likely monitor global PMI data in coming sessions, it added.

Meanwhile, the pound has room to extend its recent gains following U.K. inflation data for May on Wednesday and the BOE's interest rate decision on Thursday, Ebury said.

"In addition to yet another record-high core inflation print, we expect the Bank of England to hike rates this week and sound a hawkish tone," Ebury said.

One or both of the two BOE policymakers who voted against past rate rises could join the rest of the Monetary Policy Committee in voting for an increase, it said.

U.K. rates are likely to peak above 6%, compared to the current level of 4.5%, and "we maintain our bullish view of GBP," Ebury said.

Bonds:

Treasury yields advanced, following the Fed's new projection of two more interest rate increases this year.

Housing and labor data and speeches by Fed officials are likely to be on investors' radar.

Meanwhile, issuance of sterling corporate bonds has been relatively weaker than euro corporate bonds issuance in 2023, as it is cheaper for European companies to issue euro-denominated bonds than sterling-denominated bonds, said ABN Amro.

"It's much cheaper for euro-denominated utility companies to issue in euro and subsequently enter a cross-currency swap to switch to sterling instead of issuing in the sterling market directly," it said. "Activity in the GBP corporate bond space has been dominated by local champions, mainly local utilities."

Energy:

Oil futures fell in Asia, as investors appear to be mulling the potential impact that possible stimulus measures from China could have on oil demand.

The Chinese government has been considering what extra support it can provide to its economy as growth has struggled to gain traction following years of pandemic lockdowns, ANZ Research said.

Higher interest rates and waning inflation have diminished the appeal of commodities for investors keeping oil prices under pressure but a looming supply deficit will send crude higher soon, Rystad Energy said.

Brent has slipped 11% so far this year but the consultancy says it remains "confident that significant upside price pressure will materialize in the second half of the year."

Rystad sees a supply deficit averaging 2.4 million barrels a day for the remainder of the year and says concerns about demand and strong supplies have led to weak investor positioning which has kept prices subdued.

"At some point in the coming weeks, market fundamentals will drive the oil market. Upside price pressure will materialize soon," the group said.

Metals:

Gold retreated in Asia amid possible position adjustment.

The precious metal has been very choppy over the past month and recent economic data and central-bank decisions haven't enabled it to break out of its tight range in either direction, said Oanda.

Gold has been trapped mostly between $1,940/oz and $1,980/oz and is showing few signs of changing that in the near future, it added.

---

Copper dropped slightly amid investor disappointment that no concrete supportive policies were rolled out at China's State Council meeting on Friday.

"Base metals were lower across the board amid a lack of detail over potential Chinese stimulus measures," said ANZ.

However, China's National Development and Reform Commission is mulling a broad package of stimulus measures, which could revitalize growth in commodity prices, ANZ said.

---

Chinese iron-ore prices were lower, weighed by weak global demand and China's sluggish property market.

"Traders are concerned Beijing will hold back stimulus if it deems the [property] sector to be overleveraged," ANZ said.

Property sector growth tends to drive demand for raw materials used for construction. Still, steel mills' stocks of iron ore are low, which could support demand for the steelmaking metal if steelmakers' profits keep improving, Huatai Futures said.

TODAY'S TOP HEADLINES

China's Benchmark Lending Rates Lowered by 10 Basis Points

China's benchmark lending rates were lowered Tuesday as expected, in a bid to support the nation's slowing economic recovery.

This was the first cut in the benchmark loan rates since August 2022, as Beijing moved to roll out more measures to buoy growth.

Xi Jinping Meets Antony Blinken as U.S., China Resume High-Level Engagement

China and the U.S. took steps to halt the downward spiral in relations, with Secretary of State Antony Blinken meeting Chinese leader Xi Jinping, though the two powers might have trouble keeping their global rivalry from swamping the tentative rapprochement.

During two days of meetings in Beijing, Blinken and senior Chinese foreign-policy officials agreed to more high-level talks, continuing a thaw after months of near-frozen contacts. They also promised to find common ground on increasing flights between the two countries and combating the flow of fentanyl into the U.S.

Uganda School Massacre Signals Islamic State's Growing Reach in Africa

BWERA, Uganda-For Zephana Kirilhuhandi and Sylvia Biira, the brick buildings of Lhubiriha Secondary School presented a gateway to a future that they and other parents in this impoverished border town never had.

Now half of its buildings lie in ruins and 37 of its 63 students-between the ages of 12 and 22-are dead, as are five adult community members. Among them are Elton, the Kirilhuhandis' studious 17-year-old son, and his father, Zephana, the school's security guard.

Artificial Intelligence May Eliminate Some Jobs, OpenAI Executive Says

An executive at a leading artificial-intelligence company has said what many people fear: While its technology may create new jobs, it will likely eliminate some too.

"Every large company has an army of people that read and review contracts for revenue recognition purposes, for example," said Brad Lightcap, chief operating officer of OpenAI, at a Wall Street Journal event in Cannes, France. "You may not have that job. That may not be a job of the future."

Write to [e-mail]

Expected Major Events for Tuesday

05:00/FIN: May Labour force survey, incl unemployment

06:00/GER: May PPI

06:00/SWI: May Trade Balance

08:00/EU: Apr Euro area balance of payments

08:00/ICE: May Harmonized CPI

09:00/EU: Apr Construction output

09:00/LUX: May Unemployment

09:00/ITA: Apr Balance of Payments

10:00/POR: May PPI

12:00/HUN: Jun Hungarian interest rate decision

15:59/GRE: Apr Balance of Payments

17:59/POR: Mar ICSG Copper Report

17:59/UK: May Aluminium Production report

All times in GMT. Powered by Onclusive and Dow Jones.

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

06-20-23 0016ET