European stocks edged higher on Monday although gains were contained in lighter-than-usual trading volumes with U.S. markets shut for the day.
Investors are continuing to wrestle with worries over inflation and the risks of a global recession from central bank efforts to bring it under control. This week, comments from Jerome Powell to Congress on Wednesday and Thursday will be scrutinized for clues about the chances of a second consecutive three-quarter-point increase to U.S. interest rates in July.
“Edward Park, chief investment officer at Brooks Macdonald, expects investors to edge back into stocks and other riskier assets this week, encouraged by a lack of data on U.S. inflation. He said stocks will remain choppy until energy markets begin to fall, easing the pressure on central banks to tame consumer-price gains.
France’s CAC 40 was a touch higher but lagged other European markets after Emmanuel Macron lost his majority in the National Assembly. The results of the parliamentary elections will make it difficult for the French leader to advance his pro-business agenda.
Read a selection of analysts’ views here.
Stocks to Watch:
Jefferies said Renault can succeed in making itself relevant in a changing auto industry if it carefully deploys capital and repositions assets, raising its rating on the stock to buy from hold and its target price to EUR40 from EUR22.
Jefferies said Renault would do well to shrink its internal-combustion-engine assets and release excess capital in Nissan, which would allow the French auto maker to redirect resources to accelerating its electric-vehicle business. Meantime, earnings should normalize this year, benefiting from lower structural costs.
“In a sector without cyclical appeal…Renault stands out with a multi-faceted investment case,” Jefferies said.
There is no end in sight to the high-price momentum for producer prices in Germany, said Commerzbank’s senior economist Ralph Solveen.
In May, prices were 33.6% higher than a year ago, reaching a new record high. The year-on-year rate has increased only slightly compared with April, when producer prices posted a 33.5% rise.
However, this doesn’t mean that the underlying upward pressure on prices is weakening, rather it has intensified, Solveen said. On average over the past three months, producer prices have risen by 3.1% on a seasonally-adjusted basis compared with the previous month.
The dollar was slightly lower but declines are unlikely to persist even as signs of slowing U.S. economic momentum cast doubt over Fed rate rise expectations, said MUFG Bank.
“The dollar should continue to perform well while global financial conditions continue to tighten amidst more risk-averse trading conditions,” said currency analyst Lee Hardman, noting the currency’s safe haven status.
Hardman also said the Swiss National Bank is likely to intervene in the currency market to contain any Swiss franc depreciation as part of efforts to tackle inflation.
While Swiss inflation is well below more elevated rates in other major eurozone economies, the SNB has clearly signaled a low tolerance for a relatively small overshoot of its inflation target, Hardman said.
“We believe the SNB will cap upside for EUR/CHF at recent highs between 1.0400 and 1.0500. The SNB’s desire for a stronger CHF to dampen upside inflation risks has increased the likelihood of EUR/CHF trading below parity,” Hardman added.
Having risen above 4% last week for the first time since early 2014, the 10-year Italian BTP yield has since retreated after the European Central Bank affirmed its readiness to prevent any unwarranted rise in eurozone government-bond yields.
Danske thinks the ECB bought itself time until July to design and announce an antifragmentation program, but strategist Piet Haines Christiansen said: “I believe that I speak on behalf of all market participants in saying this was a sign of panic.”
The valuation of German Bunds looks cheap in the near term, but the path is for a higher fair value over the coming months with a rise above 2% for 10-year yields in September, said Morgan Stanley.
“Instead of a rally to 1.10%-1.20%, a 1.50%-1.80% trading range on 10-year Bund yields seems more likely for a few weeks before a resumption of the bear market above 2%.”
The backdrop to Morgan Stanley’s forecast of rising yields is inflation and expectations of interest rate rises by the European Central Bank.
ODDO BHF doesn’t currently expect a euro crisis like the one that took place a decade ago, but it’s still avoiding investing in eurozone peripheral bonds.
“We do not invest the capital entrusted to us in bonds issued by the peripheral countries, as we believe there is a high risk that yield spreads could widen further and the value of the bonds could fall further,” said Jan Viebig, chief investment officer.
The best way to permanently avoid debt crises in the euro area would be more fiscal discipline in all EU member states “but we don’t expect that either at the moment.”
The ECB’s planned antifragmentation tool is expected to differ from the asset purchase programs, with the aim to avoid a system-wide increase in liquidity, said Barclays.
“We think sterilisation would be a preferable way to achieve this, rather than selling core bond holdings in order to buy peripheral bonds.”
The latter approach is likely to add to volatility or illiquidity in core bond markets, which is the opposite of what the ECB would seek to achieve, Barclays said. When sterilizing, the central bank offsets purchases to keep the money supply stable.
Brent crude wavered between small gains and losses around the $113 level, steadying after last week’s sharp declines as economic growth concerns intensified.
Prices fell more than 7% last week, tracking sharp losses for global equity markets, as investors feared inflation and interest-rate hikes would damage growth. Still, analysts see a lack of supply supporting prices over the longer term.
“The fundamental picture remains one of tightness amid the ongoing slowdown in Russian output,” said ANZ.
Base metals were lower in London, with copper at its weakest this year, as the downbeat macro-economic sentiment continued to pressure prices for industrial goods.
The mood is becoming increasingly “bearish” and “investors are increasingly worried that hawkish central bank policies will trigger a global recession and cut demand for commodities,” said Peak Trading Research.
DOW JONES NEWSPLUS
France’s Macron Loses Majority in Parliament
PARIS-French President Emmanuel Macron has lost his majority in the National Assembly, as voters in France’s parliamentary elections delivered a blow to his pro-business agenda and positioned leaders on the far-left and far-right to wield unprecedented influence.
Results showed that Mr. Macron’s party, Renaissance, and its allies won 245 seats in the 577-seat National Assembly. That gives him the most seats in France’s lower house, but not enough to retain the majority that allowed the French leader to steamroll the opposition during his first term.
easyJet Warns on Costs, Capacity as Delays Hit Air Travel
easyJet PLC warned Monday that its operating costs and capacity will be worse than expected in the second half of the fiscal year, reflecting additional leased aircraft, crew costs and airport charges.
The U.K. airline said that it will exceed the previously provided cost per available seat kilometer, or CASK, guidance. easyJet had said at its first-half results that operating CASK for the second half ending Sept. 30 would be close to fiscal 2019 levels.
AB Foods 3Q Revenue Rose; Primark to Trial Click & Collect Service
Associated British Foods PLC said Monday that revenue for its fiscal third quarter increased, with Primark revenue beating prepandemic levels, and said it will trial a click-and-collect service in some U.K. stores.
The British conglomerate posted revenue for the period ended May 28 of 4.05 billion pounds ($4.95 billion), up 32% from the same period a year ago at constant currency.
Bayer Wins Fourth Roundup Weedkiller Trial in US
Bayer AG won a fourth case in the U.S. over claims that its Roundup weedkiller causes cancer, the company said late Friday.
A jury in Jackson County, Ore., found that the Roundup weedkiller didn’t cause a man’s cancer, according to the German pharmaceutical and agro-chemicals company.
Atos CFO to Follow CEO Out the Door Amid Split Plan
Atos SE has appointed a new finance chief to take over later this year, as the French IT-services company continues with a restructuring of its business.
Nathalie Senechault will take over in the second half of the year, succeeding current Chief Financial Officer Stephane Lhopiteau, who is leaving the group, Atos said over the weekend. Ms. Senechault is currently deputy CFO, having joined Atos nearly seven years ago.
Valneva Shares Climb as Pfizer Takes $95 Mln Stake
Shares in French drugmaker Valneva SE trade sharply higher Monday after U.S. peer Pfizer Inc. agreed to take a shareholding in the company, as the pair look to boost their development of a vaccine against Lyme disease.
Under the agreement, Pfizer will invest 90.5 million euros ($95 million) in an 8.1% stake in Valneva via a reserved capital increase at a price of EUR9.49 a share, the two companies said Monday, adding that the investment will close Wednesday.
Germany Steps Up Measures to Conserve Gas as Russia Slows Supply to Europe
BERLIN-Germany will restart coal-fired power plants and offer incentives for companies to curb natural gas consumption, marking a new step in the economic war between Europe and Russia.
Berlin unveiled the measures Sunday after Russia cut gas supplies to Europe last week as it punched back against European sanctions and military support for Ukraine.
Ukraine’s Farmers Start Harvest With Few Places to Store Grain
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