EMEA Morning Briefing: Stocks Set for Tentative Gains with Fed Policy in Focus

MARKET WRAPS

Watch For:

No major economic data scheduled; ECB Survey of Monetary Analysts; IMF World Economic Outlook; IMF Global Financial Stability Report; G24 Ministers and Governors Meeting; updates from L’Oreal, Banco Bilbao Vizcaya Argentaria, Rio Tinto

Opening Call:

Stocks in Europe looked set for modest opening gains despite US losses and a mixed session so far in Asia. Elsewhere in Asia, the dollar and oil cemented further gains while Treasury yields and gold dipped.

Equities:

European shares should open slightly higher Tuesday after one of the Federal Reserve’s earliest advocates for aggressive rate increases cast doubt on the need for a hike larger than 50 basis points.

When it comes to the size of a rate increase, one greater than 50 basis points “is not my base case,” James Bullard said during a virtual appearance Monday. But he noted the Fed has increased rates by more, and when it comes to a potential 75 basis point increase, “I wouldn’t rule it out.”

Bullard said he remains on board with an almost certain series of half percentage point rate rises as the central bank presses forward with plans to help bring inflation under control by lifting the federal-funds rate target to around 3.5% by year-end.

On Wall Street, all three major stock indexes ended with small losses in a choppy trading session as earnings season prepared to move into full swing with rising uncertainty over the economic outlook.

Corporate earnings will offer insight on how companies are grappling with inflation and which ones are best able to pass on price increases to customers, said Katie Nixon, chief investment officer for wealth management at Northern Trust.

“Pricing pressures are going to be pretty intense,” Ms. Nixon said. “Everyone is going to be focused on how margins are affected.”

Forex:

The dollar strengthened further in Asia as geopolitical tensions and a damped economic outlook underpinned demand for haven currencies.

IG market strategist Yeap Jun Rong said expectations of a Fed interest-rate increase in May were another key driver for the greenback’s strength.

The yen continued its decline against the dollar, hitting a fresh 20-year low.

Corpay’s Karl Schamotta said in a note “we think the [yen’s] decline is well-justified and could extend further, given fundamental shifts in the Japanese economy and the yen’s changing role in global financial markets–but we also think the move will soon reach its logical limits, rendering official intervention unnecessary.”

A move down to 130–or even 135–is not out of the question, Schamotta said, especially if policymakers stay on the sidelines.

Bonds:

Treasury yields eased back slightly in Asia having moved higher Monday, with the 10-year rate pushing above 2.86%–its highest since late 2018.

The Fed is seen pressing ahead with an aggressive tightening of monetary policy, including a likely half-point increase in the fed funds rate target, rather than the usual quarter-point increase, at its policy meeting next month and has outlined a tentative plan for a fast-paced reduction of its nearly $9 trillion balance sheet.

The spread between 2- and 10-year yields narrowed somewhat early Monday, though it has resteepened from where it was from late March to early this month.

“If this steepening in the yield curve is mostly technically driven, it should stall here,” said Tom Essaye, founder of Sevens Report Research.

“However, if the 10s-2s spread decisively breaks through 40 bps, we’ll again take that as a signal from the bond market that it simply does not believe the Fed will be tough enough to break inflation.”

Energy:

Oil prices edged higher in Asian trade having finished Monday’s session at their highest levels of the month so far on worries about global energy supplies.

OANDA Market Analyst, Jeffrey Halley said sanctions arising from Russia’s invasion of Ukraine and production issues in Libya were weighing on supply. Protesters appeared to have shut down one small Libyan oil field and completely disrupted loading at a major coastal terminal, I noted.

“Although only 75,000 barrels a day of actual production has been taken offline, with global supplies now so tight, even the most minor disruption is likely to have an outsized impact on prices.”

Natural gas prices closed 7.1% higher in the US at another 14-year-high.

Prices have more than doubled since the year began and are on a streak of five straight weekly gains, bolstered by an 18% storage deficit compared to the five-year average, enduring cold weather in parts of the US that’s keeping heating demand alive, and strong LNG exports as Europe looks to ditch Russian gas.

Metals:

Gold was a touch lower, weighed by a stronger dollar and higher Treasury yields.

Although these factors were broadly negative for gold, OANDA’s Halley said its price action remained constructive, likely due to lingering inflation and geopolitical concerns. He has put gold’s resistance at $2,000.

Bullion marked its highest finish in more than five weeks Monday, but closed below the key $2,000 level.

Aluminum rose 1.5% with prices supported by low inventories and supply disruptions, ANZ said.

Inventories fell to a 15-year low last week, although prices may still be weighed down by slowing industrial activity in China. “Supply disruption in the aluminum market is likely to continue, leaving room for further inventory withdrawal,” ANZ said.

There is also disruption in the alumina market, with Rio Tinto taking full control of the Queensland Alumina refinery.

   
 
 

TODAY’S TOP HEADLINES

Fed’s Bullard Casts Doubt on Need for Rate Increases Larger Than 50 Basis Points

One of the Federal Reserve’s earliest advocates for aggressive rate increases won’t rule out a truly supersize rise, though he doesn’t expect one is needed.

When it comes to the size of a rate increase, one greater than 50 basis points “is not my base case,” Federal Reserve Bank of St. Louis President James Bullard said during a virtual appearance Monday. But he noted the Fed has increased rates by more, and when it comes to a potential 75 basis point increase, “I wouldn’t rule it out.”

   
 
 

Reserve Bank of Australia Says Inflation Has Accelerated Rate-Rise Timetable

SYDNEY-The Reserve Bank of Australia says rising inflation and wage growth have brought forward the timing of its first interest-rate rise since 2010, apparently supporting the view of economists expecting a June hike.

Underlying inflation rose to 2.6% in the December quarter and minutes from the RBA’s April 5 board meeting, released on Tuesday, showed that members discussed how recent increases in fuel, food and other commodity prices would further raise the cost of living in coming quarters.

   
 
 

RBNZ Gov: More Rate Increases to Come to Constrain Inflation Expectations

WELLINGTON, New Zealand–The Reserve Bank of New Zealand has acted “reasonably aggressively” to tighten monetary policy and has more work to do, Gov. Adrian Orr said.

The current challenge for central banks in an environment of “very high” and “sustained” inflation pressures is to tighten policy without causing a recession, Mr. Orr said in an interview for an International Monetary Fund event.

   
 
 

China’s Covid-19 Restrictions Threaten Economic Recovery

HONG KONG-China’s severe Covid-19 restrictions, which for two years aided the country’s pandemic rebound by keeping the virus outside its borders, are now emerging as the largest threat to its growth.

Signs are growing that the economy has been cooling rapidly in recent weeks as the highly transmissible Omicron variant of the coronavirus spreads across dozens of Chinese cities and prompts the harshest lockdowns since the earliest days of the pandemic in 2020.

   
 
 

China PBOC Rolls out Measures to Support Pandemic-Hit Businesses

BEIJING–China’s central bank and foreign-exchange regulator jointly pledged more support for pandemic-hit businesses from financial institutions, as the world’s second-largest economy comes under intense downward pressure.

The People’s Bank of China said Monday that it would keep liquidity reasonably ample and guide banks to step up lending to the economy. It also called for banks to step up lending for businesses and individuals hit hard by the pandemic after Omicron Covid-19 outbreaks in China prompted authorities to lock down cities, confining residents at home and suspending business operations.

   
 
 

Beijing Wants European Companies to List in China. It Remains a Tough Sell.

Beijing is trying to revive a long dormant stock-exchange link with Europe, after years of unsuccessful attempts to lure multinational companies to list their shares in China.

The problem: No European company is comfortable with the idea.

   
 
 

Russia Begins New Military Offensive in Ukraine’s East, Ukrainian President Says

KYIV-Ukrainian President Volodymyr Zelensky said Monday that Russian forces have begun a fresh offensive in eastern Ukraine, signaling the latest phase of an invasion that has led to a new confrontation between Russia and the West.

“Russian troops have started the battle for Donbas, which they had been preparing for a long time,” Mr. Zelensky said in an address late Monday. “A large portion of the army has been concentrated to carry out this offensive.”

   
 
 

Spotify Rival Deezer Strikes SPAC Deal Valuing It at About $1.1 Billion

PARIS-French music streaming service Deezer is merging with a special-purpose acquisition company and aiming to go public at a EUR1.05 billion, or about $1.13 billion, valuation, the companies said.

The Paris-based competitor to Spotify Technology SA and other music streamers has 9.6 million subscribers and generated revenue of EUR400 million in 2021, Deezer said in a statement. The music streaming service offers listeners a catalog of more than 90 million songs, as well as podcasts, audio books and radio channels.

   
 
 

Israel’s Government Faces Collapse as Arab Party Threatens to Quit Over Jerusalem Clashes

(MORE TO FOLLOW) Dow Jones Newswires

April 19, 2022 00:38 ET (04:38 GMT)

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