EMEA Morning Briefing: Stocks Seen Higher But U.S. Banking Sector Worries Linger

MARKET WRAPS

Watch For:

E.U. ECB Vice-President Luis de Guindos delivers lecture at the Academia Europea Leadership; U.K. GDP, trade, index of production, business investment, Bank of England Market Participants Survey results; France CPI; Germany balance of payments; trading updates from Norwegian Air Shuttle, Sberbank, AngloGold Ashanti, MTN, Allianz, Societe Generale, Compagnie Financiere Richemont

Opening Call:

Shares are set to open higher in Europe on Friday, as investors digest earnings and U.S. data and fresh concerns over the U.S. banking sector emerge. In Asia, stock benchmarks were broadly lower; Treasury yields and the dollar were little changed; while oil and gold declined.

Equities:

European stocks could edge up as investors continue to parse earnings and grapple with another selloff in shares of U.S. regional banks and threat of a U.S. debt default.

Weekly jobless claims ticked higher Thursday, while a Labor Department measure of producer prices notched its slowest rate of growth since January 2021, providing new evidence that inflation is slowing and the Federal Reserve may pause interest-rate hikes next month.

Thursday’s indicators, which arrived a day after federal data showed consumer prices eased in April for the 10th straight month, would seem to provide a springboard for stocks to take off and sustain gains.

“But there’s no rest for the weary until that debt ceiling gets resolved, ” said Karyn Cavanaugh, chief investment officer at Carolinas Wealth Management.

Amid ongoing debt talks in Washington many investors have kept money on the sidelines of stock markets, instead earning income from Treasurys and money-market funds.

Minneapolis Fed President Neel Kashkari on Thursday reiterated that he would support more interest-rate hikes from the Federal Reserve until inflation returns to the central bank’s 2% target.

Fed Chair Jerome Powell hinted last week that the Fed would pause its campaign of interest-rate hikes after delivering its latest 25 basis point rate raise last week.

On Thursday, regional banks continued showing signs of strain. Shares of PacWest Bancorp fell 23%, dragging down other regional banks, after the Los Angeles-based lender disclosed another round of deposit flight.

“Some fear still surrounds the banking system,” said Thorne Perkin, president of multifamily office Papamarkou Wellner Perkin.

Forex:

The dollar was barely changed in Asia but could strengthen amid mild risk-off sentiment driven by worries over the U.S. economy.

Data released Thursday showed the long-awaited economic slowdown may finally be at hand, Matthew Weller, global head of research at forex.com and City Index, said.

Any weakness in the U.S. economy will probably spread to other regions, stoking demand for USD, the world’s reserve currency, Weller added.

“The US is still a place where you can get a little more for your money, ” Spartan Capital’s Peter Cardillo said.

Cardillo added that “it’s amazing that with all the fears in the market about the possibility of a US default that the dollar is stronger,” but attributes that to a lack of belief among investors and traders that the U.S. will stop paying its bills.

To be sure, Cardillo thinks a default would crater the dollar and drive money into hard assets, but you’re not seeing that in the markets, he added.

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Sterling could soon reverse its recent gains against the dollar if potential risk aversion drives investors towards safe havens, Titan Asset Management said.

Expectations for further Bank of England interest rate rises has recently allowed GBP/USD to rise above 1.26 as U.K.-U.S. yield differentials narrow, it said.

“However, it may not be all plain sailing for sterling in the coming months as several key risks remain on the table including the U.S. debt ceiling standoff and the deteriorating banking crisis in the U.S.”

The materialization of either one of these key risks would dent risk sentiment, boosting the dollar, it added.

Bonds:

Treasury yields were little changed early Friday, as traders weighed debt-ceiling concerns against signs of moderating inflation.

“The data remains consistent with end-of-cycle dynamics in the US: monetary policy is likely to be tight enough and this is increasingly reflected in the labor market, bank lending and inflation,” Deutsche Bank strategists said.

“So far, the U.S. economy has not displayed the sharper moves typical of a recession. But the question is when, rather than if,” they said.

The strategists said they “are positioned for the cycle to end sooner rather than later,” though “the timing may be delayed if the debt ceiling is resolved without a major impact on U.S. fiscal policy.”

As of Thursday, fed funds futures traders were mostly pricing in a total of three quarter-of-a-percentage-point rate cuts, plus a decent chance of a fourth cut, by year-end.

They priced in a 41.6% chance of the first cut occurring in July after accounting for a pause by the Fed in June – which would bring the fed funds rate down to a range of 4.75%-5% versus the current level of 5%-5.25%.

Borrowing costs are at their highest level in 16 years after the Fed hiked its policy rate for a 10th straight time on May 3.

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A reduction in market volatility could favor outperformance of green eurozone government bonds (EGB) relative to conventional government bonds, especially after the recent decline in the average greenium, UniCredit Research said.

Since the beginning of the year, the weighted average EGB greenium has been trading between 2 basis points and 3 basis points, slightly lower than last year’s average of 3.5 bps, it said.

“We have observed that EGB greeniums usually tighten when overall market volatility increases or when a bond is expected to be reopened,” it said.

The green EGB market is close to reaching a total volume of EUR200 billion and a further increase is unlikely to weigh on green premiums, it added.

Energy:

Oil futures were slightly lower in Asia, but ANZ Research analysts said some bullish trends were emerging.

U.S. Energy Secretary Jennifer Granholm said that the government aims to buy crude oil to replenish the Strategic Petroleum Reserve after a Congressionally mandated drawdown ends in June, the analysts noted.

Also, OPEC in its monthly report expects global oil demand for 2023 to rise by 2.33 million barrels a day, the analysts added.

There are “multiple notable influences” on the oil market right now, including, the U.S. debt ceiling drama, simmering regional bank worries, and inflation expectations driving a still-aggressive Federal Reserve policy outlook, which will ultimately result in a potentially deep economic recession, which would crush demand, analysts at Sevens Report Research said.

“Those factors will continue to influence oil prices and refined products in the near term as debt ceiling woes, bank fears, and the threat of recession will all put pressure on the energy complex, while improvement in any [or] all will provide the market with a tailwind and relief rally,” they said.

They “maintain the view that WTI prices are in a broad trading range with support near $67 and resistance near $83, leaving the $75 area as a key, magnetic pivot point that prices are likely to oscillate around.”

Metals:

Gold fell in Asia amid falling Treasury yields which boost the appeal of the non-interest-bearing precious metal.

But, there might be too much optimism in the gold market, given that the peak in U.S. interest rates is in sight, which could make it difficult for the precious metal to strengthen, Oanda said.

Gold bulls likely need a fresh catalyst that triggers market stress, it added.

The slowdown in producer-price inflation spurred a drop in bond yields as the stock market declined and “you might expect gold prices to be firm, if not rising,” BullionVault said.

Instead, gold’s drop “suggests that speculators are maybe losing enthusiasm for another attempt at breaking new all-time highs right now.”

Still, in the long term, “that’s not bad thing for the precious metal,” it said.

“Gold looks to be confirming and consolidating the latest rise in its underlying price,” which continues to climb.

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Copper prices were slightly higher in early Asian trade, showing signs of improvement from the commodity’s broad downturn in recent months.

The metal has been retreating, as investors grow increasingly worried over a global recession and re-evaluate China’s post-reopening rebound momentum.

But after the months-long price correction, a more attractive valuation could trigger renewed buying interest for the metal, Galaxy Futures analysts predicted.

They advise investors to look out for potential rebound opportunities in the near term.

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Chinese iron-ore prices declined early Friday.

The steelmaking ore continues to extend a broad downturn from a recent price peak in March, when reopening optimism drove a rally.

But the momentum is dissipating as investors grow worried about China’s still-muted industrial and real-estate construction activities, which are the main source of steel and iron demand in the world’s second-largest economy, Galaxy Futures analysts said.

They note China’s macroeconomic rebound this year is likely to remain tilted toward consumer sectors, and industries more related to iron-ore demand, such as infrastructure and property building, may not benefit as much.

TODAY’S TOP HEADLINES

White House Debt-Ceiling Meeting Postponed

WASHINGTON-A highly anticipated meeting scheduled for Friday between President Biden and congressional leaders to chart a path forward on lifting the debt ceiling was postponed until next week, officials said.

The delay will give White House and congressional staff more time to make progress in their closed-door spending talks, the officials said, adding that Senate Minority Leader Mitch McConnell (R., Ky.) was unable to attend the Friday meeting because of a scheduling conflict.