EMEA morning briefing: hopes for easing of Covid restrictions in Asia to boost European gains
Flash estimate of EU GDP; EU, France UK Unemployment; Italy CPI, EU Foreign Trade; speech by Christine Lagarde; updates from Clariant, ENGIE, Daimler Truck, Societe Generale, Orange, BNP Paribas, Caixabank, AT&S, Vodafone, Land Securities, Imperial Brands, DCC, Euronext, Harmony Gold, Signify, Fresnillo
Europe is expected to follow Asian stocks higher in hopes of easing Covid restrictions. Elsewhere, the dollar, Treasury yields and gold all gained as oil plunged.
European stocks are set to post strong opening gains on Tuesday after Asian markets were boosted by hopes of easing Covid restrictions in the region.
On Wall Street, the Dow Jones ended marginally positive on Monday, while the S&P 500 saw its gains evaporate entirely in the last hour of trading, extending a stock market selloff following a batch of weak data from China. and the United States which fueled more concerns about the state of the global economy.
Capital Economics said it was possible for central banks to reduce inflation without causing a recession, provided the rise in supply-related prices subsides. “However, the difficulty of fine-tuning policy suggests they may inadvertently create a recession.”
The chances of a recession are significantly higher if there is a fundamental change in banks’ expectations about inflation rates, CE said. “If that’s what happens, central banks will likely have to engineer a recession in order to compress activity enough to lower inflation expectations.”
Simplify Asset Management said the Fed could drag the economy into a recession. “The Fed is repeating the mistakes of last year”, warning that the central bank is “very focused on inflation targeting and dismissing fears that the economy is slowing rapidly, and arguing that it should continue to rise even confronted with this”.
Simplify concerns about potential damage to the economy if “this constant dynamic of stop-start behavior” ultimately leads Americans to refrain from spending on education or housing. “You create conditions where people withdraw from this [spending] and they may not come back.”
The dollar was somewhat firmer against a basket of currencies in Asia despite some momentum in regional equities on hopes of economic stimulus from China.
Chinese policymakers are likely to use Monday’s weak economic data as a “watershed moment” to provide a “flood-like” stimulus once the economy reopens, said Stephen Innes of SPI Asset Management.
Goldman Sachs said the dollar generally performed well before recessions, including during the “tech sinking” of 1999-2001, but not in all cases.
“Further declines in equities, rising global recession risks and high geopolitical uncertainty should keep the dollar supported for now, even if the longer-term outlook is negative.”
Goldman Sachs said the increased currency volatility this year and the rising dollar reflect both divergences between countries and the many cross-asset developments impacting currency markets – significantly higher bond yields, volatile commodity markets and a sharp decline in equities.
The bank believes the dollar is heavily overvalued “but its direction will ultimately depend on the outlook for these macro cross-currents.”
Treasury yields rose again, after falling on Monday as worries about the global slowdown took hold.
Some analysts have argued that yields may have peaked, at least for now, after a sharp selloff in 2022 that took the 10-year rate to a 3.5-year high above 3.2% in intraday trading early last week.
Others see the recent setback as a mere respite. Although inflation has technically peaked, it continues to hover near its highest level in more than 40 years – and the Federal Reserve appears determined to act aggressively to contain rate pressures, said the analysts.
Earliest “10-year yields peaked in the cycle, relative to Fed Funds, was four months in 2000 [January peak at 6.8%, May Fed Funds peak at 6.5%]“, said Kit Juckes, strategist at Societe Generale.
“The past is only moderately helpful when trying to figure out what the future holds, but I’d be surprised if we’ve seen the peak in US yields; more likely stocks will find a base and as buyers downsides will emerge, and we will have another sale of Treasuries.”
Oil prices fell at the start of Asian trading but could rise again on hopes of Chinese demand after Shanghai announced its gradual reopening with the aim of returning to normal by June 1.
Crude futures erased early losses on Monday, ending sharply higher as tight supplies allowed gasoline to continue pushing into record territory. US prices hit their highest level since March 23, ending up 3.4%.
Gains on Wall Street boosted risk appetite in energy commodities, while moves by Sweden and Finland to join NATO added a different risk premium to the oil prices due to concerns about threats from Russia if NATO militarily reinforces the Nordic countries.
Crude markets also continued to ride a bullish wave for refined fuels in the United States, as low inventories and low refining capacity – just as a summer driving season is about to begin – have sparked fears of shortages.
Gold extended its advance after prices briefly drifted below the $1,800 threshold on Monday.
While the Fed appears on track to deliver two 50 basis point rate hikes in its next two meetings, if this scenario is not improved, gold could show further signs of stabilization, OANDA said. .
Bullion is likely to find interim resistance at $1,835, with $1,750 being the key support if the $1,800 level breaks, OANDA added.
Base metals made solid gains on China’s moves to support the real estate sector, while iron ore futures rose on hopes of an aggressive increase in infrastructure spending a times the Covid-19 lockdowns eased.
The ABC said China’s daily crude steel output rose sharply in April and was only 5.2% below the April 2021 peak, suggesting infrastructure spending had a positive impact on demand in the steel sector.
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Turkish President Recep Tayyip Erdogan cast uncertainty over the Nordic countries’ bid to join the organization on Friday when he said Turkey did not welcome their request, accusing the two countries of harboring what it described as Kurdish militants belonging to a group targeting Turkey. All 30 NATO members must approve the entry of any new member.
Yellen urges Polish PM to strike international tax deal
WARSAW Treasury Secretary Janet Yellen pushed for Poland to push ahead with the European Union’s implementation of a comprehensive minimum tax during a series of meetings on Monday, saying the two sides had discussed the possibility of linking the minimum tax to an overhaul of the international tax authority.
Ms Yellen met Polish Prime Minister Mateusz Morawiecki and Finance Minister Magdalena Rzeczkowska on Monday as she tried to unlock Polish support to approve the 15% minimum tax on large multinational corporations. Poland is the only EU27 country to have approved the implementation of the agreement, which more than 130 countries created during talks last year.
Macron names first female prime minister in three decades
PARIS-French President Emmanuel Macron has appointed Elisabeth Borne as Prime Minister, elevating the first woman in decades to lead a French government and lead her party in the upcoming legislative elections.
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CVC Capital decides not to buy Brambles due to market volatility
SYDNEY-Brambles Ltd. said CVC Capital Partners decided not to make a formal takeover bid for the pallet supplier due to what the private equity firm called external market volatility.
Brambles said Tuesday that CVC would not request detailed due diligence and that talks between the parties were over.
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Major events expected for Tuesday
05:30/FRA: ILO first quarter unemployment and labor market indicators
06:00/ROM: 1Q Evolution of GDP (estimated data)
(MORE TO BE FOLLOWED) Dow Jones Newswires
May 17, 2022 12:33 a.m. ET (04:33 GMT)
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