MARKET WRAPS
Stocks:
European stocks advanced Friday but were on track to finish the
week with sharp losses, as investors have tried to assess
inflation, central banks' response to it and the outlook for the
global economy.
Prospects for repeated rate rises throughout the rest of the
year have caused investors to sell out of stocks and bonds and lent
to fears that rapid tightening could dampen growth.
"The central banks, who have been our friends for a very long
time, are telling us we should expect pain," said Hani Redha, a
portfolio manager at PineBridge Investments. "That inflation number
is the only thing that matters right now. Even if we see growth
slowing a lot, that will not be enough to cause the Fed to change
course."
Redha said it is possible that inflation could still climb
further in the coming months as energy prices remain elevated.
Economic Insight:
Credit Suisse said interest rate increases by most global
central banks are set to continue as inflation remains well above
target in major economies.
A further rise in energy prices is likely to contribute to
higher inflation in the coming quarters, while new supply
constrains stemming from China could create additional price
pressures in the goods sector.
"With high inflation set to persist, central banks look all but
certain to remain hawkish for the foreseeable future."
Credit Suisse expects the Federal Reserve to increase rates by
another 200 basis points this year to 3.50%-3.75%, and the European
Central Bank to raise rates by 150 basis points to 1%.
---
Inflation is expected to accelerate further in both the eurozone
and the U.S. in June due to higher prices for fuel, said
Commerzbank.
Inflation in the eurozone is likely to rise to 8.4% in June from
8.1% in May, while the trend in the U.S. looks similar as gasoline
prices and rents accelerate. Underlying core inflation should also
continue to rise over the medium term, at least in the eurozone,
Commerzbank added.
"In this environment, the market is likely to revise its
expectations for Fed and ECB key rates further upward. The rise in
bond yields is unlikely to be over yet."
U.S. Markets
Stock futures advanced, with major indexes likely to extend the
whipsaw moves that have injected fresh volatility into markets this
week. Thursday's rout pushed the S&P 500 down to levels not
seen since December 2020.
However, signs in the market remain that investors continue to
seek safe-haven assets such as the dollar and U.S. government
bonds.
Richard Saperstein, chief investment officer of Treasury
Partners in New York, said his firm lately has been buying
short-term Treasuries in an effort to temporarily park liquidity as
rates rise. "At some point in the cycle, we expect to draw this
liquidity to take advantage of fixed-income opportunities," he
added.
Forex:
The BOE's decision to raise interest rates by another 25 basis
points was low compared with other central banks but this doesn't
necessarily put sterling at a disadvantage, said Commerzbank.
A central bank that raises rates slowly need not be perceived as
weak if it is certain that it will continue to lift rates, said
Commerzbank.
"And because [the BOE] formulated its will to hike further
[Thursday] in a marginally more convincing manner, the pound was
able to rise correctly."
---
The dollar rebounded, as even recent "upsetting" U.S. data
couldn't cheer up the Fed doves in favor of looser monetary policy
as they know the central bank won't do much to support the economy
before inflation eases, said Swissquote Bank.
"And unfortunately, inflation won't soften until energy prices
ease significantly."
Bonds:
Credit Suisse has turned neutral on government bonds, closing
its long-standing underweight position, saying inflation dynamics
are expected to change, with inflation likely to trend lower for
the rest of the year.
Credit Suisse said another reason for the change is that most of
the monetary tightening by the Fed should be reflected in market
pricing by now, reducing the risk of further hawkish surprises.
---
The 10-year Italian BTP-German Bund yield spread, which has
narrowed on news of the European Central Bank's planned
anti-fragmentation measures, "will struggle to sustain any
tightening below 200 basis points, as that's the level at which the
ECB expressed little urgency," said Citi.
While the ECB is yet to provide details about its plans to
prevent bond market fragmentation, the backstop measures should
make any renewed spread widening more orderly, Citi said, sticking
to the year-end target of 275bps for the yield spread.
Citi said the selloff in German Bunds over the last month has
been the highest in at least 30 years and Thursday's staggering 30
basis point intra-day range for Bunds also broke the 30-year
record. It added that the market stress is even more evident in
duration than in fragmentation.
"This selloff far exceeds our expectations. We still believe it
is an overshoot, but a significant bullish reversal is perhaps only
likely later in the year." Citi's year-end target for the 10-year
Bund yield is 1.3%.
---
Pictet Wealth Management said whether the ECB will ultimately
disclose the criteria defining "fragmentation" and the yield spread
levels that justify interventions, remains to be seen.
"In other words, how it distinguishes 'orderly' spread movements
from 'disorderly' ones," Pictet said, suspecting the ECB will
remain vague.
It expects the ECB to announce its new anti-fragmentation tool
at the Governing Council's July 21 meeting.
Energy:
Oil futures inched higher, as supply issues from OPEC+ continue
to keep prices hovering around $120 a barrel.
"For oil traders specifically, outside of the supply and demand
issues that are well entrenched in the price, numerous questions
about OPEC production commitment need to be resolved," said SPI
Asset Management managing partner Stephen Innes.
With central banks now actively targeting energy-driven
inflation in their playbook, the market will need to track how
consumers react to the prospect of more rate hikes, Innes said.
Metals:
Gold futures edged up despite the strengthening dollar. Tina
Teng of CMC Markets said while risk-off sentiment prevails across
markets, safe-haven assets such as bullion will benefit.
Read Barrons.com: Gold Is Holding Up as Stocks, Bonds, and
Crypto Plunge
Base metals were mixed in early London trade as macroeconomic
worries continued to compound sentiment for industrial goods.
Three-month copper was down 0.2%, approaching its second lowest
level this year but aluminum edged up although it was down 4.2% for
the week.
"The Western focus looks to be more on the overall weak macro,"
said Marex's Asian Metals team. It added that "with prices falling,
smelters are starting to look to go into maintenance."
DOW JONES NEWSPLUS
EMEA HEADLINES
Glencore Raises Coal Guidance Amid Unprecedented Market
Conditions
Glencore PLC on Friday raised price and cost guidance for its
coal operations and said that the trading business is outperforming
expectations.
The commodity mining and trading giant said that unprecedented
dislocation in energy markets has resulted in record pricing
differentials between coal benchmarks and quality categories. As a
result of these larger differentials, Glencore has increased coal
portfolio mix guidance for the first half to $82-$86 a metric ton
relative to the Newcastle thermal coal pricing benchmark of $318 a
ton. This compares with previous 2022 guidance of $32.8 a ton,
based on a previous Newcastle price of $175 a ton.
Tesco 1Q Comparable Revenue Rose, But UK Sales Fell
Tesco PLC said Friday that like-for-like sales rose in the first
quarter of fiscal 2023, although U.K. revenue had a hit on an
on-year basis, and noted that its full-year guidance for its profit
and cash performance remains unchanged.
The British grocer said like-for-like sales excluding
value-added tax and fuel for the three months ended May 28
increased by 2% to 13.57 billion pounds ($16.76 billion). Sales in
the U.K. fell by 1.5% to GBP9.88 billion in the period, it
said.
Santander CEO to Step Down; Hector Grisi Named Successor
Banco Santander SA said Friday that its Chief Executive Officer
Jose Antonio Alvarez would be leaving his role as of Jan. 1, ending
a seven-year tenure.
The Spanish lender said the board has decided to appoint Hector
Blas Grisi Checa as his successor.
AB InBev Is Trying to Catch Up With Inflation in Some Countries,
CFO Says
Anheuser-Busch InBev SA/NV says some of its beverages are going
to get pricier and come in variable sizes as the maker of Corona
and Bud Light looks to catch up with inflation in the U.S. and
elsewhere.
Leuven, Belgium-based AB InBev found that despite regular
updates to its pricing, the company is lagging on cost increases in
certain markets, including the U.S. and Brazil, as inflation
accelerated since the beginning of the year.
Fintech Giant Klarna Slashes Fundraising Ambition
Klarna Bank AB is considering raising fresh funds at a
significantly lower valuation than it achieved a year ago,
according to people familiar with the situation, a sign of the
punishing environment for tech companies.
The Swedish payments firm is in talks with investors about a
deal that could value the company at around $15 billion, the people
said, less than it was seeking just last month. The Wall Street
Journal reported Klarna was in talks to raise up to $1 billion at a
low $30-billion-range valuation. One of the people said the current
talks could yield at least $500 million. There is no guarantee a
deal will take place.
Russia Slashes Gas Flows, Aiming Economic Weapon at Europe
Moscow's move to slash natural-gas exports to Europe has pitched
the continent's energy crisis into a dangerous new phase that
threatens to drain vital fuel supplies and kneecap the continent's
economy.
Russia's state-owned gas giant Gazprom PJSC throttled deliveries
via the Nord Stream pipeline to Germany this week, blaming missing
turbine parts that were stuck in Canada due to sanctions.
GLOBAL NEWS
Bank of Japan Maintains Ultra-Low Interest Rates, Bucking Global
Trend
TOKYO-The Bank of Japan maintained ultra-low interest rates on
Friday, confirming that it won't join the Federal Reserve and other
major global central banks in tightening monetary policy.
The Japanese central bank kept its target for short-term
interest rates at minus 0.1% and its target for the 10-year
Japanese government bond yield at around zero.
Mortgage Rates Hit 5.78%, Highest Level Since 2008
U.S. mortgage rates reached their highest level in more than 13
years, the latest sign of market tumult tied to the Federal
Reserve's campaign to cool inflation.
The average rate on a 30-year fixed-rate mortgage rose to 5.78%,
mortgage-finance giant Freddie Mac said Thursday, the highest level
since November 2008 and well above the 3.11% recorded near the end
of last year. Last week, Freddie Mac reported an average mortgage
rate of 5.23%.
U.S. Economic Growth Shows Signs of Slipping
The U.S. economy is starting to slow under the combined weight
of soaring inflation and climbing interest rates-including the
highest mortgage rates since 2008.
Recent reports show sharp declines in key sectors, raising the
prospects of a stalled economic recovery and possibly a recession.
Home construction across the U.S. fell sharply in May, the Commerce
Department said Thursday. Factories in the mid-Atlantic region
reduced activity for the first time in two years this month, the
Federal Reserve Bank of Philadelphia said. And Americans broadly
cut spending at retailers for the first time this year in May, the
Commerce Department said earlier this week.
China Launches Third Aircraft Carrier, Advancing Naval
Ambitions
HONG KONG-China has launched its third aircraft carrier, its
largest and most sophisticated to date, advancing its ambitions to
build a modern oceangoing navy that can project power around the
globe.
Christened the Fujian, after the coastal province that sits
closest to the island democracy of Taiwan, the new carrier entered
the waters at Shanghai's Jiangnan Shipyard during a launch ceremony
on Friday attended by Gen. Xu Qiliang, a member of China's
25-member Politburo and vice chairman of the Communist Party's
Central Military Commission, which commands the armed forces,
according to state media reports.
WTO Nations Agree to Ease Patent Rights to Boost Covid-19
Vaccine Supplies in Poorer Nations
GENEVA-The member countries of the World Trade Organization
agreed Friday on a narrow measure aimed at boosting the supplies of
Covid-19 vaccines in developing countries, wrapping up a bitter
fight over corporate patent rights governing critical medical
products during a pandemic.
The compromise measure on intellectual property rights will make
it easier for companies in developing nations such as South Africa
to manufacture and export a patented Covid-19 vaccine-under limited
circumstances-without a consent from the patent holder if they have
the approval of their own governments.
Write to paul.larkins@dowjones.com
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(END) Dow Jones Newswires
June 17, 2022 05:21 ET (09:21 GMT)
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