MARKET WRAPS
Stocks:
European stocks traded mixed on Monday as the U.S. debt ceiling negotiations remained the main focus.
The debt ceiling issue creates "unnecessary volatility" in markets and shakes confidence among investors, Zaye Capital Markets said.
"Moving away from the drama of the debt ceiling, there is one important economic event on the docket that is going to gather the most attention among traditional traders, and that is the Federal Open Market Committee Minutes."
Powell's comments on Friday reinforced the belief that the Fed has finished hiking and the market is pricing in just a 3-basis point hike at the next Fed meeting in June, SEB said.
London shares edged higher as China-exposed stocks rose after President Biden said relations with China should improve soon.
"Despite broker downgrades to the likes of Kingfisher and Sainsbury providing a small drag, firms with Chinese exposure such as Standard Chartered and Burberry found some support," Interactive Investor said.
A "pleasing update" on the airline sector from budget airline Ryanair also gave a positive read across to British Airways owner IAG and aerospace and defence company Rolls-Royce Holdings, it added.
Economic Insight
The latest G-7 meeting in Japan is likely sending signals of a less aggressive stance toward China by the U.S. and its allies, Jefferies said.
The wording of several joint statements have been "moderate in tone," Jefferies said. "This implies U.S. allies in G7 favor a less aggressive approach to China, to avoid overly or accidentally provoking China and create a war."
This may lead President Biden to adopt a " less confrontational" approach to U.S.-China issues in order to "keep the western coalition together," Jefferies projected, suggesting this could mitigate geopolitical uncertainties for the equities market in China and Hong Kong.
U.S. Markets:
Stock futures hovered and bond yields fell as investors awaited updates on debt-ceiling negotiations. President Biden and House Speaker Kevin McCarthy are due to meet Monday in a last-ditch effort to reach a deal to avoid a default.
Stocks to Watch
Meta Platforms was down 0.6% after The Wall Street Journal reported the parent of Facebook was fined $1.3 billion by privacy regulators in the European Union for sending user information to the U.S.
Micron Technology fell 6% in premarket trading after Beijing banned companies involved in China's critical information systems from buying chips from the U.S. chip maker, saying they posed a major national-security risk.
There are no economic updates of note due, but there will be Fedspeak from James Bullard, Mary Daly, Raphael Bostic and Tom Barkin.
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Forex:
Data on Wednesday are expected to show a sharp fall in U.K. headline inflation in April due to lower energy prices but are unlikely to ease fears over underlying price pressures and that could support sterling, MUFG Bank said.
"If underlying inflation pressures keep alive expectations for the Bank of England to deliver multiple further [interest rate] hikes it will offer support for the pound in the week ahead."
The main "downside risk" for the pound would be if underlying and food price inflation ease alongside an expected slump in energy price inflation, it added.
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The dollar edged lower after Powell didn't push back strongly against market expectations for interest-rate cuts by the end of the year in remarks Friday, MUFG said.
Powell also refrained from giving strong indications for a rate rise at the June meeting, MUFG added.
"The U.S. rate market has since pared back expectations for a hike in June and is now only pricing in around 2 basis points of hikes."
Another dollar setback was a breakdown in U.S. debt ceiling talks although that proved short-lived as President Biden said a phone call with House Republican speaker Kevin McCarthy "went well," MUFG said.
Bonds:
Bearish momentum in bonds will be put to the test as yields are at the upper end of the ranges and inflation break-evens are running into resistance, Commerzbank said.
"The broad risk-on and subsequent shift in Fed and European Central Bank sentiment looks set to be put the test this week with markets now facing major hurdles."
The market is pricing the ECB's peak deposit rate above 3.75% again, while two-year German Schatz and 10-year Bund yields traded within striking distance of the 2.8% and 2.5% levels, respectively, before consolidating, Commerzbank said.
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The 10-year Italian BTP-German Bund yield spread could tighten toward the tight end of this year's anchor level of 180-188 basis points for the coming weeks, with more support than risk seen for the eurozone periphery bonds near term, Citi said.
Moody's Investors Service didn't update Italy's rating on Friday, thus the 'Baa3' rating and the negative outlook remain unchanged. "This follows Fitch's decision of no change the week before and brings this event risk to a benign end," Citi added.
Italian government bonds continue to see strong retail demand, while net bond supply pressure is set to diminish sharply in the second half of 2023, Citi said.
Energy:
Oil prices slipped for a third trading day as U.S. debt ceiling talks remained in focus.
President Biden is set to meet with House Speaker Kevin McCarthy later Monday, resuming negotiations to avoid a default which look set to go down to the wire. "They will likely strike a last-minute deal to avoid a catastrophic outcome," Swissquote Bank said.
Supply tightness continues to add upward pressure to prices. Wildfires in Canada continue to pose a threat to Alberta's oil and gas output.
Metals:
Base metals and gold prices were falling, pressured by weak demand in China and worries over the global economy.
"Industrial metals have come under significant pressure through the second quarter, with an average 10% decline quarter-to-date," Goldman Sachs said.
China's slower-than-expected recovery from Covid-19 and Western macroeconomic worries have helped pressure prices, GS added.
"Industrial metals are likely to remain pressured until price-related physical responses - either from China import buying or supply cuts - provide a floor to the price."
Thermal-Coal
Thermal-coal prices are likely to fall further, according to Morgan Stanley, who said the commodity's fortunes hinge on Chinese import demand.
"With the gas price weighing on the coal market and China's import demand potentially unable to maintain its recent strength, the question is how low the price could go?"
Seaborne thermal-coal prices have historically found support from the marginal cost of supply--which is currently just under $100 a metric ton--at times of slowing Chinese imports, it added.
That "means downside risk vs our 3Q23 Newcastle price target of $160/ton, " say the analysts, who add that their 4Q forecast of $180/ton also looks "a bit rich" right now.
Lithium
M&A is likely to continue in the lithium industry as producers seek access to certain markets, like the U.S. and Europe, and look to expand their capabilities, Macquarie said.
"Vertical integration could continue given the strong refining capacity growth prospects outside of China," it said, adding that "companies with downstream processing knowledge could be interesting to follow."
Although a recent rebound in lithium prices may weaken the appeal of bolt-on takeovers for some. "We expect acquirers to increasingly favor early-stage developers from a valuation perspective," Macquarie said.
DOW JONES NEWSPLUS
EMEA HEADLINES
Ryanair Swung to FY 2023 Net Profit as Revenue Beat Consensus
Ryanair Holdings said Monday that it swung to a net profit for fiscal 2023 with revenue beating consensus due to a 74% rise in traffic and higher ancillary revenue, and that it was optimistic it would deliver a modest on-year profit increase in fiscal 2024.
The low cost carrier said its guidance was nonetheless dependent on the avoidance of adverse events such as the war in Ukraine or further Boeing delivery delays.
UK House Prices Jump to Record High in May, Outperforming Historical Averages
The average house price in the U.K. rose 1.8% in May to reach a new record high, significantly above the historical average for the month of 1%, according to new data from Rightmove PLC released on Monday.
The average price of property coming to the market in May rose by around 6,647 pounds ($8,249) on month to GBP372,894, the online property portal said. On an annual basis, house price growth has eased back to 1.5% from 1.7% in April.
How Bud Light Blew It
Budweiser's famous Clydesdale horses still live in St. Louis, Mo., where its brewer, Anheuser-Busch, has been making beer since the 1850s. Visitors can tour the flagship brewery to check out a vintage delivery truck and pick up a Budweiser eagle T-shirt at the gift shop.
The company's marketing hub is about 950 miles away in a sleek building in Manhattan's Chelsea neighborhood. Employees can brainstorm in the break room while helping themselves to beer on tap, or take a drink up to the roof deck.
London's Allen & Overy to Merge With Shearman & Sterling to Create $3.4 Billion Global Law Firm
London-based Allen & Overy and New York firm Shearman & Sterling said Sunday they plan to merge, representing one of the largest tie-ups in recent history with a projected $3.4 billion in annual revenue.
The proposed merger, pending approval by partners, would create Allen Overy Shearman Sterling, or A&O Shearman, with 3,900 total lawyers and 800 partners in 49 offices in 29 countries. In terms of revenue, it would be the third-largest firm globally, the firms said. Kirkland & Ellis and Latham & Watkins are the largest firms in terms of revenue, with DLA Piper currently third, according to annual rankings by legal magazine The American Lawyer.
Greek Conservatives Trounce Opponents in Elections, Buoyed by Economic Upturn
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05-22-23 0624ET
