European Midday Briefing : Stocks Track Asian Losses as China Worries Mount

MARKET WRAPS

Stocks:

European stocks were weaker on Monday, with the major benchmarks tracking declines in Asian equities, as concerns over China's economic outlook weighed on sentiment.

"The current centre of investor concerns continues to be China, where hopes are still increasing for stimulative intervention by the authorities, although the lack of any announcements last week resulted in a wave of disappointment," Interactive Investor said.

The PBOC is expected to cut prime loan interest rates on Tuesday, while growth projections are being downgraded across the region.

Stocks to Watch

European and U.K. insurers and reinsurers are going steady, Berenberg said, after meeting with investor-relations teams of companies in the sector.

"Our speed dates provided assurance and comfort about the sustainability of European and UK (re)insurers' returns, and many insurers have a progressive dividend policy," Berenberg said.

It noted that reinsurers' hard market continues, which is supporting commercial lines insurance and helping maintain prices and margins for longer. Personal lines motor insurers are starting to see a recovery in pricing and solvency and capitalization are strong but there is still an adjustment being made on real estate valuations, it added.

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Volkswagen's management needs to reassure shareholders that its capital spending is worth it when the car maker holds its capital markets day meeting on Wednesday, Jefferies said.

Even with news of better earnings, Volkswagen's improvement would be unattractive unless the company convincingly addresses the return on investment for things like its Cariad electric-vehicle software business, whose delayed launch negatively affected some battery-electric vehicle models, Jefferies said.

"We like the focus on fixing underperforming volume brands but, with key targets known already, they may fall on deaf ears unless management addresses capital spending patterns that have not delivered visible group synergies," Jefferies said.

Forex:

EUR/USD should remain in a comparatively narrow range of 1.05 to 1.11, Metzler said.

The foreign-exchange market is rewarding the European Central Bank's determination, "but in our view also fails to recognize the more fragile fundamental situation in the eurozone compared to the U.S.," Metzler said, referring to the eurozone's technical recession.

Read RBC Advises Selling Euro Vs Sterling Ahead of BOE Decision

The dollar edged higher but Commerzbank said there is no sign of a major rally in the currency as the foreign-exchange market "simply does not buy the Federal Reserve's claims of a more hawkish approach."

The difference between the Fed and the ECB is that the Fed confirmed very explicitly through its decision to pause rate rises and in its dot-plot projections that it is nearing peak rates, Commerzbank said.

The ECB appears to be taking a more open-minded view of the future, it added.

Bonds:

Ten-year German Bund yields are expected to fall to the lower end of the 2%-2.5% trading range over the coming months, Morgan Stanley said, affirming its previous expectations and despite the recent rise in yields.

At levels of 2.35%-2.40%, Morgan Stanley said it would consider adding bullish trades through Bund options, noting the setback has been more pronounced than it had expected due to the spillover effect of the sharp selloff in gilts and due to the Fed's dot plot adjustment 50 basis points higher.

Morgan Stanley expects a rally in 10-year Bunds toward lower yields because the yield is about 25 basis point cheaper versus its long-term fair value model for June and due to deteriorating hard data.

Meantime, Barclays said there was limited news in last week's ECB policy meeting outcome that could open the door for 10-year Bund yields to rise to 2.75% or higher.

"For this outcome to materialise on domestic factors, ECB terminal rate pricing would need to push well above 4%, which is not our base case ," it said.

Absent this dynamic, Barclays expects recent ranges to hold for 10-year Bund yields for now.

Read ECB Seen in Risk of Overtigthening, Says Generali

Read ECB Interest-Rate Rise in September Seen as Likely

Energy:

Oil prices weakened as investors continued to worry about the Chinese economy.

Banks have been cutting their growth forecasts for China and recent economic data from the country has been weak, undermining hopes that its postpandemic recovery would boost demand for crude.

Metals:

Copper prices slipped and other base metals were mixed, as traders nervously awaited Tuesday's PBOC meeting.

Steel Outlook

Lackluster demand should remain a weight on world steel prices, Fitch unit BMI said.

It downgraded its 2023 average global steel-price forecast to $730/metric ton from $825/ton previously. The year-to-date average is $751/ton.

There may be some tailwinds before the end of the year from China's construction sector, but "we expect prices to remain depressed in other major markets, placing a lid on the global average," BMI said.

Read Direct Lithium Extraction Unlikely to Swamp Market

DOW JONES NEWSPLUS

EMEA HEADLINES

MTU Aero Engines Lifts 2023 View

MTU Aero Engines said Monday that it expects a slightly higher operating margin this year, having previously guided for flat profitability.

The German aircraft-engine manufacturer expects adjusted earnings before interest and taxes in excess of 800 million euros ($875.6 million) for 2023, representing a slight expansion from the 12.3% margin it booked for 2022. The higher guidance comes "in light of expectations regarding future business development," MTU said.

Michelin Buys Flex Composite Group from IDI for $766 Mln

Compagnie Generale Des Etablissements Michelin said Monday that it has acquired Flex Composite Group from French private-equity firm IDI for 700 million euros ($766.1 million), including debt.

The French auto supplier said that buying the Paris-based engineer of fabrics and films will increase its high-tech materials business revenue by around 20%. FCG reported EUR202 million in revenue for 2022, Michelin said. The company had an average organic growth rate of 11% with an earnings before interest, taxes, depreciation and amortization margin of between 25% and 30% over the 2015-22 period, Michelin said.

Rio Tinto Says Driverless Iron-Ore Train Derailed in Western Australia

Rio Tinto said an autonomous train carrying iron ore from its mining operations in remote northwest Australia to a port derailed late Saturday and that efforts to recover the derailed wagons are under way.

A spokesman for the miner, one of the world's top exporters of the steelmaking ingredient, declined to comment Monday on the impact to operations.

Israel's Netanyahu Touts Expanded Investment by Intel Amid Tech Backlash

Israeli Prime Minister Benjamin Netanyahu said Sunday chip maker Intel has agreed to invest billions in a semiconductor factory, in a deal he said signaled economic confidence in the country amid controversy over his policies.

Netanyahu put the figure at $25 billion. A person familiar with the plan said that figure includes $10 billion toward the plant announced in 2021. Work at the site, in the southern Israeli town of Kiryat Gat, is already under way, the person said.

Ukraine Hits Russian Ammunition Depot Deep in Occupied Territory

DNIPRO, Ukraine-Ukraine destroyed a major Russian ammunition depot in an occupied part of the country's south on Sunday, as it launches fresh advances along the southern and eastern parts of the front line in a bid to break through strong Russian defenses.

The Ukrainian Air Force said explosions at the facility in Rykove village-deep in Russian-held territory and just north of the Crimean Peninsula seized by Russia in 2014-were the result of a successful attack.

GLOBAL NEWS

Tech-Stock Boom Pits AI Against the Fed

Technology stocks are on a tear.

Investors can't agree on whether their recent run looks like the prelude to an eventual bust-like that of the dot-com era-or the start of a more durable rally.

Xi Jinping to Meet Blinken Monday as U.S., China Resume High-Level Engagement

BEIJING-Chinese leader Xi Jinping is set to meet U.S. Secretary of State Antony Blinken in Beijing as the Biden administration seeks to restore high-level engagement and prevent misunderstanding on a range of economic and social issues.

Xi and Blinken will meet on Monday afternoon, a State Department official said in a statement.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

06-19-23 0521ET