European Midday Briefing : Traders Await This Week's Eurozone, U.S. Inflation Data

MARKET WRAPS

Stocks:

European stocks edged higher on Monday in a muted session with U.K. and U.S. markets closed, while investors were looking ahead to eurozone inflation figures and U.S. PCE inflation data due later this week.

Following Germany's Ifo business sentiment data , the inflation data will also provide key input ahead of the European Central Bank's rate decision on June 6, where a 25 basis point rate cut is nearly a done deal.

Stocks to Watch

Aviva's improved position is reflected in its share price and its remaining upside is limited, HSBC said, as it cut its rating on the stock to hold from buy but lifted the target price to 525 pence from 505 pence.

The insurer's restructuring and improvement of its core business in the past several years has paid off and shares have outperformed peers and the FTSE 100.

"The group offers fairly attractive growth metrics, but it no longer offers double-digit total capital return yields in the near term, and its valuation is less compelling than before," HSBC said, noting that it sees better opportunities elsewhere.

A potential acquisition of EFG International by Julius Baer looks strategically questionable, RBC Capital Markets said, after reports that the Swiss private banks were in talks regarding a combination.

"While we calculate that a deal could work financially on paper, it appears more questionable from a strategic point of view."

Taking on the challenges of integration would raise questions of whether Julius Baer's current strategy of hiring former UBS and Credit Suisse employees is paying off, RBC said, adding that the timing is surprising given the overhang from the still pending review of a private debt matter by Swiss regulator Finma.

Cultural differences between the lenders in the private banking franchise could also be an issue.

Forex:

EUR/USD should stay below 1.09 as the ECB looks highly likely to cut interest rates next week while prospects of a rate cut from the Fed in September are starting to dim, Swissquote said.

"If this week's [eurozone] inflation data shows no surprise, the dovish divergence between the ECB and the Fed should prevent the EUR/USD from clearing the 1.09 offers."

The dollar is struggling to recover from recent losses as expectations of interest-rate cuts are scaled back in other countries as well as the U.S., UniCredit said.

"The dollar has had difficulty extending its recovery," it said, adding that the DXY dollar index has failed to sustainably breach 105.

"Investors are scaling back their expectations in terms of the intensity of easing expected to happen this year, not only by the Fed but also by the ECB and other major central banks, such as the Bank of England and the Swiss National Bank."

Bonds:

Government bond markets were off to a slow start given U.K. and U.S. holidays, Commerzbank said.

Danske Bank has raised its long-held 12-month forecast for the 10-year Bund yield as stubborn domestic inflation is likely to lead to fewer interest-rate cuts by the European Central Bank. Danske now sees the 10-year Bund yield at 2.50% in 12 months' time, versus 2.35% previously.

"It's not a massive change, but it does reflect that the path for the monetary policy rate in the eurozone now lies slightly higher."

Energy:

Oil prices edged higher, with all eyes on OPEC+'s upcoming decision on production cuts, with the cartel and its allies expected to fully roll over supply curbs at least into the third quarter of the year.

Memorial Day weekend in the U.S. heralds the start of the summer driving season, which will be closely watched for a glimpse into demand trends.

"While U.S. holiday trips are expected to hit a post-COVID high, improved fuel efficiency and EVs could see oil demand remain soft," ANZ Research said. Yet, "this may be offset by rising air travel."

Metals:

Gold futures nudged higher with focus shifted to the next U.S. PCE price index release, the Fed's preferred measure of inflation, set for release on Friday.

The data will be scrutinized for hints as to the Fed's pathway towards monetary easing, as high interest rates typically depress demand for the non-interest-bearing bullion.

Lithium

Lithium supplies are expected to rise and potentially push down prices of the battery metal, Morgan Stanley said.

Australia's spodumene shipments should start to improve in the coming months and African shipments should also recover following the end of the wet season, MS said. China is likely to record another year of strong production growth after easing environmental restrictions, and Chile's exports are touching all-time highs.

"While the lithium price has held up well year-to-date, a loosening [supply-demand] balance from here brings downside risks," MS said.

"The China lithium carbonate price is currently trading close to our base case of $13,500/ton but we see room for it to fall below this, with the price already starting to roll over recently."

EMEA HEADLINES

ECB's Lane Says Way Is Clear for Rate Cuts, With Inflation and Wage Rises on Downward Trend

The European Central Bank has signalled that it is likely to cut its key interest rate June 6, moving before the U.S. Federal Reserve. But policymakers have been much less clear on the likely path of interest rates during the remainder of 2024.

The eurozone's inflation rate and the pace of wage rises are slowing gradually, paving the way for possible rate cuts after a first reduction in borrowing costs next month, the ECB's chief economist said in an interview published Monday.

Alstom to Raise $1 Billion in Discounted Share Capital Increase

Alstom is to raise of about 1 billion euros ($1.08 billion) in share capital as its works to reduce its debt levels.

The French train maker said Monday that under rights issue, shareholders are entitled to received one preferential subscription right, with five rights enabling holders to subscribe for one new share, at a subscription price of EUR13 per new share.

Dozens Killed in Israeli Airstrike on Rafah

Palestinian health authorities said 35 civilians were killed on Sunday night in an Israeli strike on the southern Gazan city of Rafah, where Israel said it was targeting a Hamas compound.

Israel said that it killed two Hamas officials in the operation, and that it was investigating reports that civilians had died as a result of the strike and a fire that it ignited.

U.S. Opposes European Plan to Censure Iran Over Nuclear Work

BERLIN-The Biden administration is pressing European allies to back off plans to rebuke Iran for advances in its nuclear program as it seeks to keep tensions with Tehran from escalating before the autumn's U.S. presidential election, according to diplomats involved in discussions.

The U.S. is arguing against an effort by Britain and France to censure Iran at the International Atomic Energy Agency's member state board in early June, the diplomats said. The U.S. has pressed a number of other countries to abstain in a censure vote, saying that is what Washington will do, they said.

GLOBAL NEWS

AI Is Driving 'the Next Industrial Revolution.' Wall Street Is Cashing In.

Demand for artificial intelligence is still booming, a year after the phenomenon first took Wall Street by storm. Far beyond the tech sector, investors are finding winners in old-school pick-and-shovel stocks.

Deep-pocketed companies are investing heavily in AI technology, which has meant a windfall for chip makers such as Nvidia and a host of businesses-such as suppliers of power, labor and raw materials-to operate their products.

China's Industrial Profit Rose in April as Stimulus Measures Kicked In

China's industrial profit rose in April, reversing a decline from the previous month, as Beijing's stimulus measures started to kick in and foreign demand for Chinese products improved.

Profits at China's industrial companies rose 4.0% in April from a year earlier, compared with a 3.5% drop in March, according to data from the National Bureau of Statistics on Monday.

End of Japan's Battle Against Deflation in Sight, BOJ Deputy Gov. Says

Japan is likely close to completely overcoming its decades-long deflation, according to Bank of Japan Deputy Gov. Shinichi Uchida.

"While we still have a big challenge to anchor the inflation expectations to 2%, the end of our battle is in sight," Uchida said in a speech Monday. "The labor market structure appears to have changed after the pandemic, and wages are likely to continue increasing," he added.

Biden Needs More Empathy on the Economy, Democrats Say

WASHINGTON-President Biden is facing calls from anxious Democrats to express more empathy over inflation and prices, as voters continue to reject the president's positive rhetoric on the economy.

Voter pessimism on the economy and Biden's handling of it appears increasingly locked in just over five months from Election Day, with surveys showing many voters holding a rosier view of the prepandemic economy under former President Donald Trump, the presumptive Republican nominee. Democratic worries are mounting as the summer vacation season kicks off, and Biden is gearing up for two foreign trips in June-with less of his time devoted to domestic issues.

America Is Getting Ready for Space Warfare

In space warfare, the U.S. military is seeking the ultimate high ground.

The satellites central to national defense and global communications have long faced threats from the ground, such as signal jamming and missile attacks. Orbital menaces are the next frontier.

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

(END) Dow Jones Newswires

05-27-24 0610ET