European Midday Briefing : Worries Over U.S. Economy Jolt Stocks

MARKET WRAPS

Stocks:

Shares in Europe were weaker on Tuesday, as concerns over the health of the U.S. economy outweighed hopes of Federal Reserve interest rate cuts. Oil majors led the declines, hit by sharply lower Brent crude prices following OPEC's plans to wind down supply cuts.

The focus is on U.S. job openings data at 1400 GMT as investors await "signs that the monetary policy tightening is having some effect," Mizuho said.

Stocks to Watch

Lloyds Banking Group's performance seems to be comfortably within expectations, KBW said, after the broker held a meeting with the lender's management.

KBW said bank is on track to meet its targets to 2026 and management is confident about net interest margin troughing this year.

"They noted encouraging signs around the mortgage market, which should feed better volumes, particularly in the second half, whilst management are confident on asset quality even in a higher-for-longer rate environment."

KBW remains positive on Lloyds and U.K. banks and said while it is concerned by the "borderline euphoria" surrounding the sector, it is happy to run with it for now.

Stellantis's U.S. sales improved significantly in May despite inventories remaining high, with the carmaker showing signs of reversing its negative market-share trend, UBS said.

With countrywide sales rising more than 20% on-year--a better performance than some competitors--it seems like the worst of the company's product-cycle pains are over, UBS said.

It noted that inventory levels remain high and selling cars, in some cases, requires lower wholesale prices.

"While it will still take several more months to fully turn over the inventory [and possibly also lower it in absolute terms], we are confident about the commercial success of the new product line-up," UBS said.

U.S. Markets:

Stock futures edged lower, while Treasury yields crept higher, after three sessions of declines.

Factory orders and JOLTS jobs openings are due later on Tuesday, along with earnings from Bath & Body Works, CrowdStrike and Hewlett Packard Enterprise.

Forex:

The European Central Bank is set to cut interest rates in June, while the window of opportunity is closing for the Federal Reserve as the election draws closer, Carmignac said.

"The prospects of a 2% differential in policy rates over the coming six months could be an issue for the ECB," Carmignac said, adding that a hold by the Fed until December is increasingly likely.

"Should the Fed hold rates high for longer, and the interest rates differential shift too much in favor of the USD [with the EUR depreciating], this could mean imported inflation down the road for the common market."

Bonds:

Investors should consider turning neutral on Treasurys rather than staying overweight, given the riskier political outlook in the second half of 2024, Bank of Singapore said.

The prospects of a Trump victory in November challenges the view that bond yields will fall this year as the Fed starts cutting interest rates, the bank said. Inflation, Treasury yields and the dollar could rise as fiscal, trade and immigration policies would shift sharply if Trump returns, the bank reckons.

Also, while equities may benefit from the prospect of lower taxes and regulation during a second Trump term, the risk of higher yields could hurt stocks, it added.

Energy:

Oil prices hit a four-month low, signaling OPEC+'s policy move disappointed markets.

According to analysts, the gradual return of 2.2 million barrels a day of oil supply from October 2024 to September 2025 risks leaving the market in surplus next year.

"OPEC+ made it clear that the return of these barrels to the market can be paused if market conditions do not allow for this additional supply," ING said.

"However, one must question how long some members will be willing to hold a substantial amount of supply from the market and give market share away to non-OPEC+ producers."

Metals:

Gold futures slipped but continued to trade within a tight range.

Non-interest yielding bullion found some support from stronger expectations of the Federal Reserve cutting interest rates later this year, as Monday's U.S. data revealed a slowdown in manufacturing and economic activity, broker XS.com said.

Continued geopolitical risks also support short-term expectations, so any declines are likely to remain limited with price drops seen as buying opportunities.

Traders will likely wait for key U.S. data releases this week, including Friday's non-farm payrolls report, along with the Bank of Canada's rate drecision on Wednesday and the European Central Bank's Thursday meeting to provide momentum and determine gold's short-term direction, XS.com said.

EMEA HEADLINES

Maersk Lifts Guidance Again on Surging Freight Rates

A.P. Møller-Mærsk raised its full-year guidance for the second time in barely over a month, as disruptions in the Red Sea and strong shipping demand continue to buoy global freight rates.

The Denmark-based carrier said Monday it expected freight rates to keep marching higher through the rest of the year due to strong container market demand and ongoing disruption in the Red Sea, where attacks by Yemen's Houthis have forced ship operators to divert vessels thousands of miles.

British American Tobacco Backs 2024 Guidance

British American Tobacco backed its outlook for the year as it reported performance for the first half of the year in line with its expectations.

The FTSE 100 tobacco group on Tuesday maintained its 2024 guidance of low-single-digit organic revenue growth. It also expects low-single-digit growth in adjusted profit from operation, with a 2% hit from transactional foreign exchange impact.

KfW Divests 110 Million Deutsche Telekom Shares

German state-owned KfW sold 110 million of its shares in Deutsche Telekom for 2.49 billion euros ($2.72 billion) to free up funds for investment in state-owned railway operator Deutsche Bahn.

The investment and development bank said late Monday that the stake it holds together with the German government stood at 27.8% following the divestment, and they remain the largest shareholders of the telecommunications company.

U.K. Retail Sales Rebound Weakly in May, Report Says

Retail sales ticked higher in the U.K. last month, recovering some previous decline ahead of general elections slated for July, according to a report.

Total sales were 0.7% higher than in May last year, according to the BRC-KPMG report published Tuesday. Food sales boosted the headline improvement, while nonfood sales were lower on year, with rainy weather continuing to dampen spending.

GLOBAL NEWS

India Shares Fall as Modi-Led Alliance Faces Narrower Victory Margin

India's key stock market indexes are sharply lower as early results from the country's national elections indicate that the ruling coalition wouldn't win a decisive victory as predicted by exit polls.

The headline Sensex index dropped 4.3% to 73177.13 Tuesday while the Nifty 50, which represents the weighted average of 50 of the country's largest companies listed on the National Stock Exchange, fell 5.8%.

Big Tech Companies Unplug Stock Market From Reality

Big Tech stocks aren't just dominating the market. They're also hiding just how scared investors are that the Federal Reserve will keep rates higher for longer.

The average stock in the S&P 500 is hurt more by rising yields-and helped more by falling yields-than any time this century. Yet the S&P itself is far less affected by the outlook for interest rates, because the Big Tech stocks that make up so much of the standard, value-weighted index are insulated from the Fed by their enormous cash piles.

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

(END) Dow Jones Newswires

06-04-24 0530ET