European Midday Briefing : Stocks Steady, Helped by Global Gains; French Unease Persists

MARKET WRAPS

Stocks:

European stocks opened mostly higher on Tuesday, tracking gains in the U.S. and Asia.

Investors await a string of speeches by Federal Reserve officials later in the day, looking for clues on the U.S. interest-rate outlook, with just under two 25 basis-point rate cuts priced in for 2024, IG said.

French stocks were steady as polls ahead of legislative elections suggest Emmanuel Macron's parliamentary grouping is squeezed between the left coalition New Popular Front and Marine Le Pen's National Rally, Barclays said.

While the election result remains uncertain, the most likely outcome is a hung parliament leading to gridlock or a "cohabitation" between Macron and a far-right legislature, Barclays added.

"We think the latter would be more negative for markets and, at least over time, for European Union institutions and the prospect of further fiscal and political integration of European Union member states."

Investors in the U.K. were looking ahead to key inflation data on Wednesday and a Bank of England decision on Thursday.

Stocks to Watch

AXA's risk-to-reward ratio looks compelling, Berenberg said, following the weakness in the insurer's shares after Emmanuel Macron called a surprise snap vote.

"We think that the fundamental impact on AXA of the change in government bond spreads is minimal and we believe that this offers investors a significant opportunity if or when political uncertainty normalises," Berenberg said.

Stellantis hasn't put to bed worries about high inventory levels at U.S. dealerships, Deutsche Bank said, following the carmaker's investor day last week.

"Lacking a commitment to meaningfully address the key short-term issue of U.S. inventories, we do not believe that this was the clearing event the stock needs to turn around," Deutsche Bank said.

U.K. banks will be increasingly looked at by politicians to make a greater contribution to the economic reboot given anemic GDP growth forecasts, KBW said, ahead of the country's general election on July 4.

There seems to be little to suggest any appetite for a radical rethink as politicians have shown they are comfortable with the status quo, KBW said.

Volvo should post fewer truck orders on year and sequentially, but it has already lowered production levels in Europe to adjust to the industry slowdown, Deutsche Bank said. It expects a solid margin of14.2% for the trucks business.

"Overall, Volvo was the first manufacturer to adjust its capacity and we believe that the company should continue to master the expected downturn this year very well."

Forex:

The euro has steadied above $1.0700 against the dollar, helped by comments from Marine Le Pen, leader of France's far-right National Rally, who said she would be willing to work with Emmanuel Macron if her party wins the upcoming elections.

However, investors remain nervous and the single currency could still weaken ahead of France's snap elections, MUFG said.

UniCredit Research said relative stability in the 10-year French OAT-German Bund yield spread and on European stocks markets are helping the euro, but its near-term outlook remains negative ahead of French elections.

"The EUR-USD outlook remains bearish in the near term, at least until the second round of the French parliamentary elections on 7 July, with data releases and rate-cut expectations playing a minor role in the meantime."

Any gains could also be tempered by an expected improvement in U.S. retail sales data at 1230 GMT, UniCredit said.

The dollar could benefit from upbeat U.S. retail sales data, while the euro continues to lag ahead of snap elections in France, ING said.

Focus for the dollar remains on economics and the outlook for U.S. interest rates, while politics drive the euro, ING said.

"This dichotomy between macro [in the U.S.] and politics [in the EU] will remain a key theme for FX into the summer."

ING expects the DXY dollar index to stay above 105 this week, barring weak retail sales figures.

Bonds:

Jefferies said it isn't ready to step in to buy French government bonds. It has been short on France for most of the year--having expected bond prices to fall and yields to rise.

"There is a possibility of another leg wider in French spreads post elections and that would, in our view, provide a buying opportunity."

ING said OAT spreads remain high and won't see an abatement of uncertainty until after the elections, but a contagion risk to other bond market segments are likely to be contained. "We believe spillovers to other rates markets will remain limited."

ING said the high degree of uncertainty is here to stay until the final election round on July 7 and thus French spreads can still drift higher.

Given far-right politician Marine Le Pen's strategy seeming to be one of moderation the contagion to other rates markets may remain limited, ING said.

TD Securities said the 10-year French OAT-German Bund yield spread should hover in a 70-80 basis point range for now, as markets remain cautious about the outcome of French elections.

"For now, we will be driven by headline risks/quarter-end, at least until the first round of voting on June 30."

Energy:

Oil prices were broadly stable after gaining $2 a barrel in the previous trading session on upbeat demand expectations.

"This summer deficit is starting to show more vividly in our tracking of global stocks and our OECD commercial stocks nowcast, which has turned to draws after over two months of builds," Goldman Sachs said.

It now forecasts Brent to rise modestly in the next few months, reaching a peak of $86 a barrel in August.

Metals:

Base metals were lower, with weaker home price figures from China, despite efforts to bolster the country's major property sector, and the PBOC's decision to leave the key policy rate unchanged continuing to pressure prices, Sucden Financial said.

Gold futures were broadly flat and have been largely rangebound since Federal Reserve comments last week poured cold water on hopes for a U.S. interest rate cut sooner rather than later.

EMEA HEADLINES

Whitbread Sales Rise on Strong Performance in Core Markets

Whitbread first-quarter sales rose slightly on an improved U.K. performance and continued progress in Germany, and said it remained confident in its full-year outlook.

At 0705 GMT, shares were up 68 pence, or 2.3%, at 2,971 pence. Year-to-date, shares have fallen 18%.

Spain's Frozen Bakery Europastry Seeks IPO

Spanish family-owned business Europastry intends to proceed with an initial public offering to list its shares on the country's stock exchange.

The group-specialized in frozen bakery products-on Tuesday said that it expects to raise around 225 million euros ($241.5 million) by issuing new shares through a primary offering to qualified investors. The group will also launch a secondary offering of existing shares owned by the Galles family, who will retain a controlling stake post-IPO.

GLOBAL NEWS

Central Banks Expect to Snap Up More Gold This Year Amid Dollar Pessimism

Central banks around the world expect global reserves of gold to increase over the next year, while pessimism toward the U.S. dollar has grown, according to a new report.

More than four in five respondents expect reserve managers to increase global holdings of bullion, the highest proportion on record since the annual survey began, the World Gold Council's report said. Nearly 30% of the banks plan to add to their own reserves within the next year, including 13% of banks in advanced economies.

Rent Hikes Loom, Posing Threat to Inflation Fight

Apartment dwellers got a break recently when rent growth slowed and fell in parts of the country following years of steep increases. That relief appears to be ending.

Rents in several Northeast and Midwest cities, such as Kansas City, Mo., and Washington, D.C., are rising this year.

Reserve Bank of Australia Holds Rates Steady

SYDNEY-The Reserve Bank of Australia continued to warn about ongoing inflation risks at its policy meeting on Tuesday, leaving open the potential for a further interest-rate increase if price pressures remain stubbornly high over coming months.

As expected, the board of the RBA chose to keep the official cash rate steady at 4.35%, where it has sat since November.

Corporate Tax Rate Spurs Political Fight With More Than $1 Trillion at Stake

WASHINGTON-The 21% U.S. corporate tax rate is the biggest single variable in the sprawling 2025 tax debate, and the two parties are trying to turn that dial in opposite directions with major consequences for companies' profits and federal revenue.

The rate could climb as high as 28% if Democrats sweep November's elections and move as low as 15% if Republicans gain full power.

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

(END) Dow Jones Newswires

06-18-24 0520ET