EMEA Morning Briefing : Shares to Head Higher as Investors Weigh Upbeat U.S. Data

MARKET WRAPS

Watch For:

EU money supply in euro area; Germany consumer climate survey; France consumer confidence survey, housing starts; Italy PPI, provisional CPI, industrial turnover; trading updates from B&M European Value Retail, Deutsche Boerse, Porsche, Atos

Opening Call:

Shares may open in positive territory in Europe on Wednesday, following data suggesting the U.S. economy remains resilient despite higher interest rates. In Asia, stock benchmarks were mixed; Treasury yields were also mixed; the dollar slightly strengthened; while oil and gold rose

Equities:

European stocks could head for higher ground on Wednesday, tracking overnight gains on Wall Street after fresh data signaled a resilient U.S. economy, despite the Federal Reserve's sharply higher interest rates.

The mostly positive economic data included readings on durable-goods orders, home sales, and consumer confidence.

"The data today continue to show the Fed's job is very tough," Jefferies said. "Consumer attitudes remain resilient, and their spending plans have only come in modestly."

"It's hard to envision a recession if you look at the economic data readings we've had over the past two months," said B Riley Wealth Management. "Now that we're closer to the end of the rate-hike cycle, we're in more of a place where investors view good economic data as a positive for earnings and stocks."

Together, strong stock market performance and a resilient economy are perplexing some investors and analysts who had expected the Fed's fastest interest rate increases in over four decades to cause more of a slowdown by now.

Market skeptics continue to point to the fact that much of this year's index gains have been driven by a handful of the biggest technology companies.

"If the few stocks driving the rally fail to deliver on elevated earnings expectations, the broad market will likely be exposed to a pullback," said Principal Asset Management.

Forex:

The dollar edged higher as fresh U.S. data put away recession fears for now, while boosting the prospect of higher interest rates.

The yen gained against the dollar and other G-10 and Asian currencies on prospects of more verbal intervention by Japanese authorities after Finance Minister Shunichi Suzuki's comments that the current movement of the yen-dollar exchange rate is "one-sided and rapid." USD/JPY is approaching FX intervention territory, said NAB.

Meanwhile, a senior International Monetary Fund official said the European Central Bank might need to increase interest rates to 4% or higher and hold them there through 2025 to bring inflation under control.

The IMF's latest economic forecasts for the eurozone assume a 3.75% terminal ECB rate, but it's "likely that the ECB needs to do more than that," Alfred Kammer, director of the IMF's Europe department, said.

"We are seeing that inflation is getting more persistent," Kammer said. Underlying inflation in the eurozone has hovered around 5% or higher since October.

Bonds:

Treasury yields were mixed, following previous gains on the back of data showing a strong U.S. economy.

Better-than-expected manufacturing, housing and consumer confidence data provide a tailwind for Treasury yields, ahead of Fed Chair Jerome Powell's speech at the European Central Bank's meeting of global central bankers in Portugal later in the day.

The data fueled hopes that recession may be avoided, while beefing up the prospect of higher interest rates for longer.

"We expect sovereign yields in the U.S. and Germany to rise this week amid the Sintra forum [or the ECB's forum on central banking in Sintra, Portugal], where central bankers will likely reinforce their resolution to fight inflation," said Saxo.

"Our expectation is for the front part of the yield curves to resume its rise towards 5% in the U.S. and 4% in Germany while long-term yields remain underpinned by weak growth data," Saxo said.

Markets are pricing in a 77% probability that the Fed will raise its policy interest rate by 25 basis points to between 5.25%-5.5% on July 26, according to the CME FedWatch Tool.

The central bank isn't expected to take its fed-funds rate target back down to around 5% until next year, according to 30-day Fed Funds futures.

Energy:

Oil prices were slightly higher in Asia, remaining in a range-bound trading pattern this week amid weak risk appetite.

Investors stayed on the sidelines amid rising worries about a global recession and persistent monetary-tightening risk.

In particular, Galaxy Futures warns of a weak fundamental demand outlook for the energy commodity in the coming months, given a slower-than-expected recovery in China and weakening macroeconomic conditions in most parts of the world.

Traders played down the threat to oil supply after a weekend rebellion in Russia that saw Wagner Group forces advance within around 120 miles of Moscow before abruptly standing down.

"The market appears to have quickly discounted any meaningful supply risk tied to the short-lived uprising by Russian paramilitary forces over the weekend. That comes amid a broader trend that has seen Russian crude exports frequently come in above expectations over the past year as the country continues to find buying interest from China and other developing markets to counter lost market share in the U.S. and EU," said Schneider Electric.

Overall, the market remains weighed down by economic uncertainty tied to central bank policy and generally sluggish growth to start the year, it said.

Metals:

Gold prices nudged higher, as investors weighed hawkish signals from central banks around the world, with rising worries over a global economic recession.

The precious metal's price outlook is likely to remain clouded for now, Galaxy Futures said.

Downward pressure for gold may continue in the near term, as buying interest takes a hit from a strong dollar and persistently tight monetary policies, it added.

Central bankers from Europe and the U.S. have lately reiterated the need to raise interest rates further to restrain inflation which has weighed on prices of gold and silver.

Rate hikes by several European central banks last week helped spur a selloff that eventually took gold and silver to their lowest levels since March on Monday.

While inflation in Europe and the U.S. has waned from last year's peak, the pace of declines has stalled, prompting central banks including the Federal Reserve to telegraph plans for more rate hikes to try to bring price pressures to heel. That is seen as bad for gold, since higher rates lift returns for investors buying bonds or keeping their money in cash, or a money-market fund.

"The higher the yield on Treasuries, the more likely traders seeking safe haven financial instruments will choose interest-bearing products rather than plug their money into gold," Mizuho said.

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Copper fell, but losses could be limited.

Gains in copper have been curbed by a media report that Codelco, world's largest copper producer, has resumed operations at its Andina copper mine after closing it earlier owing to rain storms, ANZ Research said.

However, inventories of base metals at commodity exchanges are at relatively low levels, which leaves the markets vulnerable to sudden tightening should demand pick up strongly, it added.

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Chinese iron ore prices were higher, extending the previous session's gains, amid hopes Beijing will unveil a new round of property stimulus measures.

"The prospect of further stimulus measures boosted sentiment in the iron ore market," ANZ said.

BHP CEO Mike Henry also urged Beijing to take more measures to boost the property sector at a meeting in Brisbane, Australia on Tuesday.

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06-28-23 0016ET