European Midday Briefing : Steady Start to Week of Political Risk, Key U.S. Inflation Data

MARKET WRAPS

Stocks:

European stocks made modest gains on Monday at the start of a week of political risks in France and some key U.S. economic data.

Stocks to Watch

Current political uncertainty in Europe is weighing on the continent's banks and increasing their cost of equity, Keefe, Bruyette & Woods said.

"Right now, politics is a cost of equity event rather than an [earnings per share] event," it said, noting that much of the political instability of the past few weeks raised the cost of equity across all sectors.

French retail banking revenue should see an attenuated recovery given the recent flows and political dynamics, Jefferies said, as uncertainty around the country's legislative elections continues to weigh on the shares of French banks.

A consequence of this is the likely acceleration of flows in June and July into regulated savings accounts. The government sets the rates for these savings accounts twice a year.

U.S. Markets:

Stock futures and benchmark bond yields were little changed as the focus shifts back to economic data this week, particularly the PCE price index, the Federal Reserve's preferred measure of inflation, which is due on Friday.

Forex:

Ways that the French election could accelerate recent falls in the euro against the dollar would include not only a large vote for the far right National Rally but also a large vote share for the left, turning the second round into a contest between two extremes, Barclays Research said.

"At any rate, French politics are turning away from Macron's pro-EU, liberal angle towards an ask for wider budget deficits and policies that would undermine the power of European institutions."

Meanwhile, demand for the dollar remains strong, Barclays added.

ING said the dollar has emerged the favored hedge for political uncertainty ahead of the elections in France.

This will likely offset the impact of potentially weak U.S. PCE inflation data on Friday which could increase prospects of a Federal Reserve interest-rate cut in September, ING added.

"The short-term downside for the dollar against European currencies may be less pronounced as markets could still favour defensive positions ahead of the French vote on Sunday."

ING said the DXY dollar index could trade above 106.00, possibly approaching 106.50 by the end of the week.

The yen's recent bout of weakness leaves a strong risk of fresh intervention by the Bank of Japan to prop up the currency, UniCredit Research said.

It said the weakness comes despite the minutes of the BOJ's June meeting flagging a possible further interest-rate hike in July.

Bonds:

The political uncertainty in France has led the 10-year OAT-Bund yield spread into a new trading regime, with an estimated range of 63-80 basis points, Morgan Stanley Research said. A new value on the spread is expected to hover around 72-75bps, depending on the value of the political premium attached to it, it said.

"We think that investors, over the coming weeks, will opt for a 'wait and see' approach and thus it is likely that the spread will continue to hover in the aforementioned range, barring any unexpected surprises or adverse headlines on politics," Morgan Stanley Research said.

Morgan Stanley Research also said the recent risk-off episode related to the elections induced a notable bid in duration, predominantly seen on the cash curve, adding that having a long duration exposure was still favored from a seasonal standpoint.

"All in all, given the uncertainties and considering that a clearer picture on the French outlook will only be known after the second week of July, we would prefer trading duration with a long stance for the time being."

Commerzbank Research said last week's tentative stabilization in or OATs, remains vulnerable.

"Overall, we still see little value in fading the OAT underperformance for now and expect the patterns to continue."

The dynamics in OAT-Bund yield spreads continue to set the tone ahead of the first round of the French elections, while markets lack direction, Commerzbank said.

Energy:

Oil prices were broadly stable early in the European session, as traders awaited key U.S. inflation data later in the week for more cues on the path of interest-rate cuts.

"The oil rally appears to be running out of momentum," ING said.

"Despite this, we remain supportive towards the oil market with a deficit over the third quarter set to tighten the oil balance."

EMEA HEADLINES

Apple Hit by First Charges Under New European Tech Law

The European Union has charged Apple with failing to comply with a new digital-competition law, alleging the iPhone maker's App Store isn't allowing developers to freely direct customers to alternative ways to make purchases.

The charges announced Monday are the first to be issued under the EU's Digital Markets Act, which took effect earlier this year and sets out a long list of rules aimed at boosting competition in digital advertising, online search and app ecosystems.

German Business Sentiment Declines on Gloomier Outlook

Sentiment at German companies has become more pessimistic on weakening expectations for business conditions ahead, according to a monthly survey.

The Ifo Institute's business-climate index fell to 88.6 in June, from 89.3 in May, data showed Monday. This was against expectations that the index would rise to 89.6, according to economists polled by The Wall Street Journal.

Prudential Plans $2 Billion Share Buyback

U.K. insurer Prudential PLC is planning a $2 billion share buyback as part of its efforts to boost shareholder returns.

Under the program, shares worth $700 million will be repurchased under the first tranche, the insurer said Sunday.

GLOBAL NEWS

The Rise of Chinese EVs Is Dividing the West

America and Europe are heading down different roads in response to China's emergence as an electric-vehicle juggernaut.

The U.S. is closing its borders to Chinese EVs before they even launch. The Biden administration last month raised the total tariff rate to 102.5% on Chinese EVs, despite extremely low imports. Canada, whose car industry is tightly integrated with the U.S., is considering new tariffs too, Bloomberg reported on Friday.

Europe's Response to China Shock 2.0: Hold China Closer

The first China shock that devastated manufacturing in the U.S. in the early 2000s bypassed large parts of Europe. A second shock now under way looks much more threatening.

But rather than simply erect ever higher barriers to the flood of Chinese imports, as the U.S. has done, European leaders are seeking an alternative: rolling out a welcome mat.

Netanyahu Says Intensive Fighting in Gaza Is Close to Ending

TEL AVIV-Israeli Prime Minister Benjamin Netanyahu on Sunday said Israel is close to shifting to a less-intense phase of fighting in Gaza, and that he opposes the idea of re-establishing Israeli civilian settlements in Gaza, a key ambition of his far-right coalition partners.

He also said he hopes the U.S. will expedite arms shipments to Israel, following a public spat with Washington.

Russian Saboteurs Behind Arson Attack at German Factory

BERLIN-As fire swept through a sprawling factory owned by a company that manufactures air-defense systems, thick, dark smoke spread through a neighborhood of luxury villas and diplomatic residences. Police warnings blared, ordering people to shelter indoors.

In the aftermath of last month's blaze on the outskirts of the German capital, German investigators said the cause was likely an accident. But Western security officials now say the fire was set by Russian saboteurs trying disrupt shipments of critical arms and ammunition to Ukraine.

Write to [e-mail]

Write to us at [e-mail]

We offer an enhanced version of this briefing that is optimized for viewing on mobile devices and sent directly to your email inbox. If you would like to sign up, please go to https://newsplus.wsj.com/subscriptions.

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

(END) Dow Jones Newswires

06-24-24 0536ET