MARKET WRAPS
Stocks:
European shares were higher on Friday as investors shifted their
views about central bank policy after some weak economic data.
Stocks have come under pressure in recent weeks from concerns
that the Federal Reserve will cause a recession as it tightens
monetary policy to combat inflation. But worse-than-expected
economic figures, including the latest composite PMI data, have
prompted a modest recovery in markets, investors said.
"It's clear that economic activity is cooling, which should cool
down inflation. That together is rather positive," said Luc Filip,
head of investments at SYZ Private Banking. "We might be at a
shifting point in terms of economic momentum."
Stocks to Watch:
With a cloudy horizon for the aviation sector, Air France-KLM's
valuation looks sensible and its financial control more stable
after a recent rights issue, said Deutsche Bank, which raised its
rating on the stock to hold from sell but cut the target price to
EUR1.50 from EUR3.20, given the uncertain sector outlook.
In the wider sector, the quarter to June should be profitable
for most companies and the following one even more so, but 2023 is
likely to disappoint versus current consensus.
"The magnitude of the potential miss is hard to quantify,
meaning it's hard to make a positive case for airlines. However,
recession is unlikely to be as painful as Covid-19."
---
Vinci looks inured to rising inflation thanks to its business
mix and careful management, said Berenberg, starting coverage of
the stock with a buy rating and a EUR105 target price.
In Vinci's primary business--the highways division that
contributes about 50% of operating earnings--pricing structures are
inflation-linked, which should ensure profit growth of around 5% in
the medium term, Berenberg said.
In other divisions, Vinci's track record on financial discipline
inspires faith in its future capital allocation, he notes. Rapid
recovery in the airports business is another potential upside.
Read: Puma Could Raise 2022 View
Read: Dior's Flagship a Standout for Luxury Megabrands
Economic Insight:
The decline in the German business confidence index adds to
signs that faltering demand is starting to hit the key
manufacturing sector, increasing the risk of a recession in the
coming months, said Capital Economics.
Economic activity seems to have been more resilient than
expected in the second quarter, but the outlook for the remainder
of the year is grim with inflation set to remain elevated and
increasing chances of gas shortages.
"With high inflation weighing on consumer demand and the threat
of high interest rates and gas rationing looming, there is a good
chance that Germany falls into recession," said Capital
Economics.
Read: Stalling German Business Sentiment Adds to Stagflation
Risks
U.S. Markets:
Stock futures rose, putting the S&P 500 on track for its
first weekly gain this month.
The index is up 3.3% for the week so far, but it is still in a
bear market. It closed down nearly 21% on Thursday from its last
peak.
The yield on the benchmark 10-year Treasury note edged down to
3.057% from 3.068% on Thursday, extending its drop into a third
day.
Lower long-dated bond yields make future profits more valuable,
especially for fast-growing tech stocks whose valuations reflect a
relatively long-term stream of future profits.
Forex:
The euro could fall as a weak eurozone economic outlook may
prompt the market to scale back its interest-rate rise expectations
for the European Central Bank, said ActivTrades.
"The situation in Europe requires careful handling by the ECB,
as high inflation calls for monetary tightening, at a time when
economic indicators exacerbate worries over the growth prospects
for the eurozone economy, especially in a scenario of rate hiking
by the central bank."
ActivTrades said that against this background, "the euro could
face further headwinds, as investors may reprice expectations over
the timing and scope of the ECB's monetary tightening."
---
Sterling showed little reaction following data that revealed a
drop in U.K. retail sales in May, confirming the bleak outlook
facing the economy.
Silicon Valley Bank wrote: "The drop in sales comes as no
surprise to FX markets and this is reflected in the GBP/USD rate,
with sterling largely unmoved on the release."
Read: UK Retail Sales Fell in May Amid Rising Cost of Living
Bonds:
The European Central Bank's recent verbal intervention regarding
an antifragmentation tool has triggered a massive narrowing of
eurozone peripheral bond spreads, "but we are far from convinced
and expect spreads to be tested eventually," said Societe
Generale.
Weakening economies, higher ECB interest rates and politics
should all play into driving peripheral spreads wider, said Societe
Generale, which expects the 10-year Italian BTP-German Bund yield
to widen to 260-300 basis points by year-end--from current levels
around 197 bps--with Italian politics probably adding uncertainty
ahead of general elections in 2023.
Societe Generale also said it was too early to consider duration
longs "as we have likely not yet seen peak hawkishness, either from
the ECB or market pricing." It expects tactical longs to become
attractive if the 10-year German Bund yield rises above 2%.
"With euro area inflation yet to peak, the market could still
come to price a higher ECB terminal rate, justifying a Bund 10-year
yield close to 2% or even higher."
However, the bearish forces might moderate toward year-end if
the ECB considers a slower pace of rate hikes after having
approached neutral rate, said Societe Generale.
---
DZ Bank's analysts underweight eurozone peripheral government
bonds and favor shorter maturities in their strategy, as they
expect the market environment to continue to put pressure on
sovereigns in the coming months
"Based on our spread expectations, we recommend underweighting
bonds in the peripheral segment relative to semi-core bonds," says
analyst Sebastian Fellechner, adding that semi-core bonds may enjoy
stronger demand than peripheral peers. "Even the cushion of a
higher carry is unlikely to be sufficient for them to outperform
bonds from the semi-core countries," he says.
(emese.bartha@wsj.com)
Energy:
Oil prices wavered between mild gains and losses in choppy
trading as investors weighed supply risks against concerns about
slowing global growth, after Jerome Powell said interest-rate
increases may lead to a recession.
"Oil prices will continue to be whipsawed by competing demand
and supply-side drivers. Recession risks continue to weigh and are
currently dragging down [...] oil prices," Fitch said.
Concerns about demand appear to have won out this week with
Brent on course to close the week 6% lower.
Metals:
Base metals were lower, as global growth fears continued to hit
sentiment for industrial goods. Gold was weaker too, with Fitch
saying "commodity prices across the board seem to have peaked."
"Mainland China's zero Covid policy dampening demand, a strong
dollar driven by a hawkish Fed, the first signs of input prices
easing, global recession fears and weakening investor sentiment are
weighing heavily on commodities," Fitch said.
DOW JONES NEWSPLUS
EMEA HEADLINES
German Business Sentiment Deteriorated Slightly in June
Business confidence in Germany worsened in June as firms in the
manufacturing and retail sectors turned more pessimistic due to
rising costs and the threat of gas shortages.
The Ifo business-climate index declined to 92.3 points in June
from 93.0 points in May, data from the Ifo Institute showed Friday.
Economists polled by The Wall Street Journal expected the index to
come in at 92.5.
UK Retail Sales Fell in May Amid Rising Cost of Living
U.K. retail sales declined in May due to lower food sales, in a
further sign that consumers have pared back on spending amid an
intensifying squeeze on household finances.
Retail sales volumes decreased 0.5% in May compared to April,
the third fall in four months, data from the Office for National
Statistics showed Friday. Economists polled by The Wall Street
Journal had forecast retail sales would fall by 0.7%.
Zalando Shares Slump on Weaker Outlook as Recession Risks
Grow
Shares of German online retailer Zalando SE plunged in Friday
morning trading a day after the company reported a
weaker-than-expected second quarter, which led it to cut forecasts
for the year as consumers are shopping less amid rising inflation
and growing recession risks.
Consumer confidence in the eurozone declined in June because of
the increasing cost of living and a slowdown in the economy. The
U.S. and European economies slowed sharply as surging prices of
energy and food weakened demand for other goods and services,
business surveys showed. Russia's war in Ukraine has hit growth as
high inflation spread across the globe.
Barclays to Buy Kensington Mortgage Co., Portfolio for Around
$2.8 Bln
Barclays PLC said Friday that it has agreed to acquire
Kensington Mortgage Co. and a related portfolio of U.K. mortgages
for around 2.3 billion pounds ($2.82 billion).
The London-based lender said it will acquire the specialist
mortgage lender from companies controlled by funds managed by
Blackstone Tactical Opportunities Advisors LLC., and funds
affiliated with Sixth Street Partners LLC.
Zurich Insurance to Sell Legacy Traditional Life-Insurance Back
Book in Germany
Zurich Insurance Group AG on Friday said it had agreed to sell
its legacy traditional life-insurance back book in Germany to
specialist insurer Viridium Holding AG, in a move to shield its
business from rising interest rates as central banks move to curb
inflation.
The Swiss insurance giant said the deal, which includes the
transfer of $20 billion in net reserves, would add 8 percentage
points to its Swiss solvency test ratio--a measure to assess the
capitalization of insurance companies.
Steinhoff International 1H Pretax Loss Widened on Higher
Costs
Steinhoff International Holdings NV said Friday that its pretax
loss widened in the first half of fiscal 2022, driven by higher
costs and volatility in its markets.
The South Africa-based conglomerate reported a pretax loss of
237 million euros ($249.4 million) for the six months ended March
31, from a restated pretax loss of EUR225 million.
U.K. Consumer Confidence Falls to Record Low in June
Confidence among British households deteriorated again in June,
setting a record low for the second consecutive month and adding to
concerns of a pullback in consumer spending amid sluggish economic
growth.
The consumer-confidence barometer compiled by research firm GfK
declined to minus 41 in June from minus 40 in May, the lowest level
since the survey began in 1974, missing economists' expectations of
a slight increase to minus 38.
Ukraine Orders Withdrawal From Severodonetsk to Avoid
Encirclement
Ukraine Becomes an Official EU Membership Candidate
European Union leaders agreed Thursday to make Ukraine an
official candidate to join the bloc, opening the door to possible
membership in the years to come.
The decision was agreed to by EU leaders at a summit in Brussels
and fulfills one of Ukrainian President Volodymyr Zelensky's
biggest requests of European countries. It also is intended to send
a resounding message of support for Kyiv to the Kremlin.
As Europe Opens Door to Ukraine, Nearby Georgia Falls From
Favor
BRUSSELS-Years before the war in Ukraine, Georgia was the victim
of Russian aggression that prompted Washington and Brussels to
swing behind it.
The Black Sea republic was ahead of other ex-Soviet states on
democratic reforms, with ambitions to join the European Union.
Iran's Revolutionary Guard Names New Intelligence Chief Amid
Suspicious Deaths
TEHRAN-Iran's Islamic Revolutionary Guard Corps named a new
intelligence chief on Thursday, after a string of suspicious deaths
of military officers and scientists raised tensions between Tehran
and its regional adversaries.
Hossein Taeb, a cleric who headed the Guard's intelligence wing
for more than a decade, was succeeded by Gen. Mohammad Kazemi,
according to a statement on the official IRGC news website. Mr.
Taeb was named an adviser to the IRGC commander, Maj. Gen. Hossein
Salami.
GLOBAL NEWS
Jerome Powell Pressed Over How Fed Would Respond to Economic
Slowdown
Lawmakers pressed Federal Reserve Chairman Jerome Powell over
how the central bank would manage trade-offs it could confront if
its interest-rate increases slow the economy sharply but don't
reduce inflation quickly.
Mr. Powell on Thursday said that in such a scenario, the central
bank would be reluctant to shift from raising rates to cutting them
until it saw clear evidence that inflation was coming down in a
convincing fashion.
Fed Stress Test Finds Big Banks Can Weather Severe Recession
The Federal Reserve gave the biggest U.S. banks a clean bill of
health in its annual stress test, saying they would be able to
continue lending to households and businesses even in a severe
recession.
This year's stress test measured the 34 biggest banks' ability
to maintain strong capital levels in a hypothetical recession
marked by sharply higher unemployment and a steep decline in stock
prices.
Inflation in Japan Raises Pressure on Central Bank to Reconsider
Low Rates
TOKYO-Inflation in Japan stayed above the Bank of Japan's target
for a second successive month, adding to pressure on the bank as it
bucks the global trend and keeps interest rates low.
Overall consumer prices rose 2.5% from a year earlier in May,
government data showed Friday. That matched the pace in April,
which was the fastest rise since 1991, excluding periods
immediately following sales-tax increases.
MSCI Keeps Emerging-Market Rating on South Korea, Despite Push
for Upgrade
MSCI Inc. is sticking with its longstanding assessment of South
Korea as an emerging market, despite the country's renewed efforts
to be upgraded to a developed one.
The index provider's reluctance to reclassify South Korea, with
no changes proposed in its latest annual review, could deprive
local markets of tens of billions of dollars of inflows from global
investors and is likely to disappoint politicians and regulators in
Seoul.
China's Top Diplomat in Australia Says Ties Can Improve
SYDNEY-China's ambassador to Australia said he believes
relations between the two countries can improve, though the
protests that interrupted his speech in Sydney suggest there will
be political challenges in thawing ties with Australia's new
government.
"Personally, I'm still optimistic," Xiao Qian said when asked
whether Australia and China would celebrate this year's 50th
anniversary of establishing diplomatic ties. "It's good for both
sides. It's not a one-sided kind of relationship."
Senate Passes Bipartisan Gun Bill Funding Red-Flag Laws, Mental
Health Programs
WASHINGTON-The Senate passed the most significant firearms
legislation in decades, with a coalition of more than a dozen
Republicans joining Democrats to provide new tools to deter mass
shootings following deadly attacks around the nation.
The 65-33 vote capped a month of negotiations, led by Sens.
Chris Murphy (D., Conn.) and John Cornyn (R., Texas), who were
tasked by the leaders of their respective parties with finding a
compromise on one of the most contentious topics in American
politics.
Write to paul.larkins@dowjones.com
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(END) Dow Jones Newswires
June 24, 2022 05:28 ET (09:28 GMT)
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