EUROPEAN MIDDAY BRIEFING – Hawkish Powell Hits Stocks, Bonds



European shares fell Friday in reaction to Jerome Powell’s comments that the Federal Reserve was likely to raise interest rates by a half percentage point at its meeting next month and as he indicated similar rate rises could be warranted after that to lower inflation.

Powell’s top lieutenants on the central bank’s rate-setting committee had already cemented market expectations of a half-point rate increase at the May gathering.

Michael Hewson, Chief Market Analyst at CMC Markets UK said the tone of Powell’s remarks could have been taken that “while markets aren’t concerned about a 50bps hike in May, they are concerned that the Fed might go harder for longer, that is another two 50 basis points hikes subsequently by the end of the summer.”

Meantime, Christine Lagarde refused on Thursday to endorse the prospect that the central bank might raise interest rates in July. “That is going to be determined by the data,” she said. She drew a contrast between high inflation in Europe and the U.S. by saying that the labor market in the U.S. is far stronger.

Stocks to Watch:

Shares of LVMH are lagging behind peers this year, as fears over the spread of Covid-19 in its key Chinese market and global inflation have taken a toll. But resilient first-quarter results suggest the dip in the stock could be a rare buying opportunity. Read more here.

Economic Insight:

A week after the European Central Bank’s last meeting, a range of officials have fuelled expectations of an interest-rate rise in July, the same month the bank expects to end net QE purchases, said Silvia Dall’Angelo, Senior Economist at Federated Hermes.

Vice President Luis de Guindos, among others, has suggested the central bank is eyeing July to start its hiking cycle, provided the upcoming forecasts in June and following data developments support it.

“After eight years of negative rates and seven years of asset purchases, it looks like the time might be ripe for the ECB to leave unconventional policy territory.” Markets have priced around 15 basis points of deposit-rate rise in July, according to Refinitiv.

U.S. Markets:

Stock futures edged lower and a selloff in government bonds continued.

Investors are confronting one of the most uncertain periods of their lifetimes as they try to assess the impact that rising rates will have on stocks. For two years, traders have continued to pile into the U.S. stock market, owing, in part, to unprecedented levels of monetary stimulus that left few alternatives for consistently strong returns. In recent months, however, investors have had to reassess their playbooks as the Fed has embarked on a monetary tightening cycle.

Powell’s comments injected fresh volatility into an already fragile stock market that has been whipsawed this year by the war in Ukraine, soaring inflation and rising Covid-19 cases in China. Many traders are now worried that the Fed’s tightening cycle could tip the economy into a recession.

In early Friday trading, the steep rally in government bond yields persisted, sending the yield on the benchmark 10-year Treasury note to 2.950%, up from 2.917% Thursday.


The dollar, up around 0.2% in Europe, looks set to remain strong for most of the year, said ING, after Jerome Powell confirmed that interest rates are likely to rise in bigger increments than the usual 25 basis points.

“Do not try to fight the strong dollar bull trend. The jury is out on how high the Fed will take rates, but with the terminal rate for Fed funds being priced higher each day [now at 3.35%] it seems far too dangerous to try and pick a top.”

ING added that the DXY Dollar Index “can probably hold above 100.”

Weak U.K. data has added to growing reasons to sell the pound, said MUFG analyst Derek Halpenny, as sterling fell to its lowest in nearly 18 months against the dollar.

GfK’s U.K. consumer confidence measure has dropped to its lowest since the 2008-09 financial crisis, while U.K. retail sales fell 1.4% during March, much more than the 0.2% loss anticipated in a WSJ poll.

These add to “a host of specific negative developments providing reason for GBP sentiment to worsen over the coming days and weeks,” including pressure on Boris Johnson to stand down, Halpenny said.

A recent correction in the currencies of commodity producers is likely to be temporary, strategist Marek Raczko of Barclays said in a research note focused on the South African rand.

“Globally, we have seen a correction in the commodity currency rally, which has also translated into weaker ZAR. We expect…EM commodity producers’ FX to return to the appreciation trend.”

Raczko said the rand has been under pressure from local headwinds, too. “We do not recommend being long ZAR at this point, even though we find current ZAR levels to be attractive.”


Societe Generale has maintained a bearish view on rates near term, expecting government bond yields to rise further.

In a review of its forecasts, it expects the 10-year German Bund yield moving above 1% in 2Q and peaking at around 1.25% later this year.

“With downside risks to growth likely to materialise more forcefully after summer, we would expect yields to mark an inflection point or even correct down in 4Q22 and 1Q23.”

However, its long-term view remains skewed toward higher yields given the likely durable switch into a regime of higher inflation in the euro area.

French Election:

With the 10-year French OAT-German Bund yield spread so tight, 45 basis points, according to Tradeweb, “we think it’s difficult to trade a Macron win,” said Societe Generale, whose strategists view Emmanuel Macron’s re-election as “almost a done deal.”

Given the limited scope for the 10-year OAT-Bund spread to narrow, possibly to 40 bps, SocGen’s strategists prefer waiting for opportunities to emerge after any rally following the election. With upside risks in eurozone country spreads, “we think it makes sense to wait until the political risks largely vanish and then enter shorts in 10y OAT vs Bund.”

A win by Macron in Sunday’s election is largely priced in bond markets and should evoke limited market reaction, said Citi.

“We see value in hedging for the tail risk of a Le Pen win via short 30yr BTP vs OAT that should work beyond the election,” Citi’s strategists said.

They expect eurozone government bond yield spreads to widen in coming months, regardless of the outcome of the French elections as the ECB’s tapering of quantitative easing starts to manifest in net government bond supply starting May.


Oil prices were lower but had pared earlier, steeper losses in Asia, as investors worried about interest-rate hikes hitting demand.

Morgan Stanley has raised its oil prices forecasts despite expecting weaker global economic growth, as supply issues caused by the war in Ukraine are likely to be greater than expected.

The bank has added $10 to its Brent forecasts for the third and fourth quarters, expecting $130 a barrel and $120 a barrel, respectively.

Demand for oil will likely weaken as global growth slows in the face of the Ukraine war, resurgent Covid-19 cases in China, and interest rate hikes in the U.S. But that is expected to be more than offset by supply issues. Russian supply has likely fallen by more than expected since the war’s outbreak while there remains a risk of an EU ban on Russian crude, Morgan Stanley said.

Gold futures moved higher in early European action after hawkish comments from Jerome Powell came against a tide of inflation and other economic growth worries, helping to push investors toward the precious metal.

“Bullion provides a good hedge against hyperinflation, which creates risks to holding traditional assets. Still, with stagflation moving from a potential tail risk to reality, investors worldwide are turning to gold as a keen portfolio diversifier,” said Stephen Innes, managing partner at SPI Asset Management.

Goldman Sachs has a year-end gold target price of $2,500 an ounce due to high demand. It said the “gold ETF build continues, Chinese gold premium remains strong, Russia is likely buying up all domestic gold production and [developed-market] retail gold purchases are running at record high levels.”

If strength in physical-investment demand continues, gold has to eventually rise to price out consumers and make room for investors, Goldman Sachs said.

Base metals were broadly flat as supply worries balanced out consumption concerns in Asia that had pushed prices down over the last week, with copper seeing a third consecutive week of losses.

But a raft of supply concerns from miners Thursday helped to balance out the weakening sentiment–20% of Peru’s copper mining industry has moved into force majeure because of local protests, while aluminum smelters battle with rising energy costs.



SAP to Take Extra Costs From Russian Pullback as 1Q Profit Fell

SAP SE said Friday that it would take further costs from its pullback from Russia after first-quarter profit fell, though kept its full-year outlook after cloud-revenue growth accelerated.

Reporting on a non-IFRS basis, the German cloud-computing company’s quarterly operating profit was 1.68 billion euros ($1.82 billion), down from EUR1.74 billion last year, which it blamed on expenses related to the war, as well as accelerated investments into research & development and sales & marketing.

Volvo 1Q Earnings Fell on Higher Costs, Russia Provision

Volvo AB on Friday posted lower first-quarter earnings amid higher freight and material costs and a previously announced provision related to its Russian assets, while it cautioned that production stoppages due to component shortages and supply-chain disruptions will continue.

The Swedish truck maker reported net profit of 7.03 billion Swedish kronor ($743.1 million), compared with SEK8.84 billion a year earlier, missing a FactSet consensus forecast of SEK7.92 billion.

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04-22-22 0557ET

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