EUROPEAN MIDDAY BRIEFING – Stocks Jump as Investors Weigh Powell Comnments

MARKET WRAPS

Stocks:

European stocks rose more than 1% Friday after Jerome Powell cooled speculation over the potential for 75-basis point rate hikes.

The Fed is not “actively considering” a 75-basis point interest rate increase, Powell told Marketplace after the U.S. market close Thursday, though he also said the central bank may not be able to engineer a “soft landing” for the economy.

“Regardless of your interpretation of Powell’s monetary policy verbal gymnastics, the Vix has eased, providing stocks with some breathing room into the weekend,” wrote Stephen Innes, Managing Partner at SPI Asset Management.

Stocks to Watch:

STMicroelectronics’ capital markets day pointed to an increased focus on margins and cash, said UBS, with the chip maker’s gross margin target of more than 50% for 2025-27 the most discussed topic at the event.

“Management highlighted that they won’t sacrifice profitability for the benefit of market share, which would be an important change vs. history, ” UBS said.

STMicro didn’t specify how it plans to spend its targeted free cash flow, but it could potentially provide some upside to shareholder returns. However, UBS see risks deriving from the macroeconomic environment over the next 6-12 months.

“We remain concerned by the high exposure to some customers [i.e Apple, Tesla].”

TotalEnergies carries significant Russia-related risk, but the oil major’s ability to generate cash and its growth opportunities are attractive, said Berenberg, upgrading its recommendation on the stock to buy from hold.

TotalEnergies has increased its buyback for the first half to $3 billion, and Berenberg said the company’s high cash flow and the current environment make it sustainable for it to continue buybacks at this pace. Its dividend yield is also one of the highest offered in the sector.

TotalEnergies said TotalEnergies has potential to grow in Brazil, Mozambique, the U.S. and Suriname, but still faces material risk from Russia, although this is largely priced into its shares.

U.S. Markets:

Stock futures were pointing to a higher start for Wall Street at the end of a volatile week. But even if equities can manage a win on Friday, all three indexes are headed for sizable weekly losses, led by the Nasdaq, down 6.3% as of Thursday.

“Unlike in April, when the equity declines were triggered by the prospect of a more aggressive Fed tightening cycle and went hand-in-hand with sovereign bond losses, this week’s declines have much more obviously surrounded global growth risks, which you can see in the way that Fed Funds futures are now beginning to take out some of the tightening they’d been pricing in over the year ahead,” said Deutsche Bank strategists led by Henry Hill.

Economic data ahead includes April import prices, followed by the University of Michigan consumer sentiment index for May and comments by Minneapolis Fed President Neel Kashkari.

Treasury yields were on the rise, with the yield on the 10-year note up 6 basis points to 2.875%.

Forex:

The dollar trimmed some of its recent steep gains after the DXY Index hit a 19-year high of 104.9250 Thursday, but any falls should be temporary, said MUFG.

“The dollar softness so far today looks more like a temporary respite with risks high that general financial market volatility will remain high.”

The euro could also be vulnerable, with focus on energy supply from Russia to Europe after a 12% rise in natural gas prices Thursday, MUFG added.

The dollar has weakened slightly with a generally risk-on prevailing mood but the currency’s gains are unstoppable, said LBBW. “For the time being, we expect the dollar strength to prevail.”

The euro has recovered slightly following its recent steep losses against the dollar but there is “no sign of recovery” as it continues to hover around $1.04, said DZ Bank.

On Thursday, the eruo fell to a multi-year low of 1.0358, and concerns about European energy supply were likely to have spoiled the mood. This offset signals from the European Central Bank that leave little room for doubt about an interest rate rise in July, DZ Bank said.

Bonds:

The selloff in German Bunds may have run out of steam for now, said Citi.

“Markets are twitchy, but we are gaining confidence that the Bund selloff may have peaked for now, not least given the sharp correction lower in inflation forwards and with neutral rate pricing likely understating periphery risk.”

Citi finds that Bunds no longer look that “rich” vs. inflation forwards on a simple long-term projection.

Despite Thursday’s rally in eurozone government bonds, the market still prices 75 basis points of interest-rate rises by the ECB this year, which Mizuho’s considers excessive.

“Current market pricing of ECB hikes and levels of EUR yields have been looking concerning to us for some time.”

It reckons that at these levels, the risk of recession in 2024 would be high and the sustainability of peripheral debt would also become problematic.

Separately, Mizuho said euro rates duration is expected to post more gains this year, led by German Bunds, as investors’ concerns over inflation are likely to abate. Euro rates were top of the leaderboard in Thursday’s risk-off session.

“We expect to see more EUR rates duration performance through the rest of the year as inflation concerns temper,” Mizuho said, adding that the 10-year Bund yield should be the main beneficiary later in the year.

Energy:

Oil made modest gains, but prices were set for weekly losses as crude has been pushed around by uncertainty over an EU ban and China’s struggle against Covid-19.

Hungary has stepped up its opposition to an EU plan to ban Russian oil imports. The EU is now considering dropping the plan altogether, Politico reported. “For oil market participants, the central issue is the forever changing EU news flows as the EU’s Russia energy spat is turning into a comedy of errors,” said SPI Asset Management.

Commodities:

Gold edged down with its “status as an inflation hedge waning, as the risk of more aggressive monetary tightening rises,” said ANZ.

Most base metals–with the exception of nickel–were rebounding in Europe but demand worries persist.

Marex’s Asian metal desk expects “Dr Copper to take another hit,” over the apparent economic weakness and worries over Asian demand. Chinese copper smelters will soon move to annual maintenance, adding further pressure on demand.

DOW JONES NEWSPLUS

EMEA HEADLINES

Deutsche Telekom Raises 2022 View; 1Q Profit Increased

Deutsche Telekom AG on Friday raised forecasts for the year and said that first-quarter net profit increased after its sale of T-Mobile Netherlands.

The German telecom company said quarterly net profit rose to 3.95 billion euros ($4.10 billion) compared with EUR936 million a year prior. The increase was mainly due to the sale of a 50% stake in the company GlasfaserPlus and the completion of the T-Mobile Netherlands divestment, the company said.

MTN Group 1Q Revenue Grew 16%; Maintains Medium-Term Guidance

MTN Group Ltd. on Friday reported a 16% rise in group revenue for the first quarter and backed its medium-term guidance.

The South Africa-based telecommunications group said that voice revenue for the quarter ended March 31 grew 2.6%, while data revenue rose 37%. Group fintec revenue rose 21% during the quarter.

Atlantia Swung to 1Q Profit as Traffic Rose

Atlantia SpA said late on Thursday that its first-quarter earnings and revenue rose, helped by positive traffic development at its businesses, and backed its 2022 view.

The Italian infrastructure company swung to a net profit of 344 million euros ($357.2 million), from a restated EUR97 million net loss a year earlier.

Norwegian Air Shuttle 1Q Pretax Loss Narrowed, Revenue Rose

Norwegian Air Shuttle ASA said Friday its pretax loss narrowed and revenue rose on increased passenger demand in the first quarter as coronavirus restrictions eased.

The low-cost carrier reported a pretax loss of 1.03 billion Norwegian kroner ($104.3 million), compared with a loss of NOK1.19 billion a year earlier.

Russian Tanker Giant in Deals to Sell Ships Amid Western Sanctions

Sovcomflot has sold about a dozen ships to buyers in Asia and the Middle East, according to people familiar with the matter, as the Russian state-controlled company works to repay loans to Western banks ending business ties to comply with sanctions.

The company, among the world’s largest tanker operators, sold five tankers to Dubai-based Koban Shipping and four natural-gas carriers to Singapore-based Eastern Pacific Shipping, the people said. Eastern Pacific paid $700 million to a bank that had taken ownership of the vessels.

Russian Oil Output Shrinks Under Western Pressure

PARIS-Western pressure on Russia over the invasion of Ukraine lowered the country’s crude-oil output by 9% in April and reshaped the global oil market as Russia sought new buyers for its production outside the West, the International Energy Agency said.

Russia’s lost supplies amounted to 900,000 barrels a day in April and are expected to grow by a further 600,000 barrels a day this month-totaling around 1.5% of the world’s oil output when the invasion began. An oil embargo being considered by the European Union, the biggest destination for Russian crude, would likely push those losses to as much as 3 million barrels a day from July, bringing Russian oil production to its lowest level in nearly two decades, the IEA said in its monthly report Thursday.

Turkish Court Upholds Prison Sentence for Opposition Leader

ISTANBUL-A Turkish court upheld a prison sentence for a prominent leader in the country’s largest opposition party, deepening a clampdown on opponents of President Recep Tayyip Erdogan as the longtime leader faces a tough re-election next year.

(MORE TO FOLLOW) Dow Jones Newswires

05-13-22 0541ET



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