European Midday Briefing: Stocks Buoyed by Fed Rate Cut Hopes; More U.S. Data on Tap

MARKET WRAPS

Stocks:

European stocks traded higher on Wednesday after weaker-than-expected U.S. JOLTs job openings data increased rate-cut prospects.

"The softer-than-expected figure boosted appetite in U.S. Treasuries and increased the probability of seeing the first Federal Reserve cut in September," Swissquote Bank said.

Attention turned to U.S. ADP private payrolls data due at 1215 GMT, where equities will likely react positively to a figure that doesn't look too weak as this could fuel recession worries, it added.

Shares on the Move

A court reduced the amount Bayer-owned Monsanto must pay in a recent case linked to the Roundup weedkiller by about 82%, or nearly $1.9 billion. Bayer's shares in Germany rose almost 2%.

Zara owner Inditex said second-quarter sales rose 12%, above expectations, with new store openings, refurbishments and online business expected to further support growth going forward. Shares traded about 4.8% higher.

Stocks to Watch

The progression of Southern European banks' shares should be more tempered as positive earnings revisions moderate on the back of ECB rate cuts, UBS said.

The broker's top picks now lean more toward banks with countercyclical net interest income features but it kept its positive stance on the sector given their two areas of defense.

Investors in Western European banks will focus on the ECB's forward indications and timing of potential rate cuts down the line rather than the first cut, Citi said.

Citi expects the ECB to start cutting rates and provide hawkish commentary. The expectation of higher-for-longer rates along with slower deposit migration have driven the outperformance of Italian, Spanish and Irish banks over the past three months, it said.

U.S. Markets:

Stock futures edged higher with the ADP employment report due, along with earnings from Dollar Tree and Lululemon Athletica.

Stocks to Watch

Guidewire Software raised its outlook for the year after posting better-than-expected quarterly results. Shares climbed almost 8%.

Hewlett Packard Enterprise results topped forecasts, with sales of AI servers doubling to over $900 million in the quarter. The stock rose almost 15%.

Forex:

The calling of a surprise U.K. general election has proved positive for sterling, which was the best performing G10 currency in May, Ebury said.

Investors have taken last month's announcement of the July 4 election "firmly in their stride" due to the prospect of a Labour Party majority, Ebury said.

A Labour government is viewed as the most market-friendly outcome given the damage caused by former Conservative leader Liz Truss's fiscal plans, Labour's move to the political centre, the limited room for fiscal manoeuvre, and Labour's promise of no increases to income tax and national insurance, it added.

Bonds:

Eurozone government bonds could outperform in the coming months, with the 10-year German Bund yield falling below 2.25% by year-end as the European Central Bank is set to start cutting interest rates, albeit at a cautious pace, Neuberger Berman said.

Eurozone wage growth of 4.7% on the year in the first quarter is "clearly an issue," but new leading indicators point to lower negotiated wage increases.

This justifies the ECB starting to cut its key rates but it should remain cautiously data dependent beyond that, it added.

Citi Research said this week's European election could have broad medium-term implications for eurozone government bonds .

Pimco said the massive stock of U.S. sovereign debt relative to GDP hanging over advanced economies should eventually cause yield curves to steepen as investors continue to demand more compensation for holding longer-dated bonds.

"There is evidence--for example, forward inflation-indexed yields or estimates of the Treasury term premium--to suggest that markets have already priced in some of this adjustment, even before central banks start to cut rates," it said.

A slowdown in the U.S. economy could cause yields to fall, with rate-cut expectations prompting shorter-dated yields to fall the most, leading the yield curve--which is currently inverted--to steepen. The curve may also steepen on heavy supply, Pimco added.

Energy:

Oil prices edged higher but remained under pressure amid bearish sentiment in the market following OPEC+'s decision to gradually phase out voluntary output cuts and a reported build in U.S. crude inventories.

According to ING, the scale of the oil selloff is overdone. "While the market has been disappointed that OPEC+ will gradually unwind cuts, it is important to remember that this is only from October."

"Our balance sheet continues to show a tightening in the oil market over the third quarter."

Meanwhile, reports citing data from the American Petroleum Institute said U.S. crude oil stocks and gasoline and distillate inventories rose in the week ended May 31, adding to concerns over demand in the top consumer.

Commerzbank said the oil market doesn't appear convinced by the production decisions made recently by OPEC+.

The recent oil price weakness suggests that "market participants doubt that OPEC+ will be able to gradually reduce its voluntary production cuts without risking oversupply."

OPEC+ appear to be counting on a significant revival in oil demand, but if the voluntary production cuts are withdrawn as announced, there will be a noticeable oversupply next year based on the IEA's forecasts, it added. "How demand for oil will develop in the coming quarters is therefore likely to be crucial."

Metals:

Base metals were lower with gold rising slightly, as investors await Friday's nonfarm payroll data, which should provide some clarity around the Fed's pathway to monetary policy easing.

Copper fell slightly, leading the way for other base metals lower, Sucden Financial said.

Copper is testing the $10,000 a ton boundary on a building appetite for lower prices and higher LME stocks, but it isn't slipping significantly as caution remains about the future path of prices, it added.

Gold

Macroeconomic concerns and geopolitical risks are expected to help push gold prices to $2,800/ounce over the next two years, according to UBS.

"This puts us circa 10% above forward gold prices and up to 37% above lagging consensus estimates," it said, arguing a structural shift in prices is underway.

UBS lifted its 2025 gold-price forecast by 21% to $2,700/oz and its 2026 projection by 34% to $2,775/oz. Its 2027 forecast was raised by 30% to $2,600/oz and the bank now expects a long-term real price of $1,950/oz, 11% higher than previously envisaged.

EMEA HEADLINES

SAP to Acquire WalkMe in $1.5 Billion Deal

SAP agreed to buy Nasdaq-listed WalkMe for $1.5 billion, in a deal that seeks to bolster the German software group's business artificial-intelligence offerings.

On Wednesday, the boards of both SAP and WalkMe approved the transaction for $14.00 a share in an all-cash transaction, representing an equity value of approximately $1.5 billion. The offer price represents a 45% premium to WalkMe's closing share price on Tuesday.

U.S. and Europe Are on the Same Economic Track After All

The U.S. economy grew more rapidly than its eurozone counterpart last year. But the two are converging, and central bank policy is likely to follow.

The U.S., which opened up faster than other countries from lockdown during the coronavirus outbreak and provided more financial support for households, quickly recovered from the knock to growth caused by the pandemic and delivered a surprisingly strong expansion in 2023.

Traders expect a hawkish cut from the ECB. What it means for markets.

The European Central Bank is widely expected on Thursday to be the first major advanced-economy central bank to cut rates since the end of the pandemic, signaling a sea-change in monetary policy that should see the Bank of England do the same in the summer and the Federal Reserve possibly follow suit in the fall.

Markets have for many weeks been pricing in a 25 basis point reduction in the ECB's deposit rate from a record high of 4% to 3.75%. Most ECB officials have done little to push back against that assumption.

Centrica Sees In-Line Full-Year Performance Despite Hit From Energy Prices

British Gas owner Centrica said its performance in the year so far has been in line with expectations, while flagging second-half results will be hit by lower commodity prices.

The U.K. energy company said Wednesday that it expects its full-year adjusted earnings per share to meet analysts views of 15.8 pence to 21.0 pence, based on a company-compiled consensus of fourteen forecasts.

GLOBAL NEWS

The Stock Market Has an Inflation Problem. More Losses Could Be Ahead.

This year's stock market rally actually isn't as good as it looks, and there could be more pain to come, Stifel warns in its latest market outlook.

While the S&P 500 has gained roughly 11% so far this year, the macroeconomic backdrop could cause it to erase much of those gains: Chief Equity Strategist Barry Bannister predicts the S&P 500 will fall roughly 10% to around 4,750 before the end of the third quarter.

New Texas Stock Exchange Takes Aim at New York's Dominance

A group backed by Wall Street heavyweights BlackRock and Citadel Securities is planning to start a new national stock exchange in Texas, aiming to take on what they see as onerous regulation at the New York Stock Exchange and Nasdaq.

The Texas Stock Exchange, which has raised approximately $120 million from individuals and large investment firms, plans to file registration documents with the Securities and Exchange Commission later this year, CEO James Lee told The Wall Street Journal. The goal is to begin facilitating trades in 2025 and host its first listing in 2026.

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