European Midday Briefing: Powell Comments on Inflation Lift Stocks; Fed Minutes Eyed

MARKET WRAPS

Stocks:

European stocks rose on Wednesday, tracking global gains after Jerome Powell noted progress in bringing down inflation.

Following his remarks in Sintra about inflation, investors are more confident in the prospect of rate cuts this year, Deutsche Bank said.

"Indeed, investors dialed up the chance of a cut by the September meeting from 69% to 75%, even though Powell said that 'I am not going to be landing on any specific dates' when he was asked about September."

Stocks to Watch

Diageo seems to have reached an inflection point, partly due to an expected ease of destocking, Citi said, upgrading the stock to buy from neutral.

H&M's potential for structural improvement is not being fully recognized by the market, Deutsche Bank said, upgrading its rating on the stock to buy from sell and lifting its target price to SEK200 from SEK165.

L'Oreal is driving both category growth and market share gains on the back of a strong volume track record, RBC Capital Markets said, upgrading the stock to sector perform from underperform.

Market Insight

Equities are more appealing than other risk assets such as corporate bonds as they are likely to offer higher returns, BlackRock said.

"In a whole portfolio context, we prefer taking risk in equities--where expected returns are more attractive--over credit on a tactical horizon of six to 12 months."

Blackrock is overweight on stocks and the AI theme. Within credit, BlackRock favors European longer-term credit versus U.S. counterparts as it provides more compensation for risk relative.

U.S. Markets:

Stock futures traded flat in a shortened trading session on ahead of the Fourth of July holiday.

Economic data due include the ADP jobs report, purchasing managers surveys on the services sector, and jobless claims.

This week's big event for markets will come on Friday, when the nonfarm payrolls report is due. Economists expect 200,000 jobs were created in June, down from 272,000 in May.

Forex:

The euro's gains are likely to remain limited ahead of the second round of the French parliamentary election on Sunday, Swissquote Bank said.

Traders are likely to sell the euro around the $1.0750 level, although buyers would likely come in around the $1.0700 area on hope that worries about far-right National Rally leader Marine Le Pen securing a majority are overdone.

"In all cases, we won't have a clearer picture on the euro's next direction before next Monday."

The dollar remained under pressure after falling following remarks by Jerome Powell on inflation.

"The remarks are very much in line with our view that recent data have increased the odds of a September cut from the Fed," Jefferies said.

The Labour Party appears on course for a massive majority in Thursday's U.K. general election but this should have little impact on sterling, which could trade in narrow ranges once the exit poll is released, Ebury said.

"A Labour supermajority is fully priced in, and indeed would not deviate too much from the status quo, with only modest tax and spending hikes set out in the manifesto," Ebury said.

The prospect of closer U.K.-EU ties under Labour, in particular, has been greeted positively by market participants, Ebury said.

If Labour's majority is smaller than expected, sterling could fall, although this seems unlikely, it added.

The yen may weaken further on bets that Japan could be less likely to intervene in foreign-exchange markets, according to analysts.

Traders are speculating that Japan's top currency diplomat, Masato Kanda, could be less prone to intervene again as he "runs out the string on his tenure" which lasts until end-July, forex.com and City Index said.

It noted media reports saying that Kanda will be replaced by Atsushi Mimura, presently director-general of the Japanese Finance Ministry's international bureau, on July 31.

Earlier on Wednesday, the PBOC set the CNY fixing versus USD at a 7-month low of 7.1312 and Mizuho Securities Asia said there are no signs of relief in the yuan's depreciation trend, as the PBOC remains determined to release CNY depreciation pressure via its CNY fixing guidance.

Bonds:

The relief trade in French government bonds continues as election tail risks decline, leading to a narrower 10-year OATs/Bunds yield spread, Commerzbank Research said.

"Fading election tail risks seem key as 2nd round withdrawals are proceeding as anticipated, hence limiting the risk of an absolute majority for RN [far-right National Rally]."

That said, price action in OATs remains fluid, Commerzbank said.

The 10-year Treasury yield remains near its highest level in a month, driven by recent political and economic developments, Tickmill said.

A Supreme Court ruling in Donald Trump's favor along with last week's televised debate results increased the odds of a second term for him, Tickmill said.

"It could lead market participants to anticipate inflationary policies such as tax cuts, tighter immigration controls, and higher tariffs under a potential Trump presidency."

Energy:

Oil prices edged higher as reports of a larger-than-expected draw in U.S. crude stockpiles signals solid demand during the summer driving season in the world's top consumer.

Crude inventories fell by 9.16 million barrels last week, according to reports citing figures from the API.

Prices were also supported by escalating tensions in the Middle East and risks of supply disruptions due to Hurricane Beryl in the Atlantic.

"There is rising possibilities of the storm hitting the upper Gulf of Mexico and impacting offshore oil production," ANZ Research said.

Brent Chart

The price of Brent crude oil could extend its uptrend , based on the weekly chart, UOB Global Economics & Markets Research said.

Among positive technical factors, Brent broke above resistance at weekly Ichimoku cloud's top and its weekly moving average convergence divergence indicator is turning positive.

However, the trendline connecting the highs of September 2023 and April 2024, which is currently near $90.00/bbl, poses a significant resistance.

Metals:

Gold futures rose as investors look towards the release of the Federal Reserve's meeting minutes later Wednesday for clues on monetary policy.

Currently, the market is pricing in around a 67% chance of Fed rate cuts in September, up from around 63% before Powell's remarks on Tuesday, XS.com said.

Panmure Liberum said gold prices appear increasingly sensitive to U.S. real rates again after earlier being propelled higher by a cocktail of other influences, including central bank purchases.

According to Panmure Liberum, "the net-long position being built by U.S. CFTC 'non-commercials' suggest short-term price risk remains to the upside."

Rio Tinto Copper

Labor negotiations at Rio Tinto's Oyu Tolgoi copper operation are unlikely to impact the ramp-up of underground production there, but the potential for industrial action does introduce some risks, Morgan Stanley said.

"Production from the high-grade underground mine has been steadily increasing since 1Q22 and is the key driver of copper production growth at Rio" toward about 1 million metric tons a year by 2028 versus 620,000 tons in 2023.

EMEA HEADLINES

GSK to Buy CureVac's Covid-19, Flu Vaccine Rights in Up to $1.56 Billion Deal

GSK struck a deal to buy the rights to CureVac's Covid-19 and flu vaccines for up to 1.45 billion euros ($1.56 billion), bolstering the U.K. pharmaceutical company's vaccine portfolio at a time when bird-flu concerns are boosting demand.

Governments around the world are stepping up efforts to prevent the potential spread of the avian flu virus to people. Vaccine maker Moderna on Tuesday received $176 million from a U.S. government program to accelerate development of avian flu vaccines for humans. Australia's CSL last month got an order for more than 40 million doses of bird flu vaccines from the European Union.

Keyword Studios Accepts $2.66 Billion EQT Takeover

Keywords Studios has accepted a 2.1 billion pound ($2.66 billion) takeover proposal from European private equity company EQT Group, as previously flagged.

The board of the London-listed videogame services company said Wednesday that accepting shareholders would receive 2,450 pence a share, as announced on Friday. The price is a 67% premium over the company's closing price of 1,470 pence on May 17, the last business day before the offer period began.

GLOBAL NEWS

Sudden Return of the Trump Trade Sends Treasurys Reeling

The increasing likelihood of a second Trump administration has helped spark a steep selloff in U.S. government bonds, with investors betting policies including tax cuts could drive up deficits and inflation.

Treasury yields, which rise when bond prices fall, started surging June 28, a day after a debate between President Biden and former President Donald Trump that Wall Street viewed as delivering a major blow to Biden's re-election chances. A poor showing from Biden could also help tip control of Congress to Republicans, creating more space for their budget priorities.

Democratic Unity Cracks in Wake of Biden's Debate Performance

WASHINGTON-A show of Democratic unity in the wake of President Biden's disastrous debate performance is starting to crack as a handful of lawmakers break ranks to warn the party is heading for defeat.

Rep. Lloyd Doggett (D., Texas) called on the 81-year-old incumbent to exit from the race following a stumbling performance in a debate with former President Donald Trump. "Too much is at stake to risk a Trump victory-too great a risk to assume that what could not be turned around in a year, what was not turned around in the debate, can be turned around now," Doggett said.

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July 03, 2024 05:51 ET (09:51 GMT)

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