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EMEA Morning Briefing: Stocks to Fall at Open, Tracking Wall Street Losses


Watch For:

German manufacturing orders; EU PPI.

Opening Call:

Losses on Wall Street could weigh on European stocks Wednesday. U.S. stock futures were pointing to another day in the red for major indexes. The dollar strengthened against the euro and the yen. Two- and 10-year Treasury yields soared to their highest levels since March and April of 2019 after hawkish comments from Fed's Gov. Lael Brainard. Oil was lower in early Asian trading, weighed down by a strong U.S. dollar. Gold declined in early Asian trading, weighed by higher Treasury yields.


European stocks are set to open lower, tracking losses on Wall Street.

U.S. stocks fell, with selling accelerating in the afternoon, after Federal Reserve Gov. Lael Brainard said the central bank is strongly committed to fighting inflation and may make significant cuts to its asset portfolio as early as May.

Big tech companies reversed course and sank a day after leading the big stock indexes higher. Twitter continued climbing, rising 2% after saying it would add Elon Musk to its board.

Stocks to watch:

There are increased risks of an industrial recession in Europe in the second half of 2022, with electrical equipment manufacturers bearing the brunt, according to Citi.

Low-voltage and automation-industry growth correlates more than 70% with the ups and down of industrial-production metrics, and the German IFO index slumped in March and Citi's own economists see EU 2022 GDP growth averaging at 2.2%, down from 3.3% previously, it said.

The bank has cut growth forecasts accordingly for Schneider Electric, ABB, Legrand, and Rexel. However, given likely strong 1Q results, companies probably won't change full-year guidance at this stage, though there is an increasing risk they will do so by mid-year, Citi added.

Market Insight:

An economic downturn looms for the US and Europe, Deutsche Bank economists David Folkerts-Landau and Peter Hooper said.

"Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated US and European inflation, have caused us to revise down our forecast for global growth significantly," they said.

"We are now projecting a recession in the US and a growth recession in the euro area within the next two years." This downturn will end when the Fed stops raising rates: "Growth is seen recovering thereafter as inflation recedes and the Fed reverses some of its rate hikes," the bank said.


The dollar strengthens against the euro and the yen, and the WSJ Dollar Index inches higher. Dollar strengthening typically reverses as the Fed's hiking cycle is priced in, Bank of America said.

"The US cyclical advantage typically erodes as U.S. growth outperformance narrows amid an expanding, broadening global economic recovery and declining risk premium; and commodity prices typically remain supported, reinforcing terms-of-trade shifts to the disadvantage of USD," the firm said.

But "this time around, things could evolve differently given the U.S. is energy self-sufficient and if the effects of war in Ukraine persist or escalate to the detriment of Europe." BofA said it maintains a bearish EUR/USD and bullish commodity FX bias.


The euro looks set to make a strong recovery if the Ukraine war ends as the ECB will start raising interest rates and EU fiscal stimulus will increase, Saxo Bank said.

The ECB could end its negative rate policy by year-end if the Ukraine war is over, Saxo Bank said. Meanwhile, Germany has vowed massive fiscal outlays to address its energy and defense liabilities while the EU will fund new fiscal initiatives with a joint debt issuance, the Danish investment bank said.

"The most supportive combination for a currency is tighter monetary policy and looser fiscal policy, and the eurozone is set to move the most in the fiscal direction over the coming year at least."


Most Asian currencies weaken against the dollar amid rising Treasury yields that enhance the appeal of USD-denominated fixed-income assets.

Fed Governor Brainard, who is awaiting Senate confirmation to serve as the Fed's vice chairwoman, talked up a "rapid pace" of balance-sheet reduction, wanting to get policy to a more neutral setting this year, NAB said. The comments have supported USD, it added.


Two- and 10-year Treasury yields soared to their highest levels since March and April of 2019 after Federal Reserve Gov. Lael Brainard said she expects the central bank's almost $9 trillion balance sheet to "shrink considerably more rapidly" than in the previous recovery. The yield on the 10-year Treasury note rose to 2.616% from 2.554% Tuesday.

"Headlines from Brainard have reinforced the call for a May balance sheet runoff announcement, noting that 'the Fed will shrink the balance sheet at a rapid pace as soon as May,' " according to BMO Capital Markets strategist Ian Lyngen.


Oil was lower in early Asian trading, weighed down by a strong U.S. dollar amid hawkish comments from the Fed's Brainard, ANZ said.

However, oil prices remain supported by the prospect of further sanctions on Russian energy exports, the bank said. The EU is proposing to ban most Russian ships and trucks from entering the bloc, it noted.


It's difficult to know with certainty how a European ban on Russian coal would impact markets, especially given Russia's exports have already been hurt by sanctions, Commonwealth Bank of Australia said.

"Banking and finance sanctions have weighed on securing trade financing, disrupting shipments of coal out of Russia," CBA said. Analysts more broadly have raised concerns other countries won't be able to plug a shortfall in Europe created by any ban.

But CBA's view is that coal prices won't return to recent peaks even if Europe formalizes such restrictions, "because the recent peak in coal prices were likely pricing in a more severe reduction in Russian coal exports a few weeks ago."


Commodity producers, especially those that have strong earnings growth or generate dividends, look like better buys than commodity futures for investors looking for commodity exposure, said Tai Hui, chief market strategist for Asia-Pacific at J.P. Morgan Asset Management.

Such companies seem to be more reliable when it comes to generating returns for investors, he said. "Energy prices have established a [trading] range...I don't think we will see any huge amount of energy-price increase which is sustainable," he said.

"There may be future price rises if new sanctions come in but this may be followed by demand destruction. The average investor might not catch [the price increases] well."


Gold declined in early Asian trading, weighed by higher U.S. Treasury yields, DailyFX said. The precious metal behaves like a zero-coupon bond, so "when other assets are offering better risk-adjusted returns or... offering tangible cash flows during a time when inflation pressures are raging, then assets that don't yield significant returns often fall out of favor," it said. "Rising U.S. real yields remain problematic."


Base metals were lower in early Asian trading, weighed by lockdowns and other movement restrictions in China as the country battles its worst Covid-19 outbreak yet.

"Sentiment has been dulled lately as a lockdown in Shanghai has impacted the flow of raw materials across the country" and is crimping economic activity in the country, ANZ said.

However, high energy prices could curtail supply of refined metals amid rising production costs, which could support prices across the metals complex, the bank added.

Three-month LME copper was 0.6% lower at $10,390 a ton; three-month LME aluminum fell 0.3% to $3,455 a ton.



Fed's Brainard Says Reducing Elevated Inflation 'Is of Paramount Importance'

A top Federal Reserve official said the central bank is strongly committed to taking steps that will reduce inflation this year, including by approving significant reductions in its $9 trillion asset portfolio at its policy meeting early next month.

Fed governor Lael Brainard, who is awaiting Senate confirmation to serve as the Fed's vice chairwoman, said she anticipated shrinking the asset portfolio-sometimes referred to as a "balance sheet"-and a series of interest-rate increases to move the Fed's policy stance to a more neutral position that no longer provides stimulus to the economy later this year.


China Services Activity Falls to Lowest Level Since February 2020

A private gauge measuring activity in China's services sector tumbled to its lowest level since the initial onset of the pandemic in February 2020, as dozens of provinces reported coronavirus cases in March, forcing Beijing to impose strict restrictions that weighed on travel and consumer spending.

The Caixin China services purchasing managers index dropped to 42.0 in March from 50.2 in February, Caixin Media Co. and research company IHS Markit said Wednesday. The reading remained above the 50 mark, which separates month-to-month activity expansion from contraction.


Ukraine's Zelensky Calls for Removing Russia From U.N. Security Council After Alleged War Crimes

Ukrainian President Volodymyr Zelensky told the United Nations Security Council that Russia should be removed from the council or it should otherwise be dissolved, after warning that newly uncovered atrocities following the withdrawal of Russian forces near Kyiv could be worse than those in the city of Bucha.

"It is difficult to find a war crime that the occupiers have not committed," Mr. Zelensky said during a virtual appearance at the council's chamber Tuesday. He has previously said more than 300 civilians had been tortured or killed in Bucha.


U.S., EU to Impose More Sanctions on Russia After War-Crimes Reports

The U.S. and the EU are set to unveil new sanctions on Russia this week, after allegations from Ukraine of potential war crimes against civilians by Russian forces galvanized a push for tougher measures against the Kremlin.

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April 06, 2022 00:34 ET (04:34 GMT)

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