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EUROPEAN MIDDAY BRIEFING - Stocks Drop, Miners and Oil Stocks Fall

MARKET WRAPS

Stocks:

European stocks mostly dropped with miners and oil stocks falling, though the CAC 40 rose after the first round of the French presidential elections.

In Europe, France's CAC 40 was an outlier, rising 0.4% after President Emmanuel Macron garnered 28.2% of the estimated vote in the first round of the presidential election, ahead of far-right leader Marine Le Pen's 22.9%. The two will face off in an April 24 rematch of the 2017 election.

Ms. Le Pen has dialed down her criticism of the eurozone but her advance in the polls still sent jitters through European markets in recent weeks. The euro traded roughly level Monday at $1.0912. The yield on 10-year French government bonds rose to 1.297% from 1.257% Friday.

Meanwhile, stocks in China tumbled as the economic toll of Covid-19 lockdowns in Shanghai and supply-chain disruptions in the country continued to mount.

"Resurgence of the pandemic is the major reason," said Bruce Pang, head of macro strategy research for China Renaissance Securities. He said investors have been hoping for measures from Beijing to help counter the effects of the slowdown.

Chinese auto sales data on Monday showed that passenger-car sales fell 10.5% in March, after production was hampered by factory closures. Shanghai, the center of the Covid-19 outbreak, reported more than 25,000 asymptomatic carriers of coronavirus Sunday, according to the National Health Commission.

Shares on the move:

Vodafone Group shares topped the FTSE 100 risers, up 1.8% after reports claimed TalkTalk had appointed advisers to sound out potential interest in a possible GBP3 billion sale of the privately-owned broadband, phone and TV provider.

"Press reports indicate that an informal offer to buy all/part of TalkTalk has been considered by Vodafone, Sky and others," Goldman Sachs analysts said.

"If true, while an acquisition by a financial bidder wouldn't change market dynamics, a transaction with Vodafone and Sky would offer a route to a more consolidated U.K. fixed-line/broadband market, likely boosting returns.

We view such a transaction as a clear positive for Liberty Global and Telefonica, a likely positive for BT and mixed for Vodafone," GS said.

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Continued dampeners on demand in China should hit Puma's sales in 2Q as well as 1Q, but the longer-term view remains positive, Deutsche Bank said.

The German sporting-goods company will report 1Q results later this month, and should bear the slight impact of new lockdowns in China and the Russia-Ukraine crisis, Deutsche said.

Further short-term China weakness means 2Q sales will also be lower than previously forecast, it added. But there is no change to the underlying positive view, with likely lower operating profit for the full year still in line with the company's guidance range, Deutsche said. The bank keeps a buy rating on Puma stock, trimming the target price to EUR120.

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Societe Generale's agreement to sell its Russian subsidiary should come as a relief for shareholders, Keefe, Bruyette & Woods analysts said.

The capital hit from the disposal will be limited at 20 basis points, whereas the French lender had previously warned that it would have a roughly 50bp hit if it lost control of its Russian assets, KBW said.

The sale leaves SocGen with EUR3.2 billion of Russia-related exposures outside the country, which still poses some risk, but overall the news should be received positively by the market, KBW said.

SocGen also confirmed its capital returns policy for 2021. "Although we had already assumed this would be the case, this view wasn't widely shared," KBW said. SocGen traded 5.1% higher.

Stocks to watch:

Beiersdorf's year is off to a strong start, with first-quarter sales coming in ahead of consensus led by the consumer division, UBS said.

However, despite expectations for an upgrade, the German manufacturing company reiterated its organic sales growth guidance for its consumer division, which led shares to underperform the broader European food and health-and-personal-care sector, according to the bank.

The company also highlighted several areas of uncertainty such as the war in Ukraine, lockdowns in China and inflationary pressure on raw material and logistic costs, UBS said.

According to the bank, Beiersdorf is expected to face downside risks brought about by lockdowns and incremental inflationary pressure, which could affect its gross margin development. Beiersdorf traded down 2% at EUR95.00.

Data in focus:

Economic growth in the U.K. is set to be weak for several months and could even contract in 2Q, Pantheon Macroeconomics said.

The economic-research firm expects GDP to fall 0.3% on quarter between April and June, reflecting a decline in output in the health sector and an extra public holiday in June.

Moreover, a sharp decline in households' real disposable income due to the cost of living crisis likely will bring the recovery in households' real expenditure to a standstill, Pantheon said.

"Given this weak near-term outlook for GDP growth, we continue to think that the [Bank of England's] Monetary Policy Committee will stop increasing the bank rate after raising it to 1.0% next month," it said.

Market Insight:

Danske Bank's analysts bring forward their expectations for an interest rate rise by the European Central Bank by one quarter, expecting the first rise in September and another one in December, each of 25 basis points.

This revised forecast comes on the back of the recent comments from ECB Governing Council members, hawkish minutes and inflation surprises, said Piet Haines Christiansen, Danske's chief strategist for ECB and EUR fixed income research.

Beyond 2022, Christiansen doesn't look for a prolonged interest-rate rising cycle into 2023 because he expects inflation to fall back to target. In addition, the Fed will also have contributed to a significant tightening of global financing conditions by then, worsening the economic outlook, he said.

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French President Emmanuel Macron is well positioned to win another term, but uncertainty surrounding the second round of the election has increased, UniCredit Research said.

"While we think the chances of Ms. [Marine] Le Pen winning are low, and lower than implied by polls, the voting intentions gap between the two candidates is so narrow that a victory of Ms. Le Pen cannot be ruled out, " the Italian bank said.

The two weeks until the second round on April 24 will be key for the candidates to mobilize their voters through debate and widen their appeal beyond their base to improve their chances of winning, UniCredit said.

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The first round of the French elections confirmed the collapse of traditional parties and rise of the protest vote, Barclays said.

"The 2022 presidential election in France marks the second and final step towards a reshuffling of the political landscape," the bank said.

After the 2017 election, the emergence of Emmanuel Macron, a centrist, liberal and pro-European politician, and the qualification of Marine Le Pen, the far-right, nationalist and euroskeptic leader, put an end of the historical dominance of the centre-right Gaullists and the centre-left Socialists since the start of the fifth republic, according to Barclays.

Macron will oppose Le Pen on April 24 and although most opinion polls point to a likely re-election of Macron, Barclays says there is still much uncertainty.

U.S. Markets:

Stock futures fell, with technology stocks on track to lead losses, as Covid-19 shutdowns in China added to the uncertainty investors face in a period of rising interest rates.

Ahead of bank earnings and inflation data later in the week, traders were left focusing on the health of the market.

Michael Darda, chief economist and market strategist at MKM Partners, says the S&P 500 is overvalued even with the recent pullback.

He said that for the equity risk premium - the earnings yield minus the bond yield - to move back to its five-year average, one of four things would have to happen: bond yields to fall by around 100 basis points, earnings to rise about 20%, the stock market to fall about 17% or some combination of the three.

"Our valuation work shows that financials remain the most attractive cyclical sector while healthcare is the most attractive defensive sector. High valuation tech across the capitalization structure remains an 'avoid' or a short, in our view," said Darda.

In the spotlight this week will be a key U.S. inflation reading. The release Tuesday of the consumer-price index for March will be the last CPI data the Fed receives before its next meeting on monetary policy.

Also in focus is the start of the first-quarter earnings season. While just 15 companies in the S&P 500 will report results, they include major U.S. financial groups JPMorgan Chase and BlackRock on Wednesday, before Citigroup, Morgan Stanley), Goldman Sachs, and Wells Fargo on Thursday.

Forex:

The dollar rose as the Fed looks prepared to deal with surging inflation through expeditious monetary policy normalization, ING said.

The market is currently expecting the Fed to raise interest rates by 250 basis points by year-end, ING analysts said. "And at ING, we look for 150bp of that tightening to come in the May-July period."

With uncertainty over the global economy also boosting demand for safe havens, investors are likely to hold onto their long dollar positions--bets on the currency strengthening--over the Easter break, the analysts said.

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The euro fell against the dollar following earlier gains in reaction to French President Emmanuel Macron's win in the first round of the country's presidential election.

Higher long-term U.S. Treasury yields and the consequent widening of the corresponding yield differentials with the rest of the world remain the main determinants of renewed dollar strength, together with demand for safe havens due to uncertainty over the Russian-Ukraine conflict, Unicredit Research analysts said.

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April 11, 2022 06:26 ET (10:26 GMT)

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