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EUROPEAN MIDDAY BRIEFING - Stocks Steady as ECB Eyed for Clues on Unwinding Timeline

MARKET WRAPS

Stocks:

Most European stock markets edged into positive territory Thursday, although gains were minor, with investors looking ahead to the latest policy decision from the European Central Bank.

The big question for the ECB is whether the governing council is ready to put a timeline on the end to net asset purchases, paving the way for interest-rate hikes. With headline annual eurozone inflation for March coming in at 7.5%, the pressure for the ECB to begin hiking remains strong.

"The ECB doesn't appear to have the luxury of doing nothing, yet this is what we can probably expect when President Lagarde holds her press conference later today, against a backdrop of rising discontent amongst countries like Germany and the Netherlands, about ECB inaction," wrote Michael Hewson, Chief Market Analyst at CMC Markets UK.

More on the ECB

Upside surprises in inflation and an uncertain growth outlook due to the war in Ukraine have made the majority of the European Central Bank's Governing Council to argue for a "data-dependent and step-by-step approach," said Dirk Schumacher, head of European macro research at Natixis.

The crucial question for the ECB is whether the end of net asset purchases under the Asset Purchase Programme will be brought forward, Schumacher said, seeing scope for a nuanced tweak in the ECB's wording.

"While we think it is likely that the [ECB's] statement will re-confirm the 'third quarter' as the end of net asset purchases, we expect Lagarde to signal that the Governing Council is leaning towards 'early 3Q'."

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Caught between high inflation, slower growth and a highly unpredictable environment, UniCredit Research expects Christine Lagarde to indicate the direction of travel for monetary policy remains unchanged. "The huge uncertainty caused by the Russia-Ukraine crisis makes it unlikely the ECB will provide new monetary-policy signals today."

The ECB is on course to wrap up net asset purchases in the third quarter, UniCredit said, but added that it they doesn't envisage Lagarde to drop any clear hints on the exact timing. UniCredit expects September as the earliest possible date for a first interest rate rise.

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With inflation the predominant risk at present and with the last two meetings having seen the ECB shifting toward a more hawkish interpretation of its mandate, "the undertone of the necessity to tighten policy will not fade," RBC Capital Markets' analysts said.

However, with rising risks to growth and inflation pulling in different directions, the ECB is likely to have ample reason to refrain from any major decisions on policy at Thursday's meeting, the analysts said. They expect the central bank to stress the necessity to obtain more information on the economic outlook and set up the June meeting as the key date for concrete decisions.

Economic Insight:

Fitch has cut its 2022 eurozone growth forecast while raising its inflation forecasts for the region. Fitch said it expects eurozone growth this year at 3%, 1.5 percentage points below its previous forecast.

Meanwhile, Fitch now expects eurozone inflation to average 5% this year, from 2.6% in December. Fitch also said it continues to forecast narrower deficits in nearly all eurozone member states this year, "partly due to last year's outperformance, but we expect their updated Stability Programs to show slower fiscal consolidation strategies in response to the Ukraine conflict."

U.S. Markets:

Stock futures were little changed as investors awaited a batch of reports from major financial firms, seeking clues on how soaring inflation and signs of slowing growth were expected to affect businesses.

Big U.S. banks are among the first to report earnings, with updates due from Morgan Stanley, Goldman Sachs, Wells Fargo and Citigroup before the opening bell. The sector is expected to be a weak spot after banks booked bumper profits during the pandemic. Analysts expect first-quarter earnings for S&P 500 banks to fall 37% from a year ago, according to FactSet.

Corporate results will also be scrutinized for guidance on how companies expect to manage tighter policy from the Federal Reserve, with a series of interest-rate increases expected.

"Investors are trying to figure out if the Fed is on the right course. Can they stick the landing in terms of bringing inflation down without bringing the economy down?" said David Donabedian, chief investment officer at CIBC Private Wealth.

The yield on the 10-year Treasury note declined to 2.675% from 2.688% on Wednesday. While declining in recent days, the yield on the benchmark note earlier this week hit its highest level since January 2019 as investors gear up for rising interest rates. Bond yields and prices move in opposite directions.

Retail sales figures for March, weekly jobless claims and the University of Michigan's consumer sentiment index are all due later in the session.

Forex:

The euro was 0.2% higher against the dollar as investors anticipate the ECB could detail plans to start raising interest rates in the coming months at its meeting later.

"Market participants in the European rate markets have been bringing forward ECB rate hike expectations ahead of today's policy meeting," MUFG Bank's Lee Hardman said. The overnight index swap curve is pricing in about 20 basis points of rate rises by the July meeting, 36bp by September and 70bp by year-end, he added.

Bets for faster ECB policy tightening have been reinforced by higher-than-expected March inflation data and plans for accelerated tightening from other central banks, Hardman said.

Meantime, the dollar hit its lowest in a week against a basket of currencies, pressured by a drop in two-year Treasury yields.

Hardman said bond moves suggest that market participants have gone "far enough for now" in pricing in more aggressive policy tightening from the Fed, leaving limited scope for the dollar to extend its recent rise to a near two-year high.

"Now that the U.S. rate market is better priced for Fed tightening, U.S. yields and the dollar should find it more challenging to continue their recent strong upward momentum."

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The Turkish lira edged down as Turkey's central bank is expected to leave interest rates unchanged despite surging inflation at Thursday's policy meeting.

The central bank delivered a series of rate cuts late last year after coming under pressure from Turkey President Erdogan to take such action but has paused its rate-cutting cycle since the start of this year. Soaring inflation should allow the central bank to refrain from cutting rates and remain on hold again, Unicredit Research analysts said.

"USD/TRY is thus likely to remain largely steady below the 15.00 threshold." The rate decision is expected at 1100 GMT.

Bonds:

Eurozone government bond yields were mostly higher in early European trading, with market focus on the ECB's meeting where it's expected to confirm a gradual normalization of monetary policy.

"[The] ECB is likely to emphasise a gradual policy normalisation (taking depo out of negative territory, stopping net QE), rather than a more aggressive tightening," Mizuho's rates strategists said, adding that there should be enough factors that Governing Council members cite for why it is best to retain optionality at this stage.

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As the era of unconventional monetary policy which drove bond yields to exceptionally low levels is coming to an end amid a broadly global inflationary surge, it seems "bonds are no longer the safe haven for investors they once were," Jon Mawby, senior fixed-income investment manager at Pictet Asset Management, said.

Risks are particularly significant for those holding longer-dated securities, an investment staple for institutional investors with long-term liabilities. Pension funds represent an example, he added.

Commodities:

Oil prices extended losses in Europe following Wednesday's bearish inventory data from the EIA that showed a bigger-than-expected jump in U.S. crude stocks.

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Gold was lower after hitting a one-month high Wednesday.

"Geopolitical risk premium is building again and this is underpinning gold," Stephen Innes, head of trading and market strategy at SPI Asset Management, said, adding that "investors are hedging through gold for the next inflation/growth discussion phase to shift to stagflation."

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Copper prices edged higher on the LME, with sentiment lifted on expectations of rising demand from China and low inventories of the red metal in the region.

Despite recent lockdowns in China, demand in the region remains firm, with warehouse stocks being drawn down amid a lack of material moving between the ports and warehouses.

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EMEA HEADLINES

Companies Size Up Their Losses on Russian Operations

Global businesses are tallying up tens of billions in losses from their Russian operations as they grapple with the impact of asset sales, shutdowns and sanctions, according to public statements and securities filings.

The cost to shareholders of Western companies' exodus from Russia will become clearer in coming weeks, as companies make their first earnings announcements since the invasion of Ukraine.

   
 
 

Ericsson 1Q Net Profit Missed Views on Delayed Contract, Russia Provision

Ericsson AB's first-quarter net profit missed expectations because of a delayed contract, expired licensing deals, and the previously announced 900 million kronor ($95 million) provision after suspending its Russian business, the company said Thursday.

However, the company won market share in the quarter after having strong sales of 5G equipment in North America, Europe and Latin America, as overall sales of network equipment grew organically by 4%, it said.

   
 
 

ECB's Timing for Ending Asset Purchases in Focus for Investors -- Market Insight

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April 14, 2022 05:51 ET (09:51 GMT)

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