EMEA Morning Briefing: U.S. Rebound to Stoke European Gains

MARKET WRAPS

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UK Public Sector Finances; updates from Orange, Santander, UBS, ABB, Novartis, Michelin, Lagardere, Valeo, Enagas, Kuehne & Nagel, SMCP, BIC, Telekom Austria, Valeo, Randstad, Associated British Foods, HSBC, SKF, EQT, SSAB, Avast, Taylor Wimpey, Sasol

Opening Call:

A sharp turnaround on Wall Street should propel European stocks higher early Tuesday. In Asia, most major benchmarks posted solid gains; the dollar and bonds edged lower; and oil prices and gold advanced.

Equities:

European shares look poised for a strong rebound after Wall Street flipped higher Monday with investors scooping up shares of beaten-down technology and other growth stocks.

Dow industrials staged their biggest intraday turnaround in two months, while the S&P 500 and Nasdaq each posted their biggest gains in almost a week, as investors brushed aside worries from earlier in the day about fresh lockdowns in China.

"I think a lot of growth stocks have been punished too severely," said Brian Price, head of investment management for Commonwealth Financial Network. "Part of what we're seeing may be a reversal of that. The market is stepping back and assessing if they should have moved so fast."

Market Insight:

Russia is now at serious risk of defaulting on its debt which would have global impact, said Andrew Stanners, investment director at abrdn. It's been 24 years since the country's last rouble-based default, which triggered a crisis that shocked the financial world, he said, adding that this time both rouble- and foreign-currency debt are affected.

"The sanctions imposed on Russia over the invasion of Ukraine risk not only a rouble-based default, but also a foreign-currency default." Prior the conflict, Russia was an investment grade country with low debt and high gold reserves, and as such, a default will undoubtedly impact pensions and portfolios around the globe, Stanners said.

Stocks to Watch:

First-quarter earnings for reinsurers look set to be dominated by negative uncertainties, said analysts at UBS.

Concerns around Russia's invasion of Ukraine, higher inflation impacting reserves and the strength of catastrophe budgets after an active quarter--including floods in Australia, European storms--will be in focus. Catastrophe losses, even excluding initial war estimates, look set to miss company budgets by 23% on average, with Swiss Re as the most likely worst hit, UBS said.

Incorporating initial estimates for the war, budgets could be exceeded by more than 50%. The bank has buy ratings on Munich Re and Scor, is neutral on Hannover Re and has a sell on Swiss Re.

Forex:

The dollar gave back some of Monday's strong gains but remained elevated, particularly against the euro and sterling.

"Despite the sharp FX moves and the higher volatility after Russia's invasion in Ukraine, we continue finding aggregate market positioning not stretched, and, in most instances, light" said Bank of America.

It said the market is long the euro, short the yen and broadly neutral the dollar. "Flows since the war have been positive for the commodity G10 FX [particularly AUD and CAD], SEK, USD and LatAm FX." BofA added that flows since the war have been in line with the price action and driven mainly by prospects of central bank normalization, terms- of-trade shocks and the war directly, with the European currencies in G10 and EM except NOK hurt.

The yen strengthened in Asia on concerns over the possibility of more Covid-19 lockdowns in China. Together with the Russia-Ukraine conflict, these lockdowns are causing major global supply-chain issues, exacerbating worries of a looming global economic stagflation, said CMC Markets analyst Tina Teng.

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The ability shown by the U.S. and its allies to freeze Russian assets moves central banks around the world to pursue more independence from dollar assets, although that could be difficult given the dollar's strength, said Strategas's Nicholas Bohnsack.

"Ultimately they diversify away from the dollar into things like gold, crypto, commodities. That does have the potential to be very disruptive to the global financial system."

Bohnsack said the stock of dollar-denominated debt is very high, and flow remains elevated. "But over time you would anticipate that dollar debt particularly outside of the U.S. would start to ebb a little bit."

Bonds:

Treasury yields edged higher in Asia after they fell sharply Monday, with investors cautiously shaking off recent weakness tied to China's expanded lockdowns.

Markets are facing a busy week on the economic front, as the Federal Reserve is now in a blackout period ahead of the May 3-4 FOMC meeting. The March core personal-consumption expenditures price index, the central bank's favored inflation indicator, is due Friday.

On Monday, traders of fed funds futures pulled back on their expectations for a 75 basis point rate hike from the Fed in June. The likelihood of such a move, which would have followed a 50 basis point hike in May, dropped to 81% from 91% on Friday, according to the CME FedWatch Tool.

Energy:

Oil prices steadied in Asia, partially reversing some of Monday's steep declines, although WTI crude remained below $100 a barrel.

ANZ said there are still concerns that Covid-19 outbreaks in China, the world's biggest crude importer, are weighing on demand. EU-Russia relations also remain in focus after Emmanuel Macron called for more sanctions on Moscow, including a ban on oil and coal imports, said SPI Asset Management analyst Stephen Innes.

Jeffrey Halley, senior market analyst at OANDA, said he's sensing a shift in sentiment for oil, even amid tight supplies, because Asian markets ignored a couple of key headlines on Monday.

Firstly, Valdis Dombrovskis, the European Commission's executive vice president, told The Times, that the EU was preparing "smart sanctions" on Russian energy imports, which would include "some form" of an oil embargo.

Given that many European countries are dependent on Russian oil and gas, a ban on those commodities is not supported by all, with Germany and Hungary among those opposed. But Halley said he has "reservations that any European energy sanctions on Russian oil and natural gas can be ignored for long."

As well, the market has dismissed heavy damage to a major Libyan oil terminal during recent clashes, Halley said.

"Preliminary assessments indicate that 29 sites, including oil derivatives tanks and several other tanks, have been damaged," Libya's state-owned National Oil Corp. said in a statement late Saturday.

Metals:

Gold made modest gains in Asia after prices settled at a 2-month low Monday as investors sidestepped the metal for more attractive safe havens.

"Gold's inability to benefit from falling stock markets is a reflection of how difficult it will be for gold to make significant gains given the interest rate outlook outlined by the Fed last week," said Rupert Rowling, market analyst at Kinesis Money.

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Copper and aluminum were also higher as Chinese inventories were drawdown, tightening supply levels, said ING's commodities strategists Warren Patterson and Wenyu Yao.

Despite movement curbs in parts of China, "logistical conditions were reported to have improved in some regions, which may have contributed to stock drawdowns." However, fears of Beijing going into a harsh lockdown will continue to weigh on the industrial metals complex, the strategists said.

Other News:

The recent sharp declines in mining share prices is likely to continue in the short term, but the powerful upturn in commodities prices that began two years ago is probably on hold, rather than dead, said Christopher LaFemina, an analyst at Jefferies.

Concern that a spike in Covid cases in Shanghai, and the subsequent lockdowns by authorities, will lead to a decline in demand for metals has pulled share prices lower, LaFemina added. Prices for most key commodities will probably fall in the second half of this year, then prices for base metals, especially copper, should recover, he said.

That trend should boost mining share prices in the longer term. Risks for the sector are skewed to the upside for the longer term, LaFemina said.

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April 26, 2022 00:27 ET (04:27 GMT)

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