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EUROPEAN MIDDAY BRIEFING - Stocks Extend Rebound But Worries Remain

MARKET WRAPS

Stocks:

European shares extended gains into a third trading session on Tuesday, as sentiment improved and despite heightened concerns over a global economic slowdown.

Few investors are willing to call a bottom to a selloff in the markets that has dragged the S&P 500 down 23% this year. Many say they view market turbulence, such as the kind seen last week in the markets, as buying opportunities.

"Seller fatigue could be setting in. Equity markets are attempting to grind higher as traders do not like the risk-reward of selling at the bottom with high volatility," wrote Stephen Innes, Managing Partner at SPI Asset Management.

Stocks to Watch:

Generali is seeking a compromise candidate to fill a vacant seat on its board at a meeting on Wednesday, a source close to the company told Dow Jones Newswires.

Italy's largest insurer is looking to replace industrial tycoon Francesco Gaetano Caltagirone, who quit the board in May after mounting a rival slate to oust current management led by Chief Executive Officer Philippe Donnet.

Read the full article here.

Market Insight:

The fact that investors have shrugged off the French legislative election outcome suggests their worry about monetary tightening supersedes other drivers, said ING.

"The fate of sovereign yields and spreads is beholden to monetary policy and, in that regard, European Central Bank comments should continue to carry disproportionate importance in setting price action."

From the bond market's point of view, potential changes along fiscal issues, structural overhauls and European integration matter, ING said, adding that only the probability of unpopular structural reforms can be said to have decreased in France after the elections.

Economic Insight:

A fall in GDP in the U.S. and Europe has now turned from a serious risk into the base case, said Berenberg.

It projects the eurozone economy will enter recession before the U.S., as it is hit harder by the energy price shock than the U.S.

"If it were not for a likely post-Covid-19 return of summer tourists, the recession would probably be starting already," Berenberg said.

As some easing of supply constraints and some decline in energy prices over the course of 2023 can make a bigger difference to the eurozone, the recession can end in mid-2023, according to Berenberg. For 2023 as a whole, Berenberg forecasts an on year decline in real GDP of 0.8%.

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Goldman Sachs expects eurozone core inflation to be close to its peak of 3.9% year-on-year in June and looks for a headline inflation peak of 9.4% year-on-year in September, with core and headline inflation at 3.4% and 8.4% respectively, in December.

The bank expects second-round effects from the surge in energy prices and estimates the weakness of the euro will push up inflation over the next couple of years. The re-intensification of bottlenecks is likely to keep core inflation elevated and food price inflation will remain high, pushing up headline inflation.

It expects core inflation at 3.4% in 2022 and 2.7% in 2023, with headline inflation at 7.9% in 2022 and 3.8% in 2023.

Read: Eurozone Economy Expected to Contract After Summer of Meager Growth, Says Barclays

U.S. Markets

Stock futures rose sharply as investors returned from a three-day weekend feeling a bit more optimistic after last week's steep selloff.

In premarket trading in New York, gains were spread across many sectors, with technology shares, travel companies and banks trading higher. Cruise lines Royal Caribbean, Carnival and Norwegian Cruise Line each climbed more than 3%, while American Airlines climbed 3.1%, boosted by expectations for what is expected to be a busy travel season.

Appearances before Congress from Jerome Powell will be closely watched this week. The Fed has been hiking rates in an effort to cool inflation that is running at 40-year highs. Some investors fear the Fed's aggressive policy tightening will lead to a recession.

Forex:

The euro could fall below parity against the dollar in coming years if weak growth and elevated inflation, or stagflation, becomes the new normal, said Danske Bank.

The global investment environment has been characterised by secular stagnation--mediocre growth but low inflation--since the 2007-08 financial crisis but it could transition toward years of stagflation, said Danske analyst Lars Sparreso Lykke Merklin. That means the dominance of the dollar, especially in EUR/USD, could last for some time.

"We may see a continued drift lower in EUR/USD over the coming 2-5 years, taking spot towards the 0.80-1.00 area."

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The prospect of a temporary pause in the federal gasoline tax could support the dollar, ING said.

Looser fiscal policy combined with monetary policy tightening, which the Fed is carrying out, is "generally good news" for a currency, ING said.

"Let's see how this gasoline tax holiday story develops and what size of fiscal stimulus it represents. This should be another factor keeping the dollar strong this summer."

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Cryptocurrencies continue to recover after the weekend's heavy losses but they aren't out of the woods, said Swissquote Bank analyst Ipek Ozkardeskaya.

"The risk of a further selloff cannot be ruled out as the tighter Fed expectations, the global selloff in risk assets and the fact that the massive outflows in cryptocurrencies started showing some cracks in the freshly born crypto industry make the cryptocurrencies increasingly less appetizing."

Ozkardeskaya added that cryptocurrencies could see a limited recovery in the near-future.

Bonds:

Eurozone government bonds were weaker in early trading, with a slightly more pronounced weakness in semicore and periphery than in core, as the market continues to contemplate the impact of planned monetary policy tightening by the ECB.

"Uncertainty about the ECB's rate path, the ECB's flexible PEPP reinvestments and the ECB's anti-fragmentation tool continue to linger, also visible in the mixed EGB [eurozone government bond] spread performance across curves and countries," said Commerzbank.

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European real money investors turned underweight in eurozone peripheral bonds for the first time since mid-2018, according to J.P.Morgan's latest client survey, conducted on the day of the ECB's ad-hoc meeting on June 15. But JPM said this underweight is modest.

"Based on anecdotal evidence, we believe that since the ECB ad-hoc meeting there has been decent short covering in the periphery by investors especially in the future space ."

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The implementation of a proper antifragmentation tool by the European Central Bank should increase the odds of a 50 basis point interest rate rise already in July, despite its intention to raise rates by 25 bps, said JPMorgan.

"Over the short term, we believe that the targeted and potential frontloaded use of PEPP reinvestment could limit volatility, however the vagueness of details could trigger some widening pressure especially if we move to the narrow side of the expected range on which the ECB have not been vocal before."

Energy:

Oil prices made solid gains, clawing back some of last week's losses as investors focus on limited supplies and building demand.

Recent Chinese data showing record oil imports for May suggests that demand is still strong, said OANDA's Jeffrey Halley. "That remains so around the world, and the squeeze on refined products like diesel and gasoline remain as tight as ever."

DNB's Helge Andre Martinsen said last week's slump in prices was technical in nature and "hence, we consider the recent weakness a buying opportunity."

Exxon CEO Darren Woods said a lack of investment in new supply means that the oil market could remain tight for another three to five years, according to Bloomberg.

Metals:

Gold futures eased lower, pressured by weak demand .

"Physical demand is subdued, but we believe the gloomy economic backdrop should strengthen gold's appeal," said ANZ.

Metal prices edged higher in London but remained at multi-month lows on inflationary worries and weak demand, with Peak Trading Research saying that copper's weakness is "a good proxy for weak global growth expectations."

"We still need sustained consumption over a longer period to inspire macro confidence" with yo-yoing Covid-19 policies in China not helping to improve sentiment, said Marex's Asian Metals team.

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Assicurazioni Generali SpA is seeking a compromise candidate to fill a vacant seat on its board at a meeting on Wednesday, a source close to the company told Dow Jones Newswires.

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June 21, 2022 05:36 ET (09:36 GMT)

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