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North American Morning Briefing: Hopes for Less Aggressive Fed Spur More Gains for Stocks

MARKET WRAPS

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Opening Call:

Stocks look likely to continue their momentum from a rally last week with futures rising early Monday, as fears eased somewhat over more aggressive interest-rate increases from the Federal Reserve.

"Markets continue to price that the worst is over for U.S. bond markets and that the end of Fed rate hikes will occur sooner as the economies in the U.S., and elsewhere, slow sharply in the second half of 2022," said Jeffrey Halley, an analyst at broker Oanda.

The week ahead holds a wave of economic data and meetings, including an event on Wednesday with Jerome Powell and the heads of the European Union and U.K. central banks. The personal consumption expenditures index on Thursday also will be closely watched, considering the PCE measure is the Fed's preferred inflation indicator.

"Without having a blockbuster event to look forward to this week there are plenty of things to keep us occupied in what are highly uncertain times," said Jim Reid, a strategist at Deutsche Bank.

Overseas, the pan-European Stoxx 600 increased 1% while and benchmarks in Asia posted solid gains.

Stocks to Watch:

French biopharmaceutical Ipsen has reached an agreement to acquire oncology drugmaker Epizyme for a cash consideration of around $247 million, or $1.45 for each outstanding share. Epizyme's board has unanimously approved the transaction and recommended it to shareholders.

Read Barrons.com: Slumping Chip Stocks Microchip and Analog Devices See Insider Buying

Economic Insight:

Inflation in the U.S. is expected to remain high as the increase in the price of services and housing costs will be sustained even if the price of goods ease, said Oxford Economics.

With the labor market still showing signs of tightness, the Federal Reserve is likely to continue to act aggressively to tame inflation until it shows clear signs of retreating on a sustained basis.

"We expect the Fed to hike its policy rate by another 75 basis points at its July policy meeting and again at the September confab before easing up later in the year when, we expect, the economy's growth engine will be down shifting," said Oxford Economics.

Forex:

The recent better environment for equities as expectations of interest-rate rises are scaled back is negative for the dollar, said ING currency analysts.

"Barring fresh shocks and since it is not a big week for U.S. data, it seems not unreasonable to think equities could post some marginal further gains this week," ING said.

Firmer equities should lift commodity-linked currencies in particular, such as the Canadian dollar and Norwegian krone, while the DXY Dollar Index could fall toward 103.40, ING added.

Commonwealth Bank of Australia said the USD DXY can track higher to 106.00 points this week from 104.00 currently as the growing risks of a global recession, or at least a sharp slowdown, support further dollar gains.

While this week's PCE deflator for May could show persistently high inflation requiring the FOMC to stick to its path of tightening aggressively, the ISM manufacturing index could ease modestly and remain in expansionary territory for now, CBA said.

A sharp downside surprise could paradoxically support the dollar because it is a safe-haven currency, CBA added.

Bonds:

Prices in long-term sovereign bonds on either side of the Atlantic might have been propped up by a recent downward trend in long-term inflation expectations on both the euro and dollar interest rate markets, said LBBW.

"It therefore seems that the gradual strengthening of hawkish signals from the major central banks has boosted the confidence of market players when it comes to reining in inflation risks over the medium term--by means of a recession if need be."

The 5-year/5-year forward inflation expectations have declined by more than a quarter percentage point in each case, said LBBW, adding the forward inflation swap in the eurozone was approaching the 2% mark again.

Energy:

Crude prices wavered as investors awaited more information on new sanctions on Russian oil, following talks at the G-7 summit.

Leaders of the G-7 nations are considering capping the prices at which they purchase Russian oil. Doing so would create a buyers' cartel of Western nations and their allies, though much of the details are still to be finalized.

Read: Russian Gas Cuts Threaten World's Largest Chemicals Hub

Metals:

Base metals and gold rose in early European trading despite ongoing worries of a global recession.

"Whilst not exactly a call for a turn from the current bear scenario, we do note positioning starting to show shorts emerging across risk assets, " said Marex's Asian metals team.

"It does seem like markets are buying--but just very slightly," Marex said, noting that supply of base metals is expected to remain on track despite strikes in South America.

   
 
 
   
 
 

TODAY'S TOP HEADLINES

 
 

Russian Gas Cuts Threaten World's Largest Chemicals Hub

LUDWIGSHAFEN, Germany-For years, BASF SE, one of the world's largest chemicals companies, built its business model around cheap and plentiful Russian natural gas, which it uses to generate power and as feedstock for products that make it into toothpaste, medicines and cars.

Today, dwindling Russian gas supplies are proving a threat to the company's vast manufacturing hub here-the world's largest integrated chemical complex spanning some 200 plants. Earlier this month, Russia started throttling back its supply of gas to Germany and other European countries. In response, company executives are doing what was unthinkable just a few months ago: considering how to potentially shut down the complex if gas supplies fall further.

   
 
 

3M Faces Potentially Billions in Liabilities Over $7.63 Earplugs

A tiny business for 3M Co.-making foam earplugs for the U.S. military-threatens to become a major liability for the manufacturing giant.

More than 100,000 U.S. military veterans have filed lawsuits against Minnesota-based 3M over hearing damage linked to what they claim are defects in the company's military-grade earplugs. The company faces billions of dollars in potential costs from legal settlements or trials after soldiers alleged they returned from war with hearing damage due to the earplugs, which the government bought for around $7.63 a pair.

   
 
 

Tesla, Ford and GM Raise EV Prices as Costs, Demand Grow

High gasoline prices are prodding more people to consider an electric vehicle. But car shoppers are likely to face sticker shock at the dealership, too.

Auto makers have been raising prices on electric cars, partly to offset the soaring cost of materials used in their large batteries. Car executives also are capitalizing on strong consumer interest in EVs, as a new wave of plug-in vehicles hits the market.

   
 
 

Employees Scrambled to Keep Robinhood Afloat in January 2021 Meme-Stock Frenzy, House Report Finds

Robinhood Markets Inc. struggled to handle huge volumes of stock trading and sparred with its principal customer, market maker Citadel Securities, during the week in January 2021 when meme stocks exploded, according to a report from the Democratic staff of the House Financial Services Committee.

The committee held hearings in February 2021, questioning the chief executives of Robinhood and Citadel Securities, as well as meme-stock hero Keith Gill and Gabe Plotkin, the hedge-fund manager who lost billions betting against GameStop Corp. and other hot stocks. The staff reviewed tens of thousands of pages of internal documents, including pointed communications inside and between the companies.

   
 
 

Cruise Lines Can't Duck Their Debt

Cruise ships, it seems, are like ducks-elegant and effortless above the water, fighting like crazy to stay afloat beneath.

On the surface, the industry is finally steaming ahead after over a year at bay: The world has reopened, occupancy limits have relaxed and bookings are at or above prepandemic levels. Carnival Corp., Royal Caribbean Group and Norwegian Cruise Line Holdings are all eyeing a near-term return to profitability this year-a milestone they are hoping will reignite investor interest, with their shares down an average of over 45% over the past six months.

   
 
 

Amazon's Prime Day Isn't Quite the Blockbuster It Once Was

Amazon.com Inc.'s Prime Day appears to be losing some of its momentum.

Sales growth for the online shopping extravaganza has slowed and consumers aren't purchasing orders as large as they once did, data show. Amazon doesn't appear to be investing in the event as it has in the past, and many of the deals have been focused on the company's own products. Excluding electronics, the discounts on many items don't surpass those on other days at Amazon, data show.

   
 
 

Spirit-Frontier Deal Backed by ISS

Proxy advisory firm Institutional Shareholder Services Inc. recommended Spirit Airlines Inc. investors vote for a proposed merger with Frontier Airlines, reversing its position on the deal after Frontier sweetened its offer Friday.

"On balance, support for the merger with Frontier on the revised terms is warranted," ISS wrote in a report that was published late Friday and made public Saturday.

   
 
 

AT&T, Verizon Raise Prices and Test Consumer Budgets

This summer will test whether Americans already absorbing surging costs for fuel and food can also shoulder the burden of costlier cellphone service.

Wireless companies have spent the past month boosting fees and raising the cost of some midrange wireless plans. Industry executives say that consumers already numbed to surging prices for other necessities might absorb slightly higher rates instead of switching providers or dropping service.

   
 
 

G-7 Nears Agreement on Exploring New Sanction Capping Russian Oil Price

The Group of Seven club of wealthy democracies is inching toward an agreement on expanding its sanctions against Russia by looking for a mechanism to cap the purchase price of Russian oil, officials said, but the details are still being worked out.

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June 27, 2022 05:22 ET (09:22 GMT)

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