EMEA Morning Briefing: Stocks Seen Lower as Earnings Season Rolls on

MARKET WRAPS

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Germany GfK consumer climate survey; France consumer confidence survey, Pole emploi unemployment; UK CBI distributive trades survey; trading updates from Deutsche Boerse, Iberdrola, Puma, Beiersdorf, Orange, MTU Aero Engines, Danone, Roche, Safran, GSK, Standard Chartered, KPN, Saab, SEB, Assa Abloy, Telia, Universal Music Group, Bunzl, Fresnillo, Smith & Nephew, Reckitt Benckiser, Royal Vopak, Impala Platinum

Opening Call:

European stock futures decline, signaling further losses as corporate earnings rush continues. In Asia, stock benchmarks mostly fell; the dollar and Treasury yields were little changed; while oil and gold futures advanced.

Equities:

European shares look poised to drop at Wednesday's open after a mixed picture of U.S. corporate earnings dragged Wall Street indexes lower overnight.

"I think earnings are really the go-to excuse for [Tuesday's] pullback," said Timothy Chubb, chief investment officer at Girard. "We've seen a significant amount of earnings revisions lower coming into this earnings season."

"We obviously got a pretty broad-based update for companies in various sectors. as opposed to, predominantly financial companies recently," said Chubb.

So far, the results are painting a mixed picture of strengths and weaknesses for companies and the markets they target. For example, McDonald's - a fast food giant with a window into consumers' wallets - beat expectations on metrics including earnings per share and same-store sales.

At the same time, 3M announced a restructuring plan that will cut 6,000 jobs as the company navigates "significant weakness in consumer electronics and consumer retail."

Anxiety about the banking sector continues to lurk after shares of First Republic Bank slumped almost 50% on news of a huge deposit flight earlier in the year.

Some investors' profit-taking ahead of big tech earnings may have also contributed to the stock sell-off on Tuesday, said Chubb.

Alphabet and Microsoft both saw shares up in after-hours trading after reporting earnings that topped expectations after the close, boosting U.S. futures.

Some analysts cited revived concerns about an economic downturn, amid anxiety about the budgetary and debt ceiling debate gridlock in Washington, D.C.

"Investors are assessing the extent to which nervousness about what may lie ahead for economies is holding back marketing budgets and delaying purchases by shoppers," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Read: The Party for Consumer Staples Stocks Might Be Ending. Here's Why.

Forex:

The dollar wavered in Asia as the yen strengthened amid risk-off sentiment spurred by Wall Street losses Tuesday.

A troubled U.S. regional bank reported bigger-than-anticipated withdrawals in 1Q and disappointing earnings, Commerzbank said. This has sparked renewed worries over the regional banking sector.

The USD has been well behaved in a manner of speaking, Bank of America strategist Adarsh Sinha said. He said both BofA's fundamental/macro-driver and agnostic frameworks show the ICE US Dollar Index is roughly in line with estimated levels. He says convergence may partly explain the drop in FX volatility this year.

"Within G10 FX, GBP stands out as overbought due to seasonals and BoE expectations; we like to fade recent strength."

Meanwhile, commodity currencies excluding the Canadian dollar generally look oversold, especially the New Zealand dollar, Sinha said.

Bonds:

Treasury yields were little changed in Asia after plunging by the most in a month overnight, as first-quarter results from First Republic Bank reignited concerns about the banking sector and boosted the attractiveness of most government debt.

Renewed concerns about an economic slowdown, stresses in the banking sector and the prospects of a U.S. debt-ceiling fight continued to plague the government-debt market on Tuesday.

Traders now see June as the most likely month in which the government may run out of money, unless Congress raises the $31.4 trillion debt ceiling.

Debt-ceiling issues weren't the only thing on the bond market's mind. Most Treasury yields took a decisive dive on Tuesday following late Monday's announcement of disappointing deposit losses at First Republic Bank. Lower-than-anticipated volume reported on Tuesday by package delivery giant United Parcel Service Inc. for the first quarter only reinforced the sense that the world's largest economy may be about to tip into a recession.

"U.S. recession risks have returned to the forefront of market worries since the start of the banking turmoil," said Goldman Sachs economist Vickie Chang.

"Our yield-curve-based estimates of recession probabilities now imply very high probabilities of a recession starting in the next 12 months, largely due to the market pulling forward and deepening cut pricing in the policy curve," Chang said. For now, rates markets appear to be "priced for a significant weakening in the economy."

Energy:

Oil futures rose early Wednesday, rebounding from losses on Tuesday amid recession worries.

Crude oil remained under pressure amid broader market moves amid a low volume session, said Daniel Hynes, senior commodity strategist at ANZ. "This was sparked by weak economic data, with US consumer confidence in April falling to its lowest level since July 2022," he said.

Metals:

Gold futures rose slightly in Asia, hovering close to the $2,000/oz level on a risk aversion mood.

There's a fresh wave of fear over the U.S. banking system after First Republic Bank released its earnings on Tuesday, stating it lost around $100 billion in deposits. "If the bloodbath on Wall Street gets uglier, investors will eventually pile back into the precious metal," said Craig Erlam, senior market analyst at Oanda.

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Aluminum rose amid ongoing supply-side issues. Tight power supply in China's Yunnan province associated with the most severe drought in a decade is a significant supply risk, said Daniel Ghali, senior commodity strategist at TD Securities.

Most of aluminum's rally over the past month seems related to a recovery in demand in April, which helped to support the base-metals complex, Ghali added.

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Chinese iron ore futures declined, extending losses after Beijing officials indicated their intentions to crack down on price speculation.

Galaxy Futures said the regulatory move is likely adding to investor pessimism, with trading sentiment already weighed by slowing steel production in China, in part due to a weaker-than-expected construction and real estate recovery after the country's post-pandemic reopening. Galaxy thinks the price downturn may drag on in the near term.

TODAY'S TOP HEADLINES

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The bill is designed to unify Republicans around a position as they prepare for expected talks with the White House and congressional Democrats over spending cuts, ahead of a projected summer deadline to raise the country's borrowing limit. Unless Congress raises the ceiling, the U.S. could default on payments to borrowers and other obligations.

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The company, British American Tobacco PLC, entered into a deferred prosecution agreement with federal prosecutors over illegal sales that took place over more than a decade, even after the company announced that it had abandoned its North Korean business, U.S. officials said. But BAT, which makes Lucky Strike, Dunhill and Pall Mall cigarettes, continued selling tobacco products to the isolated regime through a Singaporean front company.

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April 26, 2023 00:17 ET (04:17 GMT)

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