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European Midday Briefing: Sentiment Boosted by Debt-Ceiling Deal; U.S. Jobs Report Looms

MARKET WRAPS

Stocks:

European stocks made gains again on Friday as investors cheered the U.S. debt-ceiling deal.

Focus now shifts to the U.S. non-farm payroll report.

"Consensus is looking for moderating non-farm payroll growth (190,000 from 253,000), but we see some upside risks after most leading employment indicators and yesterday's ADP report surprised to the upside, " Danske Bank said.

Stocks on the Move

Shares in Adidas and Puma gained Friday after U.S. sports-gear maker Lululemon increased its earnings guidance for the year on the back of a strong fiscal 1Q, pointing to surging demand in China.

Lululemon said it also hopes to reach some $12.5 billion in revenue by 2026, from half that in 2021.

The sunny outlook--a "solid print in a sea of volatile results across the retail industry," Jefferies said --is also good news for Germany's Adidas and Puma, which will hope to regain rapid growth in the key East Asian market after recent travails including a consumer boycott and pandemic turbulence.

Shares in Adidas gained 3.4%; those in Puma rose 4.2%. Lululemon itself saw its shares gain 13% in after-hours trading following Thursday's print.

Other Stocks to Watch

British American Tobacco is expected to report a business update on Tuesday ahead of its first-half results.

The cigarette maker faces a range of longstanding issues that may weigh on sentiment, including regulatory pushback against smoking as well as menthol and flavored alternatives, its ability to create new income streams with next generation products and a $635 million fine by the U.S. for violating North Korean sanctions, AJ Bell said.

"All of these issues will be under scrutiny as [New Chief Executive] Marroco oversees the second-quarter update, which will be benchmarked against the full-year guidance for 2023 given by [Former CEO] Bowles alongside the 2022 full-year results back in February."

Read Marks & Spencer Likely to Report a Robust Start of FY 2024

Read Inditex Investors Will Have an Eye on Current Performance at 1Q Results

U.S. Markets:

Stock futures higher after the Senate voted to raise the debt limit and with the jobs report looming.

Other gauges this week have suggested the job market remains strong. Many investors believe labor-market tightness will pressure wages and force the Fed to resume policy tightening later in the summer.

Stocks to Watch

Dell's revenue plunged in the first quarter by the largest percentage on record and executives said they expect a similar drop in the current period. Shares fell nearly 3% in off-hours trading.

MongoDB reported better-than-expected first-quarter results and said it added the most net new customers in over two years. Shares rose 25% ahead of the opening bell.

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Forex:

The euro should find support as there is limited scope for lower front-end eurozone yields given that the European Central Bank looks set to raise interest rates further, MUFG Bank said.

Although data showed eurozone inflation eased in May, ECB President Christine Lagarde said on Thursday there wasn't clear evidence that underlying inflation had peaked, while ECB meeting minutes reinforced "the prospect of at least two more rate hikes," MUFG added.

Services inflation could "well drift higher over the summer on tourism-related inflationary pressures."

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The dollar continues to fall after Fed officials hinted at a pause in raising rates in June, and non-farm payrolls data at 1230 GMT could help determine whether losses continue, ING said.

"Today's U.S. NFP [non-farm payrolls] data will have a major say in determining whether the Fed hikes in June or not," ING said, adding that only above-consensus data could dampen prospects of a pause.

"Unless the May NFP surprises on the upside we would say today's DXY bias lies towards the 103.20 area."

Bonds:

The 10-year German Bund yield could struggle to fall meaningfully below 2.25% even as U.S. data could support a bond market rally, Commerzbank said.

A slowdown in U.S. nonfarm payrolls-with the data due at 1230 GMT-could ease market expectations of Fed interest-rate rises further, the bank said.

"Thus [it] does not stand in the way of the positive market backdrop that prevailed throughout the week," it added. "Yet, the air for 10y Bund yields seems to be getting thinner below 2.25%, as they are approaching the lower end of the recent trading range."

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The 10-year U.S. Treasury-German Bund yield spread could narrow, in line with the usual behavior around the time the Fed delivers its last interest-rate rise, Societe Generale said.

"Euro area core inflation is not yet in free fall, and the European Central Bank's stance is less restrictive than the Fed's," it said. "This argues in favour of a narrower 10y UST-Bund spread."

Read Spanish Bond Spreads Unlikely to Widen for Now Amid Election Risks

Energy:

Oil prices jumped for a second day after the U.S. Senate passed a bill averting a default.

Focus now turns firmly to this weekend's OPEC+ meeting at which analysts broadly expect the group to keep production quotas unchanged.

Outlook

Oil's outlook in June is likely to hinge on supply trends, especially the upcoming decision from the OPEC+ meeting later this week, Hengtai Futures said.

It added that demand-side fundamentals are showing mixed signals, with U.S. data showing sharply lower inventories buoying sentiment, but a soft China macro recovery is weighing on trading confidence.

Therefore, supply-side factors may be essential in driving prices. "If officials don't offer clear price support actions at the upcoming OPEC+ meetings, investors are unlikely to turn more bullish," Hengtai said.

Metals:

Base metals prices were pushing higher, while gold was flat, with investors looking to the U.S. jobs report as the next big macroeconomic indicator.

Aluminum

Aluminum prices will likely remain in range-bound trading this month, Hengtai Futures said.

It notes that Chinese supply of the base metal is likely on the rise, with several main producing regions expected to ramp up output as hydropower capacity becomes more abundant in the summer rainy season.

More hydropower also means lower production costs of the metal, which could further weigh on prices, Hengtai said, advising investors to stay on the sidelines and monitor the supply trend in the near term.

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

French Industrial Production Rose More Than Expected in April

French industrial production rebounded more than expected in April, suggesting that some pressures on output could be easing as supply bottlenecks loosen, despite the squeeze on spending caused by high inflation and rising interest rates.

Industrial output-comprising output in manufacturing, energy and construction-rose 0.8% on month in April, after falling by 1.1% in March, data from the country's statistics office Insee showed Friday.

   
 
 

Rio Tinto to Spend $395 Million on Australia Desalination Plant

Rio Tinto, the world's second-biggest miner by market value, said it plans to invest $395 million in a seawater desalination plant in the Pilbara region of Western Australia, where it runs massive iron-ore mining operations.

The plant, which will be built within Rio Tinto's existing iron-ore port operations at Parker Point, will support future water supply for the company's coastal operations and communities in the region, Rio Tinto said.

   
 
 

OPEC+ Cuts Could be More Painful

A change in behavior by U.S. oil producers could make a production cut by OPEC and its allies this weekend more effective in boosting oil prices.

OPEC+, which is made up of OPEC and its Russia-led allies, will meet in coming days to decide their production plan for the balance of the year. And the group won't need to worry as much that cutting its quotas will prompt U.S. shale producers jack up their own production to grab market share, says Rystad Energy's Jorge León, an economist who once worked for OPEC.

   
 
 

Germany Is Cooling. 3 Stocks to Put Your Money In.

Europe's stock market rally had to end sooner or later. Germany slipping into recession makes that seem like sooner. But there are still great companies to buy on the Continent.

European equities went on a tear last fall when fears for the region started to look overblown. A warm winter, plus deft policy responses, avoided calamities expected when Russia cut off most natural gas exports. China scrapped its zero-Covid regime, expanding a key market for European, particularly German, manufacturers. The iShares MSCI Eurozone exchange-traded fund (ticker: EZU) has soared by 40% over the past eight months. The good news looks priced in by now. "The market has recovered to more reasonable levels," says Andrew Clifton, an equities portfolio specialist at T. Rowe Price.

   
 
 

U.S. Is Willing to Begin Nuclear Arms Dialogue With Russia

The Biden administration is prepared to begin talks without preconditions with Moscow on steps to limit nuclear arms after the New Start treaty expires in 2026, national security adviser Jake Sullivan plans to say in a speech Friday.

But the limits on U.S. nuclear forces that the administration might accept at that point will be influenced not only by the size of Russia's nuclear arsenal but also by the pace of China's nuclear buildup, according to senior administration officials familiar with the address.

   
 
 

Ukraine Says It Stopped Russia's Latest Missile and Drone Attacks on Kyiv

Russia continued its aerial campaign against the Ukrainian capital of Kyiv, launching cruise missiles and drones against the city Thursday night, according to Ukraine's armed forces.

The Ukrainian air force said its air defenses intercepted all 15 of the Russian cruise missiles and all 21 of the Iranian-made Shahed drones.

   
 
 
   
 
 

GLOBAL NEWS

Jobs Report Expected to Show Unemployment Still Historically Low

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June 02, 2023 06:01 ET (10:01 GMT)

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