European Midday Briefing: Saudi Cuts Give Boost to Oil Majors

MARKET WRAPS

Stocks:

European stocks struggled for direction on Monday, following the strong U.S. jobs data on Friday, and after OPEC announced another voluntary production cut.

"Friday's jobs report had something for the bulls and the bears, and while European markets underperformed last week, there is a feeling that central banks are quite close to the end game when it comes to rate hikes, and that while rates shot up at the end of last week, they are holding below their recent peaks," CMC Markets said.

Saudi Arabia, following an OPEC+ meeting, said it would unilaterally slash output by 1 million barrels a day.

Read European Oil Major Shares Rise on Saudi Arabia's Output Cut

Stocks to Watch

Pernod Ricard shares may not have much room to grow in the near term, Citi said.

The distiller should benefit from improving momentum in Asia, but depletion trends in the important U.S. market are discouraging, Citi added.

With a current buyback set to end this month, the shares may pause for breath, it said.

Citi trimmed its target price on Pernod stock to EUR235 from EUR244, keeping a buy rating.

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Rio Tinto shares are down more than 20% year-to-date, making them attractively undervalued given the company's high quality, cash generative business, Deutsche Bank said.

The company has seen consensus turn progressively more bearish over the past three years due to persistent concerns over the iron ore market and company-specific ESG and strategy issues, Deutsche added.

"We have trimmed back our near-term iron ore prices, but remain more bullish than consensus and see 30% total return potential on a 12-month basis."

Deutsche lifted its rating on the stock to buy from hold, and its target price to 6,200 pence from 6,000 pence.

U.S. Markets:

Stock futures were broadly treading water.

With the debt ceiling resolved and earnings season out of the way, investors are training their focus on the Federal Reserve's meeting next week.

Stocks to Watch

Chevron, Exxon and Occidental Petroleum saw modest gains premarket, after a weekend production cut by Saudi Arabia boosted global oil prices.

Nvidia retreated more than 1% premarket. Shares in rival Advanced Micro Devices also slipped.

Palo Alto Networks will join the S&P 500 benchmark, replacing Dish Network. Shares in Palo Alto Networks rose more than 5% in premarket trading. Stock in Dish fell more than 6%.

Economic updates set for release on Monday include the S&P services PMI for May, followed by factory orders for April and the ISM services report for May.

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Forex:

The euro edged lower, reversing its Friday gains seen after ECB's Lagarde said further interest-rate rises are necessary, and this seems justified, Commerzbank said.

EUR/USD rose close to 1.08 on Friday but for it to rise to that level on a sustainable basis, "proof of a continued restrictive ECB stance would have to come from the board and not from the ECB President on her own," Commerzbank said.

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The dollar rose following Friday's jobs data.

Strong employment growth will "keep pressure on the Fed to keep raising rates," although a higher unemployment rate and slightly slower wage growth could lead to a slower pace of rate rises and potentially a pause in June, MUFG said.

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The Turkish lira extended its losses to a record low against the dollar as investors digested lower inflation data and Mehmet Simsek's appointment as finance minister.

Turkey inflation fell to 39.59% year-on-year in May from 43.68% in April, though this is due to the artificial stabilization of the lira ahead of Turkey's recent presidential elections, Commerzbank said.

This policy isn't sustainable so the reduction in inflation won't last either, it said.

Although some observers see Simsek's appointment as the government returning to "orthodox" interest-rate rises to curb inflation, the lira's weakness indicates most market participants don't share this "hardly justified euphoria," Commerzbank said.

Bonds:

After the recent rally, there is room for some consolidation going into the early June bearish seasonality in eurozone bond markets, Morgan Stanley said.

"The net short positioning on German futures should, however, limit the setback on 10y Bund yields," it added.

Morgan Stanley recommends investors to wait for a return of 10-year Bund yields to the 2.35%-2.40% area before adding long EUR duration trades ahead of the mid-June bullish seasonality on duration.

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French government bonds are relative outperformers versus German Bunds after S&P Global Ratings on Friday affirmed France's 'AA' rating, keeping the outlook negative.

"The negative outlook reflects our view of downside risks to our forecast for France's public finances amid its already elevated general government debt," the ratings firm said.

S&P expects France's budget deficit will decline to 3.8% of GDP in 2026 from about 5% in 2023, with general government debt remaining above 110% of GDP.

Read Spanish-French Bond Spreads Could Tighten on Medium Term

Read US, Eurozone Corporate Bonds Should Stick to Tight Ranges This Week

Energy:

Oil prices rose following the OPEC+ meeting.

The OPEC+ alliance of OPEC and their Russia-led allies made no changes to their oil output quotas. However, Saudi Arabia said it would voluntarily cut its own output starting in July, and that the cuts could be extended.

Other group members who had cut production earlier this year said they would extend those cuts until the end of 2023.

Outlook

Analysts seem split on whether the OPEC+ meeting showed unity or a lack of cohesion and on how oil prices will respond in the short term.

But the one thing they do agree on is that it will deepen a broadly expected supply deficit later this year.

The IEA was already expecting a 1.9 million bpd deficit by Q3 before the latest move. That deficit could now reach 3 million bpd "Which could add upside [price] pressure in the coming weeks" Rystad Energy said.

Read Saudis Leave Market Guessing About Future Oil Output

Read Barron's The Price of Oil Could Run Up Soon. 6 Stocks to Play It.

Metals:

Base metals and gold prices were falling in early trading, as dollar strength and macroeconomic weaknesses continued to weigh.

Last week's strong jobs number raised the prospects of another rate hike from the Federal Reserve next week, ANZ Research said.

"With core services inflation ex-shelter still well above target, the FOMC needs to tighten further. It cannot take the risk that the lags in monetary policy may be weaker than expected and elevated inflation persists."

Read Commodities Slide as Investors Bet on Economic Slowdown

Read Euro-Denominated Gold Could Outperform in Near-Term

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June 05, 2023 06:36 ET (10:36 GMT)

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