European Midday Briefing: Investors Digest Iran Attack

MARKET WRAPS

Stocks:

European stocks traded mostly higher on Monday despite heightened tensions in the Middle East after an Iranian retaliatory attack on Israel on Saturday.

Investors hope the attack remains a one-off event, with the base scenario being that there won't be further escalation, though this could change at any time, CMC Markets said.

This week, investors will closely watch U.S. economic data releases and comments from Federal Reserve officials for clues on the monetary policy outlook, while the U.S. earnings season is also underway, IG said.

Shares on the Move

Most European defense stocks traded higher after tensions in the Middle East grew. Leonardo rose 2.1%, Thales and Dassault Aviation rose 1.5% and 1%, respectively, Rheinmetall gained 1% as well, and BAE Systems was up 0.5%.

Shares in oil-and-gas majors were down as oil prices dipped despite the heightened Middle East tensions. Shell, BP and TotalEnergies were down 1.5%, 2.5% and 0.4% respectively.

Economic Insight

A rising oil price could halt or even reverse the recent trend of falling inflation, potentially leaving central banks cautious about cutting interest rates, DZ Bank said.

"The question then arises for central banks as to whether, as in the past, they can 'see through' the inflationary effect of rising oil prices and thus take into account the economic risks associated with higher energy prices."

However, central banks would more likely be wary of jeopardizing their recent successes in combating inflation by cutting interest rates, DZ Bank added.

Market Insight

Iran's attack against Israel could cause short-term market uncertainty due to concerns that it marks a new, more volatile phase of the Middle East conflict, OCBC said.

However, these concerns probably won't derail the broader medium-term investment outlook for markets. That would likely only happen if there is all-out war in the Middle East, involving Iran versus Israel and its allies, as well as a sharp and sustained rally in oil prices, OCBC added.

Markets will be on edge in the coming days, watching to see if Israel will retaliate against Iran. "If there is no major retaliation, markets will heave a sigh of relief."

U.S. Markets:

Stock futures traded higher with Goldman Sachs earnings due this morning, along with results from brokerage Charles Schwab.

Stocks to Watch

Encore Wire agreed to merge with Milan-based Prysminian in a deal that values Encore Wire at an enterprise value of about $4.15 billion. Encore Wire stock rose over 7%.

Salesforce is in advanced talks to acquire Informatica, WSJ reported. Informatica was rising 2.7% while Salesforce fell 2.5%.

Forex:

The dollar could move higher, building on recent strong gains, due to safe-haven demand after Iran's drone and missile attack on Israel and as markets only price in just under two Fed interest-rate cuts this year.

"There seems little reason for the dollar to hand back recent gains. DXY may be due some consolidation around 106 after some powerful gains last week - but the direction of travel looks to be 107," ING said.

Even if weak, U.S. retail sales data at 12:30 GMT are unlikely to alter rate expectations, ING added.

Bonds:

Economic fundamentals suggest more widening of the Treasury-German Bund yield spreads, Commerzbank Research said.

"As the FTQ [flight to quality] bid fades, UST-Bund spreads have scope to continue to widen as rate prospects are drifting further apart."

This week's macro data releases are unlikely to challenge the ECB's rate cut intention nor the cautious thinking at the Fed, Commerzbank added.

Energy:

Oil prices edged lower as Iran's retaliatory attack against Israel was already priced in last week, but the market remained on edge waiting to see how the Israeli government would respond.

OPEC members likely don't want to see oil prices rising too high as that would risk damaging demand, ING said.

"If prices were to rally significantly on the back of supply losses, one would imagine that the group [OPEC] would look to bring some of this spare capacity back onto the market," ING added, stressing that OPEC currently sits on more than 4 million barrels a day of spare production capacity.

Moreover, in case of significant supply losses due to a broadening of the conflict, the U.S. could always release crude from its strategic petroleum reserves, it said.

Saxo said any oil price gains will likely be driven by fear more than actual disruption.

"Despite deflating a bit on Friday, crude prices already included a risk premium and the extent to which it will widen further depends almost exclusively on developments near Iran around the Strait of Hormuz."

Metals:

Base metals rose, while gold futures slipped 0.1% after having risen to a record $2,448.8 on Friday as the markets awaited Iran's retaliatory attack against Israel.

The market appears to have taken the drone and missile attacks with a sigh of relief, RBC Capital Markets said.

The most likely interpretation is that the attack was seen as a well-telegraphed response from Iran that was designed to send a message and act as a response to the airstrike on the Iranian consulate rather than cause maximum damage and lead to further instability, RBC added.

Russian Metals Ban

Aluminum, copper and nickel miners should benefit from U.S. and U.K. restrictions on trading of Russian metals , potentially boosting prices over the medium term, Jefferies said.

The restrictions apply to Russian aluminum, copper and nickel produced after April 12 as preexisting stocks are exempt from these sanctions.

"We expect prices for these metals to be very volatile initially on this news," Jefferies said, adding that it will have the most significant impact on aluminum prices as they appear to have been depressed due to Russian supplies.

EMEA HEADLINES

CVC Looks to Raise at Least $1.3 Billion in Amsterdam IPO

Global buyout firm CVC Capital Partners said it plans to list its shares in Amsterdam, making a second attempt to go public in less than six months.

CVC said Monday that it expects to raise at least 1.25 billion euros, equivalent to around $1.33 billion, by selling new shares as well as stock from some existing shareholders. The listing is expected to take place in the coming weeks, it said.

Biden Urges Caution as Israel Weighs Response to Iran

TEL AVIV-President Biden urged Israel to use caution in any response to Iran's unprecedented attack and pressed allies Sunday for a united diplomatic front in a bid to stop the hostilities from spiraling into open warfare that could engulf the Middle East and entangle the U.S.

The race to de-escalate tensions underscored the intense new phase that Iran and Israel's long-simmering conflict had entered after Tehran launched what military analysts said was one of the largest combined aerial attacks in recent history with more than 300 drones and missiles.

BNP Paribas Buys 9% of Ageas From Fosun for EUR730 Mln

BNP Paribas is buying Fosun International's 9% shareholding in Belgium insurer Ageas through its insurance subsidiary BNP Paribas Cardif for 730 million euros ($776.8 million).

The French bank said on Sunday that it will buy an initial 4.8% of Ageas in the coming days, and the rest following the receipt of mandatory regulatory approvals.

GLOBAL NEWS

China's Central Bank Holds Key Policy Rates, Drains Liquidity From Banking Sector

China's central bank kept key policy rates steady and drained liquidity from the banking sector as economic data shows fresh signs of weakness.

The People's Bank of China on Monday held the interest rate on its one-year medium-term lending facility at 2.5% while injecting 100 billion yuan ($13.82 billion) funds via the instrument, according to a statement on its website.

Consumers' bad feelings about a good economy shouldn't be ignored, Boston Fed President says

Boston Fed President Susan Collins says the central bank could benefit from paying attention to American consumers' bad feelings about a good economy.

In a wide-ranging conversation with MarketWatch, Collins talked about the stubborn impact of inflation, the often uneven picture of a healthy economy and the value of listening to frustrated American consumers as policymakers at the Fed work to stabilize the economy.

Fresh uncertainty around Fed rate cuts exposes the stock market's winners and losers

Higher U.S. inflation is dashing investors' hopes for multiple Federal Reserve interest rate cuts this year, while opening the door to 5% Treasury yields across the board and cleaving the stock market into distinct categories of winners and losers. Winners are being identified as those companies with ample cash and little debt, sheltering them from the need to borrow or refinance at higher interest rates.

Before Middle East tensions came to the fore on Friday, technology stocks were driving the equity market to a mostly higher finish only a day after Wednesday's hotter-than-expected consumer-price inflation report for March. By contrast, small-cap companies, as reflected in the Russell 2000 index RUT, suffered some of the worst post-CPI reaction, ending the week down by 2.9%.See: Small-cap stocks 'challenged' as inflation pushes out Fed rate-cut expectations, warns BofAThe prospect of either no 2024 Fed rate cuts, or fewer than the three quarter-point reductions projected by policymakers, has lead to relatively sharp and rapid increases in Treasury yields - moves that typically produce problems for the stock market as a whole.

Israel Had Created Enormous Political Trouble for Biden. Then Iran Attacked.

President Biden's tightrope on Israel-and his re-election bid-got even more perilous over the weekend as images of hundreds of drones and missiles launched by Iran threatened to escalate the Middle East conflict and push gasoline prices higher.

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April 15, 2024 06:13 ET (10:13 GMT)

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