EMEA Morning Briefing - Shares Could Waver Amid Signs of Persistent Inflation

MARKET WRAPS

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EU flash estimate euro area inflation, unemployment, ECB accounts of last monetary policy discussions, indicator of euro area economic activity; Italy provisional CPI, unemployment; trading updates from Merck, Veolia Environnement, Salvatore Ferragamo, Clariant, SAP, Hapag Lloyd, EDP, Impala Platinum, Anheuser-Busch InBev, Taylor Wimpey, London Stock Exchange, Melrose Industries, CRH, Universal Music, Capita, Haleon, EDP Renovaveis

Opening Call:

Shares could extend losses in Europe on Thursday on the prospect of higher interest rates. In Asia, stock benchmarks were mixed; Treasury yields advanced; the dollar gained; while oil was steady and gold fell.

Equities:

European stocks seem headed for a weak start amid rising Treasury yields and signs of persistent inflation.

"There's a growing realization that the economy hasn't fully responded to the rate hikes so far," said Thorne Perkin, president of multi-family office Papamarkou Wellner Perkin.

With the next Fed policy decision not until late March, investors will be left to fixate on every word from U.S. central bankers, said Schwab Center for Financial Research. "We know another rate hike isn't for three weeks," it said. "The market is in a vacuum until then, and going to react to them a lot."

Minneapolis Fed President Neel Kashkari said on Wednesday that he is "open-minded" about the size of the next rate hike in March.

Samuel Dedio, portfolio manager at Patrumin Investors, said he has responded with short-term bets on corporate bonds that mature in a year or less. Beyond that, he said, it is difficult to project how businesses will finance investments or acquisitions given uncertainty around the Fed's interest-rate policy.

"Companies have to adjust for the cost of capital," Mr. Dedio said.

"China's reopening after zero-Covid is really underrated, particularly by American investors," said Rusty Vanneman, chief investment strategist at Orion Advisor Solutions. "It's going to give some lift to commodity prices, and that's going to lift inflation across the global economy."

Forex:

The dollar gained strength amid higher Treasury yields, which increased the appeal of USD-denominated fixed-income assets and underpin demand for the greenback.

The U.S. ISM manufacturing PMI released overnight added to recent data pointing to a challenging "disinflation" process, IG said.

Fed rate-increase expectations have recalibrated to the data, with more bets toward a higher terminal rate, it added.

March is coming in like a lion, Corpay said in a note, "with risk appetite rebounding across asset classes on evidence of a stronger-than-expected recovery in the Chinese economy."

Liberty Street Economics said a strengthening of the dollar hurts global manufacturing as imports and international borrowing are priced in dollars.

The resulting contraction spills back to the U.S. due to a reduction in global demand. Commodity prices and world trade also fall. But since the U.S. is less exposed to global developments, "the contraction of global manufacturing and global trade is associated with a further strengthening of the dollar," it said.

Bonds:

Treasury yields rose on concerns that China's post-Covid economic recovery may complicate the fight against inflation for central banks and result in even higher interest rates.

News that China's manufacturing sector is expanding at its fastest pace in more than a decade rippled through markets, pushing up industrial commodity prices and forcing up government bond yields on fears central banks may need to raise interest rates further as they face a tougher task suppressing inflation.

Markets are pricing in a 30.6% probability that the Federal Reserve will raise its policy interest rate by 50 basis points, to a range of 5% to 5.25%, on March 22, according to the CME's FedWatch tool.

The central bank is now also seen as having a 39% chance of lifting its fed-funds rate target to between 5.5% and 5.75% by September, according to 30-day fed-funds futures.

Energy:

Crude oil prices steadied amid signs of recovering demand.

China's positive February PMI data signaled that demand for oil could remain strong in a key market, while the increase in U.S. inventories was smaller than expected, said CMC Markets.

Meanwhile, Russia was set to cut crude production in March and limit exports in response to new rounds of price caps and sanctions imposed by Western nations after its invasion of Ukraine just over a year ago.

If the Fed raises rates even more next month, that would put pressure on equities, and might lead to weakness in the energy market, Tyche Capital Advisors said. Still, the Chinese economic data was "very bullish for energy."

Overall, the risk is "definitely to the upside in energy markets," it said.

Metals:

Gold futures weakened after earlier getting a boost as the U.S. dollar weakened in the wake of upbeat economic data from China.

China's manufacturing data was higher than estimates "leading the China reopening narrative at the moment," Wolfpack Capital said.

Another contributor to the weakness in the U.S. dollar is strength in the euro, with the currency "factoring in higher inflation data in the European Union and speculation of faster EU central bank interest-rate increases, it said.

Investors also weighed uncertainty over the path for interest rates in the U.S.

"Gold has found some support with the price edging back up to $1,830 an ounce after a challenging February in which the precious metal slumped to its lowest level for two months," Kinesis Money said.

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Copper fell in Asia amid weak market sentiment spurred by a jump overnight in the 10-year Treasury yield.

However, copper's weakness may be limited, analysts said.

Expectations of lower demand from the electric-vehicle sector may need to be reset after Vice-Finance Minister Xu said China will extend the sales-tax exemption for new-energy vehicles and is looking at new policies to further support the sector, ANZ Research said.

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Chinese iron-ore futures were higher, with investor confidence boosted by China's positive February PMI data on Wednesday.

"The PMI data exceeded market expectations, and the economic environment is improving," CSC Financial said.

Solid demand from steel mills and their low inventory are lending strong support to ore prices, it added.

TODAY'S TOP HEADLINES

Germany, Italy Signal They Could Block EU Combustion-Engine Ban

A group of large European Union countries is threatening to block a plan by Brussels to effectively ban the internal combustion engine, endangering the bloc's ambitious agenda to combat climate change.

Germany and Italy said this week they could block the plan's formal approval at crucial meetings this week and next. Berlin said it would oppose the plan unless Brussels agrees to allow so-called synthetic fuels that can burn like gasoline and diesel but spew fewer climate-damaging emissions alongside fully electric vehicles.

Salesforce Stock Surges as Software Maker Sees Its Profitability Rising

Salesforce Inc.'s shares surged Wednesday, after the company forecast its profitability would increase this fiscal year as it faces activist shareholders focused on spending levels at the business-software provider.

For its just-started fiscal year, Salesforce projected widening profit margins and revenue that would surpass analysts' forecasts.

Reckitt Cleans Up Well

Consumer goods giant Reckitt Benckiser isn't exactly in limbo, even as it awaits a new chief executive.

The maker of Lysol and Clearasil posted solid results on Wednesday that should reassure investors it is on track. Comparable sales rose 6.2% from a year earlier in the fourth quarter of 2022, slightly better than analyst expectations. Margins were also strong, with adjusted operating profit margin for the full year up nearly a percentage point to 23.8%. Reckitt shares were up about 1.5% in London afternoon trading.

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Citigroup, M&G and Goldman Sachs join JPMorgan with ChatGPT crackdown

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Expected Major Events for Thursday

07:00/ROM: Jan PPI

07:00/DEN: Jan Unemployment

07:30/HUN: 4Q GDP

08:00/SPN: Feb Unemployment

08:30/EU: Feb EuroCOIN indicator of euro area economic activity

09:00/ITA: Jan Unemployment

10:00/ITA: Feb Cities CPI

10:00/ITA: Feb Provisional CPI

10:00/EU: Feb Flash Estimate euro area inflation

10:00/EU: Jan Unemployment

10:00/GRE: Jan Labour Force Survey

15:59/UKR: Jan Industrial Production

16:00/DEN: Feb Foreign Exchange & Liquidity

All times in GMT. Powered by Kantar Media and Dow Jones.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

03-02-23 0018ET