MARKET WRAPS

Stocks:

Most European benchmarks pushed higher Friday on improved risk sentiment after Wall Street's rally and following some encouraging U.S. earnings.

London's FTSE 100 lagged, however, as utility and oil companies were under pressure after U.K. Treasury Chief Rishi Sunak Thursday outlined a windfall tax on oil-and-gas producers to ease a cost-of-living crisis.

Market Insight:

UniCredit said a majority of European companies have reported better-than-expected quarterly financial results but this comes with warnings that future earnings may not meet analysts' expectations.

"The earnings season is almost over, with almost 90% of Stoxx Europe 600 corporates having reported their quarterly results," UniCredit analysts said, adding that companies surprised mostly on the upside.

Around 72% of them reported better-than-expected revenue and 65% reported better-than-expected earnings, though most companies issued outlook warnings, with the war in Ukraine likely to weigh on future earnings as the conflict drags on.

The ECB:

The European Central Bank is more likely to initiate the interest rate rise cycle with 25 basis points in July as favored by Christine Lagarde, rather than the 50 bps that has been advocated for by the more hawkish camp of the Governing Council, said SEB.

Although recent comments by ECB members paint a picture of a divided Governing Council, SEB continues to forecast 75 bps of deposit rate rises in 2022, followed by another 75 bps in 2023.

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If the ECB Bank starts its interest rate rise cycle with a 50 basis-point increase in July, the market would likely price in follow-up 50bp rises in the rest of the year, said Barclays.

However, a 50bp rise in July is not a certainty as inflation expectations are starting to cool off from their peaks, while recessionary noise is increasing in the background.

Markets are pricing in an ECB deposit rate rise of slightly more than 25bps for July and a total of more than 100bps for 2022, according to Refinitiv data.

Economic Insight:

The U.K. government's fiscal package, valued at around GBP15 billion, significantly reduces the chances of the economy falling into recession later this year because it is timely and well-targeted, said Pantheon Macroeconomics' chief U.K. economist Samuel Tombs.

The extra support is expected to fully compensate the rise in October's energy bills at least for low-income households, whose finances have been most affected by the current cost-of-living crisis, he says. The extra cash is expected to increase GDP by 0.7% in the second half if all spending is concentrated this year, Tombs said.

"Accordingly, the risk of recession has fallen substantially."

U.S. Markets:

Stock futures edged higher, putting major indexes on track to extend a recent stretch of gains and snap a punishing losing streak.

Investors will parse data including consumer spending to get a better gauge of how Americans are feeling. Trading volumes may be light Friday ahead of the U.S. holiday weekend.

In early New York trading, shares of Dell jumped 12% after reporting a rise in profit and a decline in some operating expenses. Ulta Beauty climbed 8% after the retailer raised its full-year sales and earnings guidance following better-than-expected first-quarter results.

Gap shares tumbled 16% premarket after the retailer swung to a loss amid a drop in net sales. Shares of Workday fell 8.4% after it reported first-quarter adjusted earnings that came up short of expectations.

In the bond market, the yield on the benchmark 10-year U.S. Treasury note fell to 2.750%, from 2.756% Thursday.

Forex:

Speculation of a possible pause in Fed interest-rate rises in September "was surely contributing to keeping the dollar soft," said ING currency analysts.

In the past week, market interest-rate pricing showed a reduction in Fed rate expectations of around 10 basis points, while "the likes of the ECB have seen all but a consolidation of expected tightening plans."

However, the Fed's rhetoric is "still very hawkish" and ING expects U.S. rate expectations to recover and the DXY Dollar Index to push back toward 103.00.

Bonds:

Ten-year German Bunds should start to strengthen as inflation shows signs of easing, said Mizuho's rates strategists and consider yields above 1% as an attractive level to enter longs.

The market's pricing of a 100 basis point interest rate rise by the ECB by the end of 2022 seems a "bit excessive," the strategists said, adding that with flash national and eurozone inflation data due Monday and Tuesday, "market participants are likely to remain cautious about putting money to work into the front-end."

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Traders dealing in euro corporate bonds are likely to wait for next week's eurozone inflation data before taking substantial action, said UniCredit.

Investors potentially will be concerned about duration risk posing downside risk, particularly to long-dated segments of the market.

Duration risk, or the risk that a bond's price will drop as interest rates rise, has been already observed this week when sovereign, supranational and agency bonds were volatile and widened by up to four basis points.

Energy:

Crude futures edged higher, with Brent at a more- than two-month, as supply uncertainty continued to support prices.

Stephen Innes, managing partner at SPI Asset Management, said there "is likely a lot of short-term length in crude markets as speculators...position for the EU Russian embargo bounce," adding that there may be a reluctance to push the market higher because of this.

Metals:

Base metals gained in London on modestly improving overall market sentiment and despite consumption in Asia remaining weak due to the Covid-19 lockdowns. But prices were still lower for the week.

Inventories have moved higher in recent weeks, given the lack of consumption in Asia, said Fitch. "A recent slew of negative global economic readings has revived growth concerns, driving industrial metals back into decline following a muted attempt at recovery early on in May."

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05-27-22 0545ET