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EMEA Morning Briefing : Europe Seen Higher but Growth, Inflation Fears Persist

05/23/2022 | 12:24am


Watch For:

Germany Ifo Index, Bundesbank Monthly Report; OECD Quarterly National Accounts; Eurogroup meeting of eurozone finance ministers; updates from Leonardo Finmeccanica, Pershing Square, Kingfisher

Opening Call:

European shares should be set for opening gains but persistent worries over growth, inflation and central bank tightening continue to shadow markets. In Asia, stocks were mostly lower, along with the dollar, while Treasury yields, oil and gold all gained.


European and U.S. stock-index futures were solidly higher Monday but investors remain wary about the direction of the global economy and as central banks raise interest rates to combat high inflation.

"It's clear that in a very short period of time, we moved from a pandemic to an inflation scare to, now, serious concerns about growth," said Brian Levitt, global market strategist at Invesco.

Until the Federal Reserve convinces investors it can tighten monetary policy and reel in inflation without triggering a downturn, it is unlikely markets will stabilize, analysts said.

A reasonably-busy week in terms of economic data will include minutes from the May 3-4 Fed meeting, and could add more context around discussions on the size and pace of future interest rate increases.


The dollar weakened slightly in Asia, although the overall tone in regional markets remained cautious due to recession fears, inflation risks and monetary-policy tightening across the world, said Commerzbank.

The bank added that investors were also seeking clues on China's policy response to address slowing growth owing to Covid-19-related lockdowns.

Capital Economics said two factors that could cause the dollar to struggle to make more headway in the near term are the recent underperformance of U.S. stocks and increasing hawkishness from foreign central banks.


Treasury yields moved higher in Asian trading after they fell across the board for the day and the week on Friday.

With economic data starting to waver, "bonds are reassuming their time-tested position as a risk-off hedge against an economic slowdown," wrote Tom Essaye, founder of Sevens Report Research.

"Volatility is significantly above normal levels across bond, equity and currency markets. Bond markets, in particular, are experiencing extreme volatility, and the MOVE index of implied volatility of Treasuries is close to its peak in early 2020, and much higher than during the 2013 'taper tantrum,'" wrote Capital Economics.


Oil futures were firmer in Asia on signs of strong demand as the U.S. heads to its peak driving season.

"Refineries are typically in ramp-up mode to feed U.S. drivers' unquenching thirst at the pump," wrote SPI Asset Management.

Meanwhile, market focus will likely be on U.S.-Saudi Arabia relations following reports that Joe Biden is considering a meeting with Saudi Arabia Crown Prince Mohammed bin Salman next month. This could be an important meeting for the oil market, SPI wrote.


Coal pries are likely to stay elevated this year, albeit with risks to the downside should global tensions resolve unexpectedly quickly and Chinese demand slows more, said UBS.

The Ukraine war, Indonesian export restrictions imposed in early January, and wet weather in Australia have led to seaborne coal shipments falling 2.7% so far this year, but supply is already showing some signs of recovery now that the Australian wet season has concluded. Global shipments rose by 6% last week.

UBS said the premium low volatility coking coal price has risen 48% to $530/ton so far this year, while thermal coal from the port of Newcastle has more than doubled in price to $412/ton.


Gold prices gained, supported by safe-haven demand on worries over economic growth and high inflation.

"Gold is comfortably above the $1,800 level and seems like it could become attractive again as investors anticipate another round of stock market selling," wrote OANDA.


Copper was higher, helped by an improved market sentiment.

Selling of the metal by commodity trading advisors appears to have ended, removing a weight from the market, said TD Securities. However, copper is still in a precarious position as global "macro angst" grows, while China's Covid-19 lockdowns continue to hinder growth and effectiveness of stimulus proposals.


Iron ore futures rose almost 5% on reports the Indian government has imposed duties on iron-ore exports, effective May 22, in an effort to curb inflation.

Citi said the global market may be deprived of roughly 15 million tons of exports from India.

Separately, Citi said the degree of weakness in Chinese metals demand can't be fully explained by Covid lockdowns and believes China's economy has been deteriorating in the absence of sufficient government easing.

"We continue to recommend selling rallies until China gets ahead of the curve and/or until the Fed starts to deliver 'dovish' hikes."

Citi expects LME copper prices will fall to $8,500/ton over the next three months, and projects aluminum dropping to $2,700/ton, nickel to $25,000/ton, and zinc to $3,300/ton over the same period.


Stock Market Bottom Remains Elusive Despite Deepening Decline

U.S. stocks are in the midst of their longest selloff in decades.

Whether they are close to bottoming is anyone's guess.

China's Markets Are Tested by Foreign Outflows and a Falling Currency

HONG KONG-A withdrawal of foreign capital from China and a weaker yuan have prompted comparisons with 2015, when Beijing faced a vicious cycle of outflows and currency depreciation.

China has plugged many of the holes that once allowed its citizens and companies to move money out of the country, making a destabilizing exodus of homegrown funds less likely this time around.

Higher Rates Raise Risk of Future Fed Losses

The Federal Reserve's plans to raise interest rates aggressively to combat high inflation could have an overlooked and uncomfortable side effect for the central bank: capital losses.

The potential for losses hinges on obscure monetary plumbing. The Fed's $9 trillion portfolio, sometimes called a balance sheet, is full of mostly interest-bearing assets-Treasury and mortgage-backed securities-with an average yield of 2.3%. On the other side of the ledger-the liability side of the Fed's balance sheet-are bank deposits held at the Fed known as reserves, which are also interest bearing, as well as currency in circulation.

Conditions Are Ripe for a Deep Bear Market

With the S&P 500 briefly on Friday down 20% from its January peak, it is very tempting to start trying to call the end of the selloff. The problem is that only one of the conditions for a rally is in place, that everyone's scared. That worked beautifully for timing the start of the 2020 rebound, but this time around may not be enough.

The other requirements are that investors start to see a way through the challenges, and that policy makers start to help. Without those, the risk is a series of bear-market rallies that don't last, hurting dip buyers and further damaging investor confidence.

Crypto Might Have an Insider Trading Problem

Public data suggests that several anonymous crypto investors profited from inside knowledge of when tokens would be listed on exchanges.

Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance-the world's largest cryptocurrency exchange by volume-said in a blog post that it would list Gnosis, allowing it to be traded among its users.

Recession Trade Is On as Market Pain Spreads Beyond Tech

Stock investors are positioning for a recession.

A monthslong selloff in the stock market has accelerated lately, with the pain spreading beyond technology shares and speculative corners of the market. Recently, even consumer-staples companies, which had been relatively shielded from the turmoil, have taken a hit.

Swedes Ask if NATO Membership and Peacemaking Can Coexist

For two centuries, Sweden has shunned military alliances. Its decision last week to seek NATO membership ends that, fundamentally altering the Scandinavian country's security posture.

It also challenges the notion of neutrality, for many years a pillar of Swedish national identity, and poses a quandary for many Swedes: How can the country seek to lead global efforts in peace and nuclear disarmament as a member of a military alliance whose power largely rests on nuclear weapons?

NATO Bids From Finland and Sweden Now Depend on Turkey's President

ISTANBUL-NATO membership for Finland and Sweden, potentially among the most dramatic shifts in European security policy in decades, now depends largely on the decision of one man: Turkey's President Recep Tayyip Erdogan.

Mr. Erdogan's decision to block a speedy entrance for the two countries into the North Atlantic Treaty Organization has opened the door to complex negotiations between Western allies and the Turkish government over its stated concerns about the presence of alleged Kurdish militants in Sweden and restrictions on arms sales to Turkey.

Russia Pays Bond Coupons Ahead of Likely U.S. Payment Block

Russian finance officials said Friday that they had pushed through around $100 million in interest payments due under some of the country's foreign-currency debts, ahead of a likely change in U.S. sanctions next week that is expected to curtail Moscow's ability to keep paying its sovereign debt.

Russia's Finance Ministry said it had submitted roughly $71.3 million due under a dollar-denominated bond due 2026 and 26.5 million euros, equivalent to about $28 million, under a euro-denominated bond due 2036, according to Russian state media agency TASS.

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Expected Major Events for Monday

08:00/POL: Apr Retail Sales

08:00/GER: May Ifo Business Climate Index

(MORE TO FOLLOW) Dow Jones Newswires

05-23-22 0023ET

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