MARKET WRAPS

Stocks:

European equities mostly drifted lower Wednesday as investors continued to weigh the Federal Reserve's commitment to fight inflation after the latest hawkish comments from Jerome Powell.

Mining shares retreated on weaker base metals while the oil sector gained as crude futures rose.

On the economic front, U.K. annual inflation reached a four-decade high of 9% in April as higher energy prices fed through households' utility bills, exacerbating a cost-of-living crisis that is squeezing consumers' real incomes.

The consumer price index--which measures what consumers pay for some goods and services--increased at its fastest pace since 1982, a sharp pickup from the 7% inflation rate registered in March.

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Economic Insight:

Citi's rates strategists expect the market to likely gravitate toward a 50% chance of a 50 basis point interest rate rise by the European Central Bank at the July monetary policy meeting.

They consider a 25bp rate hike in July "as close to a 'done deal' as it can be," adding that there appears to be little opposition across the ECB's Governing Council to ending negative rates. The strategists expect the "hawks" to become worried about recession closing the window for raising rates.

U.S. Markets:

Stock futures traded modestly lower on Powell's hawkish pivot.

Jim Reid, an analyst at Deutsche Bank, said that while Powell's sentiment was not "necessarily new, his explicit comment that neutral rates are 'not a stopping point' garnered focus" on Wall Street.

The yield on the benchmark 10-year Treasury note ticked down to 2.964% from 2.969% Tuesday.

Shares on the move premarket:

Lowe's was up slightly ahead of the company's first-quarter earnings report. Home-improvement rival Home Depot finished with a gain of 1.7% Tuesday after earnings topped analysts' expectations and it raised guidance for 2022.

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Target gained 0.4%. It reports earnings Wednesday. Shares of the retailer fell 1.4% Tuesday after Walmart missed first-quarter earnings expectations and forecast a decline in full-year per-share earnings.

Forex:

The scope for the euro to rise against the dollar looks limited as the market's expectations for interest-rate rises from the ECB seem too aggressive, said ING.

Markets are pricing in too much tightening for the ECB but not for the Fed, while the U.S.-eurozone growth divergence will become more relevant into the summer, exacerbated by the EU-Russia standoff on commodities, said ING.

"With this in mind, we suspect that any further rally in EUR/USD may start to lose steam around the 1.0650-1.0700 area, with risks of a return below 1.0500 in the near term being quite material."

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Sterling fell after data showed U.K. inflation accelerated further in April, hitting 9%, and adding pressure on already strained household incomes. Economists polled by the WSJ expected inflation to reach 9.1%.

"Inflation in the U.K. is completely out of control, and there is no doubt that soaring inflation is having a negative influence on disposable incomes," said AvaTrade analyst Naeem Aslam.

The Bank of England is under pressure to do more to control inflation but it is walking a fine line and can only do so much, he said.

Bonds:

Eurozone government bonds steadied in early European trading following a selloff Tuesday triggered by a risk-on mood in global markets.

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Citi estimates the fair value of France's new 0.75% February 2028 government bond 8 basis points above the yield of the 0% February 2027 OAT.

The French Treasury Agency will launch the new bond as part of a EUR10 billion-EUR11.5 billion auction Thursday where it will also reopen the 0% February 2025 OAT and the 0% February 2026 OAT. Citi said they see relative value in the February 2025 and February 2026 OAT on the French bond curve.

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The green premium on Denmark's 0% November 2031 green bond, which will be reopened at auction on Wednesday, has narrowed to 1 basis point versus its conventional twin bond from around 5 bps at the launching auction in January, said Danske Bank. However, the green premium rarely goes below 1 bp and thus the 10-year Danish green bond looks cheap relative to EU peers such as Germany and the Netherlands.

The green premium, or "greenium", on the Danish green government bond is exactly measurable because the Danish debt management office issues green bonds in a twin-bond structure, first applied by Germany, with conventional and green bonds having identical maturity and coupons.

Energy:

Oil futures were more than 1% higher on easing Covid curbs in China and expectations for new sanctions on Russia, with DNB Markets forecasting prices will rise as high as $130 by the end of the year before easing to $115 next year.

A combination of increased demand as China eases its Covid-19 lockdowns and declining Russian oil production is likely to completely exhaust global capacity by the end of the year, said DNB Markets.

Macquarie said that while the near-term outlook for oil is strong, it expects prices to fade in the second half.

Brent crude has averaged $107 in the second quarter so far but a likely increase in supply from OPEC and other countries, potentially including Iran, should weigh on prices in the second half, Macquarie said.

"We maintain our long-term assumption of $65 but defer this to the first quarter of 2024 [from 1Q of 2023]," Macquarie said.

Metals:

Industrial metals weakened on gloomy signs for the global economy following Powell's comments Tuesday. And weak Chinese data in recent days caused by lockdowns have raised concerns about demand.

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

UK Inflation Accelerated to 40-Year High of 9% in April

U.K. annual inflation reached a four-decade high of 9% in April as higher energy prices fed through households' utility bills, exacerbating a cost-of-living crisis that is squeezing consumers' real incomes.

The consumer price index--which measures what consumers pay for some goods and services--increased at its fastest pace since 1982, a sharp pickup from the 7% inflation rate registered in March, according to data from the U.K.'s Office for National Statistics released Wednesday.

   
 
 

Siemens Energy Is Considering Tender Offer for Siemens Gamesa

Siemens Energy AG on Wednesday said it is considering a cash tender offer for all outstanding shares of Siemens Gamesa Renewable Energy SA with the aim of delisting.

"The outcome of this consideration is open," the German energy company said following media reports earlier this week. "No decision has been made and there is no certainty that a transaction will materialize."

   
 
 

Finland, Sweden Apply for NATO Membership, Breaking Decades of Neutrality

Finland and Sweden formally applied for NATO membership on Wednesday, a move that, if approved, would fundamentally transform the security landscape of Northern Europe and give the alliance a valuable edge against Russia following Moscow's invasion of Ukraine.

The two Nordic countries' bid to join the North Atlantic Treaty Organization breaks with a decadeslong defense doctrine that has seen them balance political and security partnerships with other Western nations while staying out of formal military alliances.

   
 
 

Burberry FY 2022 Profit Rose Despite 4Q Hit From China Lockdowns

Burberry Group PLC on Wednesday reported an improved profit for the year ended April 2, although coronavirus restrictions in China severely affected the business in the fourth quarter.

The U.K. luxury brand made a pretax profit of 511 million pounds ($638.5 million) in fiscal 2022, up from GBP490 million a year earlier.

   
 
 

ABN AMRO Swung to 1Q Net Profit; Sees War in Ukraine Affecting Clients

ABN AMRO Bank NV said Wednesday that it swung to net profit for the first quarter, and that it expects the war in Ukraine to affect its clients.

The Dutch lender reported a net profit of 295 million euros ($311.3 million), compared with a net loss of EUR54 million a year earlier.

   
 
 

EU New Car Sales Slumped in April as Supply Squeezes Drag On

Continued supply chain pressures led to a big decline in new car registrations in the European Union in April, according to data from European Automobile Manufacturers Association, or ACEA.

Total new car registrations in the bloc fell 21% on year to 684,506 units sold. This was the lowest volume for the month of April since records began, barring the Covid-19 pandemic-hit April 2020, ACEA said. "[S]upply chain issues continued to weigh heavily on car production," the association said.

   
 
 

Spain, Australia, U.K. Most Exposed to Financial Shock as Rates Rise, Says Fitch

SYDNEY-As central banks raise interest rates to combat the biggest inflation spike in decades, Fitch Ratings says Australia, Spain and the U.K. are the most exposed to a financial shock.

Australia and Spain's vulnerability stems from a high proportion of variable-rate mortgage lending, while borrowers in the U.K. already have relatively high debt-to-income ratios.

   
 
 

U.K. Threatens to Tear Up Key Part of Brexit Deal Due to Northern Irish Tensions

LONDON-The British government Tuesday threatened to tear up an important part of its Brexit divorce deal with the European Union, saying it was causing political paralysis in Northern Ireland.

In a move that risks stoking a trade war with the EU, U.K. Foreign Secretary Liz Truss said Tuesday the government plans in the coming weeks to present a law allowing it to unilaterally alter the terms of a deal agreed in 2019 with its European counterparts that governs the movement of goods between Northern Ireland, which is part of the U.K., and the rest of the U.K.

   
 
 

U.S. Floats Tariff on Russian Oil as EU Oil-Sanction Talks Drag On

BRUSSELS-The U.S. is talking with the European Union about ways to limit global energy price increases that could be caused by an EU-proposed embargo on Russian oil, looking at additional options like setting a tariff on imports of Russian oil, according to U.S. Treasury officials.

Treasury Secretary Janet Yellen, who is in Brussels Tuesday ahead of a meeting of finance ministers of the Group of Seven major economies in Germany this week, has previously said that the proposed EU embargo on Russian oil could significantly raise oil prices globally.

   
 
 

Mariupol's Last Defenders Yield, Ending Long Russian Siege

KYIV, Ukraine-Soldiers defending the Ukrainian city of Mariupol laid down their arms at the sprawling steel plant that served for weeks as their final redoubt, ending months of bloody battle for the industrial port that has become a symbol of Russia's invasion and Ukraine's resistance.

More than 260 soldiers were taken to Russian-controlled territory on Tuesday morning after Ukraine announced the end of combat operations in Mariupol. Video footage released by Russia's Defense Ministry appeared to show the men being patted down and escorted to waiting buses. Some were on stretchers, some wrapped in bloodied bandages, and many were gaunt after weeks of surviving on minimal rations.

   
 
 

How Germany Is Racing to Sever Dependence on Russian Energy

WILHELMSHAVEN, Germany-Days after taking office as Germany's vice chancellor and economy minister in December, Robert Habeck asked his most senior officials for a detailed assessment of his country's dependence on Russian energy. The result shocked him.

The country heavily relied on Russian hydrocarbons to power vehicles and factories and heat homes, and there was no contingency plan to secure other supplies, Mr. Habeck said. The government had no viable alternative to Russian imports.

   
 
 
   
 
 

GLOBAL NEWS

Powell Says Fed Has Resolve to Bring U.S. Inflation Down

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Federal Reserve Chairman Jerome Powell said the central bank's resolve in combating the highest inflation in 40 years shouldn't be questioned, even if it requires pushing up unemployment.

   
 
 

Fed's Evans: Inflation Is Much Too High and Fed Must Act

Federal Reserve Bank of Chicago President Charles Evans said Tuesday that aggressive central bank rate rises are needed to get inflation back under control.

"Inflation is clearly much too high and monetary policy must be repositioned to address this," Mr. Evans said in a speech in New York.

   
 
 

China's New Home Prices Fall for the First Time in More Than Six Years

BEIJING-A monthly measure of new home prices in China fell for the first time in more than six years, offering further evidence of the pain that Beijing's regulatory campaign is inflicting on a sector that has long served as an economic growth engine.

Average new-home prices in 70 major cities edged 0.11% lower in April from a year earlier, according to Wall Street Journal calculations based on data released Wednesday by China's National Bureau of Statistics.

   
 
 

Chinese Bonds Suffer Third Straight Month of Foreign Outflows

Foreign investors cut their holdings of Chinese bonds in yuan by more than $16 billion in April, marking a third straight month of outflows.

Global investors started scaling back their investments in February, amid concerns about the geopolitical risks of investing in Chinese assets, and about the economic impact of China's tough approach to Covid-19. Yields on Chinese sovereign bonds last month fell below those on equivalent U.S. Treasury notes for the first time in more than a decade, further reducing the former's appeal.

   
 
 

Japan's Economy Shrank Slightly in First Quarter

TOKYO-Japan's economy contracted in the first three months of this year, when restrictions related to a resurgence of Covid-19 infections held back consumer spending.

While economists expect a rebound in the current April-June quarter, the outlook for this year is cloudy because of factors including Russia's invasion of Ukraine, the rise in energy prices and the weakness of the yen, which is near a 20-year low against the dollar.

   
 
 

North Korea Receives Aid From China as Covid Outbreak Spreads

SEOUL-North Korea, battling its first major Covid-19 outbreak, has reached out for help to its closest ally, China, while ignoring offers of vaccines from South Korea.

Three North Korean cargo planes flew to the Chinese city of Shenyang on Monday, returning the same day carrying basic medical supplies, according to diplomats familiar with the flights.

   
 
 

Write to paul.larkins@dowjones.com

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

 

(END) Dow Jones Newswires

May 18, 2022 05:48 ET (09:48 GMT)

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