MARKET WRAPS

Stocks:

European stocks posted solid gains by midmorning Friday following a rebound in Asia after China cut its five-year loan prime rate 15 basis points to 4.45% to support the economy.

"While the move is not seen as sufficient to overcome the more general headwinds of regional lockdowns and a lack of consumer demand for the quarter, it nonetheless shows something of a sympathetic ear from the Chinese authorities which could lead to more monetary easing in the near future," wrote Interactive Investor analyst Richard Hunter.

Other analysts pointed to another choppy week for Europe with sentiment seemingly much more fragile now on general fears the global economy is headed for a slowdown.

"The one silver lining from the selling of the past two days was that we managed to close well off from last week's lows, suggesting a general reluctance to become too bearish too quickly," wrote Michael Hewson, Chief Market Analyst at CMC Markets UK. "That said every single rebound we've seen since early April has seen a rebound shallower than the previous one followed by a lower low."

Economic Insight:

April's producer prices rise in Germany highlights the stark challenges facing the country's industrial sector, said Thomas Rinn, global industrial lead at Accenture.

Producer prices rose 33.5% in April on year. Shocking energy prices, material costs, and more backlogs than ever recorded for manufacturers in April has left industrial companies in a precarious position, hampering their ability to operate smoothly and remain profitable, Rinn said.

"Though there is clearly demand for production, the sector must prepare more effectively for inflationary pressures that are preventing companies from reaping the rewards of strong order books."

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A sudden stop in Russian gas supplies to Europe would likely push the eurozone into a recession, said Fitch.

"Exposures are so large that an immediate and total cessation of Russian natural gas supplies would result in gas shortages and rationing, causing a major macroeconomic shock."

According to Fitch's estimates, about 30% of domestic gas consumption in the eurozone is supplied by Russia.

Eurozone GDP would fall by 0.7% if gas supply declines by 10% and a 30% loss of gas supply would translate into a 2% decline in eurozone GDP.

U.S. Markets:

Stock futures pointed to a strong bounce for Wall Street, with sentiment getting a lift from the China rate cut. But investors still faced yet another weekly loss.

The data calendar is empty for Friday, but next week will bring another round of inflation data, personal consumption expenditure prices excluding food and energy.

Government bonds have largely rallied this week as they typically perform well in times of economic stress. The yield on the benchmark 10-year Treasury note held steady at 2.855%, from 2.854% on Thursday.

Forex:

The European Central Bank could move away from negative interest rates soon but this may not considerably boost the euro as some anticipate, said RBC Capital Markets.

Looking at recent evidence on central banks moving into or out of negative rates, it's hard see why the ECB raising its deposit facility rate from -0.5% to zero would have more impact on the euro than 50 basis points of cumulative rises at any other point in the cycle, said RBC currency strategist Adam Cole.

A move to zero in September is more than fully priced and rates will still remain far below other developed markets, RBC said, which expects EUR/USD to fall to 1.00 by year-end, from 1.0567 currently.

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The dollar edged higher after the Fed's Esther George said that interest rates need to rise further to curb inflation. In an interview with CNBC, George also said policymakers aren't focused on the impact rate rises are having on the stock market.

"Not until the Fed pours cold water on tightening expectations should the dollar build a top," said ING. "And yesterday Fed hawk, Esther George, said that even this 'rough week' in equity markets would not blow the Fed off course."

---

Sterling gained after data showed U.K. retail sales unexpectedly rose in April.

Retail sales increased 1.4% on month in April, with the March print revised to a 1.2% decline from the 1.4% drop initially estimated. Economists in a WSJ survey expected retail sales to fall 0.3% in April.

The data suggested the cost-of-living crisis hasn't caused consumer spending to collapse, said Capital Economics. "This adds weight to our view that the Bank of England will have to raise rates further to bring inflation back down to its 2% target."

Bonds:

Intraday fluctuations in the 10-year German Bund have been substantial in recent days, with the yield trading between 0.9% and 1.1%, said UniCredit Research.

This has contributed to widening spreads between the Bund yield and those of peripheral bonds--Italian, Spanish and Portuguese--which are near their widest levels since the outbreak of the pandemic.

"Lower volatility and clearer communication by ECB officials could help reduce these spreads to Bunds," though they should remain wider than earlier this year as the ECB will end net asset purchases in July, UniCredit said.

Energy:

Oil prices ticked lower, on course to end the week largely where they began, as investors weigh concerns about both supply and demand.

Demand concerns stemming from Chinese lockdowns and flagging global growth are balanced by tight supplies, heightened by the threat of an EU embargo on Russian oil.

"The market continues to be torn between tight supply on the one hand, led by underperformance by the OPEC+ group and export declines in Russia, and weakening demand on the other, with lockdowns in China undercutting imports," said Fitch.

Metals:

Gold prices were higher, adding to this week's gains, with the precious metal looking slightly more attractive to investors as other safe-haven assets slip.

Fitch said it expects significant volatility for gold prices going forward, but sees gold prices remaining elevated due to uncertainty surrounding the Ukraine invasion.

---

Copper prices, higher early Friday, are set to post their first weekly gains since the end of March.

Expectations that China's copper demand is set to rise during the second half of the year combined with labor shortages and high energy costs hitting the red metal's supply growth, have helped support prices, said ANZ Research.

"The prospect of a rebound in demand in China, amid falling inventories, is unlikely to keep downward pressure on metals prices for long."

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

Richemont Shares Fall After FY Op Profit Missed Views, No Resolution Regarding YNAP

Shares in Compagnie Financiere Richemont SA fell sharply Friday after it said full-year profitability missed expectations and a planned divestment of its e-commerce platform Yoox Net-a-Porter remained unresolved.

At 0740 GMT, shares in the Swiss luxury-goods giant traded 10% lower at CHF10.94.

   
 
 

German Producer Prices in April Posted Highest Increase on Record

Germany's producer prices rose strongly in April, driven by higher energy prices, posting the biggest increase ever recorded, the German statistics office Destatis said.

Producer prices rose 33.5% on year, Destatis said.

   
 
 

THG Rejects GBP2.07 Bln Bid From Belerion Capital, King Street

THG PLC said late Thursday that has it rejected a proposal from investment companies Belerion Capital Group Ltd. and King Street Capital Management, LP for 170 pence a share, which valued the deal at 2.07 billion pounds ($2.58 billion).

The U.K.-listed online retailer--known as the Hut Group--said this had been an unsolicited, highly preliminary and indicative nonbinding proposal, and that it undervalued the company and its future prospects.

   
 
 

EDF Delays UK Hinkley Point Nuclear Plant Start Date, Raises Costs Estimates

Electricite de France SA said late Thursday that it has delayed the start date of its U.K. Hinkley Point C nuclear plant by a year and now estimates project costs in the range of 25 billion to 26 billion pounds ($31.18 billion-$32.43 billion).

The French utility company said the start of electricity generation for unit 1 of the reactor is targeted for June 2027 and risk of further delay for the two units is assessed at 15 months.

   
 
 

U.K. Retail Sales Rebounded in April

U.K. retail sales rebounded in April, beating analysts' forecasts, as spending on alcohol, fuel and at online stores rose, the Office for National Statistics said Friday.

Retail sales volumes rose 1.4% last month from March. Economists polled by The Wall Street Journal had forecast retail sales would weaken by 0.3%.

   
 
 

Air France-KLM in Talks With Apollo for $530 Mln Capital Injection

Air France-KLM said Friday that it has entered into exclusive discussions with Apollo Global Management Inc. for a 500 million euro ($529.3 million) capital injection to an affiliate of Air France that owns of a pool of spare engines for the air carrier.

The capital injection would reinforce the group's equity, as well as facilitate the financing of future spare-engine purchases under Air France's fleet-renewal program, the airline said.

   
 
 

SoftBank-Backed Fintech Giant Klarna Looks for New Funds at Lower Valuation

Klarna Bank AB is seeking to raise new funds that could value the fintech giant at almost a third less than the roughly $46 billion valuation it achieved just under a year ago, according to people familiar with the matter, an example of the struggles facing the tech investing world.

Klarna specializes in buy-now-pay-later services, a popular type of cash advance that competes with credit cards and lets customers pay for goods and services in installments without paying interest. Klarna makes money by charging merchants who offer Klarna's services a fee.

   
 
 

Russia Rejects Pleas to Permit Grain Shipments From Ukraine

Russia dismissed calls from top United Nations and Western officials to halt a Black Sea blockade that has prevented Ukraine from exporting much of its grain to world markets, causing price hikes and exacerbating food shortages.

Moscow's ambassador to the U.N., Vasily Nebenzya, told a meeting of the U.N. Security Council on Thursday that rising food prices had been caused by Western sanctions against Russia and other factors, rather than the nearly three-month old war in Ukraine. He didn't acknowledge calls to negotiate the shipment of grain from Odessa and other Ukrainian ports.

   
 
 

Europe's Natural-Gas Buyers Defuse Standoff With Kremlin Over Ruble Payments

PARIS-Some of Europe's biggest natural-gas utilities have agreed to new payment terms with Russia's Gazprom, defusing the threat of a sharp cutoff of Russian gas to the region after President Vladimir Putin demanded payment in rubles.

The demand roiled Europe's energy industry and prompted warnings from the European Union that paying for gas in rubles would run afoul of sanctions the bloc imposed in response to February's invasion of Ukraine. Gazprom last month cut off supply to Poland and Bulgaria after the countries refused to comply with a Kremlin decree.

   
 
 

U.K. Consumer Confidence Falls to Record Low as Cost of Living Crisis Intensifies

Confidence among British consumers fell in May to its lowest level in at least five decades as high inflation continued to weigh on households moods and squeezed real incomes.

The consumer-confidence barometer compiled by research firm GfK declined to minus 40 in May from minus 38 in April, the lowest level since the survey began in 1974. The index, which gauges consumers' views on the general economy and their personal finances, has decreased for six consecutive months.

   
 
 

Sweden, Finland Weigh Cyber Risks Stemming From NATO Applications

Authorities in Sweden and Finland have raised alert levels for cyberattacks, concerned they face increased hacking risks because of the war in Ukraine and the two Nordic countries' subsequent applications to join NATO.

Since Russia invaded Ukraine in February, cybersecurity officials in Sweden and Finland haven't seen an increase in attacks targeting critical infrastructure, though they say the countries are becoming more interesting targets for hacking groups with Russian ties.

   
 
 
   
 
 

GLOBAL NEWS

China's Central Bank Makes Unexpected Rate Cut as Growth Crumbles

SINGAPORE-China's central bank cut a key interest rate while keeping another unchanged, an unexpected policy shift that economists said would likely help the country's moribund housing market but bring only limited relief to its struggling economy.

The latest in a series of targeted steps by the central bank highlights how policy makers in China are constrained by rising interest rates in the U.S. and Beijing's zero-tolerance approach to the pandemic. Easing too aggressively would risk prompting capital to flee China in search of better returns, while lockdowns are crushing appetite for new loans from businesses and households.

   
 
 

Glynn's Take: RBA Likely to Consider Big Rate Hike in June

SYDNEY-The Reserve Bank of Australia's upcoming board meeting on June 7 will again be dominated by the uneasy reality that policy settings remain a long, long way from where they should be given the huge jump in inflation over the past six months.

For that reason alone, a 40-basis-point rise in the official cash rate next month to 0.75% can't be ruled out. The RBA faces more than the usual amount of uncertainty around the economic outlook and won't go overboard. But there is scope to act early and with urgency.

   
 
 

Japan Inflation Tops 2% for First Time in 13 Years

TOKYO-Consumer prices in Japan rose at a pace above 2% for the first time in more than 13 years, a sign of how higher costs of energy and raw materials are hitting even the world's most inflation-resistant regions.

Despite the price numbers released Friday and interest-rate increases by other global central banks, the Bank of Japan is likely to stick to its policy of keeping interest rates near zero. Both the BOJ and outside economists see consumer demand in Japan as relatively weak and believe inflation above the bank's 2% target is unlikely to take hold.

   
 
 

Palm Oil Outlook Still Bearish Despite Prices Rebounding -- Talking Markets

Palm oil prices recovered quickly from a knee-jerk dip after Indonesia said its soon-to-be-lifted export ban will be replaced with a requirement for local producers to keep some output for domestic consumption.

But the outlook for the edible oil remains bearish as Malaysia and Indonesia, the world's biggest palm oil producers, head into a high production season in the second half, with supply likely to overtake demand despite a potential easing of China's Covid-19 restrictions and the Russia-Ukraine conflict, analysts say.

   
 
 

Gas Prices Hit New Highs Again With All 50 States Above $4 a Gallon

Gas prices continued to rise across the U.S. this week, and pressure on the pump is unlikely to decrease as the summer travel season begins.

The average price for a gallon of regular unleaded gasoline in the U.S. hit a record of $4.59 on Thursday, according to AAA. It is the highest national average recorded by AAA since they began tracking fuel costs in 2000. On average, prices are about 50 cents more a gallon than they were a month ago. A year ago, the average cost of a gallon of gas was $3.04, according to the group.

   
 
 

Senate Passes $40 Billion Aid Package for Ukraine

WASHINGTON-The Senate passed a nearly $40 billion military and economic aid package to help Ukraine repel Russia's invasion, sending the bill to President Biden's desk and bringing America's commitment to almost $54 billion.

The 86-11 vote was overwhelmingly bipartisan, with all Democrats and most Republicans voting yes. The Republicans who opposed the bill cited its price tag and misgivings about long-term involvement in funding a foreign war.

   
 
 

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 20, 2022 05:35 ET (09:35 GMT)

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