MARKET WRAPS

Stocks:

European shares were higher on Friday as investors shifted their views about central bank policy after some weak economic data.

Stocks have come under pressure in recent weeks from concerns that the Federal Reserve will cause a recession as it tightens monetary policy to combat inflation. But worse-than-expected economic figures, including the latest composite PMI data, have prompted a modest recovery in markets, investors said.

"It's clear that economic activity is cooling, which should cool down inflation. That together is rather positive," said Luc Filip, head of investments at SYZ Private Banking. "We might be at a shifting point in terms of economic momentum."

Stocks to Watch:

With a cloudy horizon for the aviation sector, Air France-KLM's valuation looks sensible and its financial control more stable after a recent rights issue, said Deutsche Bank, which raised its rating on the stock to hold from sell but cut the target price to EUR1.50 from EUR3.20, given the uncertain sector outlook.

In the wider sector, the quarter to June should be profitable for most companies and the following one even more so, but 2023 is likely to disappoint versus current consensus.

"The magnitude of the potential miss is hard to quantify, meaning it's hard to make a positive case for airlines. However, recession is unlikely to be as painful as Covid-19."

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Vinci looks inured to rising inflation thanks to its business mix and careful management, said Berenberg, starting coverage of the stock with a buy rating and a EUR105 target price.

In Vinci's primary business--the highways division that contributes about 50% of operating earnings--pricing structures are inflation-linked, which should ensure profit growth of around 5% in the medium term, Berenberg said.

In other divisions, Vinci's track record on financial discipline inspires faith in its future capital allocation, he notes. Rapid recovery in the airports business is another potential upside.

Read: Puma Could Raise 2022 View

Read: Dior's Flagship a Standout for Luxury Megabrands

Economic Insight:

The decline in the German business confidence index adds to signs that faltering demand is starting to hit the key manufacturing sector, increasing the risk of a recession in the coming months, said Capital Economics.

Economic activity seems to have been more resilient than expected in the second quarter, but the outlook for the remainder of the year is grim with inflation set to remain elevated and increasing chances of gas shortages.

"With high inflation weighing on consumer demand and the threat of high interest rates and gas rationing looming, there is a good chance that Germany falls into recession," said Capital Economics.

Read: Stalling German Business Sentiment Adds to Stagflation Risks

U.S. Markets:

Stock futures rose, putting the S&P 500 on track for its first weekly gain this month.

The index is up 3.3% for the week so far, but it is still in a bear market. It closed down nearly 21% on Thursday from its last peak.

The yield on the benchmark 10-year Treasury note edged down to 3.057% from 3.068% on Thursday, extending its drop into a third day.

Lower long-dated bond yields make future profits more valuable, especially for fast-growing tech stocks whose valuations reflect a relatively long-term stream of future profits.

Forex:

The euro could fall as a weak eurozone economic outlook may prompt the market to scale back its interest-rate rise expectations for the European Central Bank, said ActivTrades.

"The situation in Europe requires careful handling by the ECB, as high inflation calls for monetary tightening, at a time when economic indicators exacerbate worries over the growth prospects for the eurozone economy, especially in a scenario of rate hiking by the central bank."

ActivTrades said that against this background, "the euro could face further headwinds, as investors may reprice expectations over the timing and scope of the ECB's monetary tightening."

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Sterling showed little reaction following data that revealed a drop in U.K. retail sales in May, confirming the bleak outlook facing the economy.

Silicon Valley Bank wrote: "The drop in sales comes as no surprise to FX markets and this is reflected in the GBP/USD rate, with sterling largely unmoved on the release."

Read: UK Retail Sales Fell in May Amid Rising Cost of Living

Bonds:

The European Central Bank's recent verbal intervention regarding an antifragmentation tool has triggered a massive narrowing of eurozone peripheral bond spreads, "but we are far from convinced and expect spreads to be tested eventually," said Societe Generale.

Weakening economies, higher ECB interest rates and politics should all play into driving peripheral spreads wider, said Societe Generale, which expects the 10-year Italian BTP-German Bund yield to widen to 260-300 basis points by year-end--from current levels around 197 bps--with Italian politics probably adding uncertainty ahead of general elections in 2023.

Societe Generale also said it was too early to consider duration longs "as we have likely not yet seen peak hawkishness, either from the ECB or market pricing." It expects tactical longs to become attractive if the 10-year German Bund yield rises above 2%.

"With euro area inflation yet to peak, the market could still come to price a higher ECB terminal rate, justifying a Bund 10-year yield close to 2% or even higher."

However, the bearish forces might moderate toward year-end if the ECB considers a slower pace of rate hikes after having approached neutral rate, said Societe Generale.

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DZ Bank's analysts underweight eurozone peripheral government bonds and favor shorter maturities in their strategy, as they expect the market environment to continue to put pressure on sovereigns in the coming months

"Based on our spread expectations, we recommend underweighting bonds in the peripheral segment relative to semi-core bonds," says analyst Sebastian Fellechner, adding that semi-core bonds may enjoy stronger demand than peripheral peers. "Even the cushion of a higher carry is unlikely to be sufficient for them to outperform bonds from the semi-core countries," he says. (emese.bartha@wsj.com)

Energy:

Oil prices wavered between mild gains and losses in choppy trading as investors weighed supply risks against concerns about slowing global growth, after Jerome Powell said interest-rate increases may lead to a recession.

"Oil prices will continue to be whipsawed by competing demand and supply-side drivers. Recession risks continue to weigh and are currently dragging down [...] oil prices," Fitch said.

Concerns about demand appear to have won out this week with Brent on course to close the week 6% lower.

Metals:

Base metals were lower, as global growth fears continued to hit sentiment for industrial goods. Gold was weaker too, with Fitch saying "commodity prices across the board seem to have peaked."

"Mainland China's zero Covid policy dampening demand, a strong dollar driven by a hawkish Fed, the first signs of input prices easing, global recession fears and weakening investor sentiment are weighing heavily on commodities," Fitch said.

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

German Business Sentiment Deteriorated Slightly in June

Business confidence in Germany worsened in June as firms in the manufacturing and retail sectors turned more pessimistic due to rising costs and the threat of gas shortages.

The Ifo business-climate index declined to 92.3 points in June from 93.0 points in May, data from the Ifo Institute showed Friday. Economists polled by The Wall Street Journal expected the index to come in at 92.5.

   
 
 

UK Retail Sales Fell in May Amid Rising Cost of Living

U.K. retail sales declined in May due to lower food sales, in a further sign that consumers have pared back on spending amid an intensifying squeeze on household finances.

Retail sales volumes decreased 0.5% in May compared to April, the third fall in four months, data from the Office for National Statistics showed Friday. Economists polled by The Wall Street Journal had forecast retail sales would fall by 0.7%.

   
 
 

Zalando Shares Slump on Weaker Outlook as Recession Risks Grow

Shares of German online retailer Zalando SE plunged in Friday morning trading a day after the company reported a weaker-than-expected second quarter, which led it to cut forecasts for the year as consumers are shopping less amid rising inflation and growing recession risks.

Consumer confidence in the eurozone declined in June because of the increasing cost of living and a slowdown in the economy. The U.S. and European economies slowed sharply as surging prices of energy and food weakened demand for other goods and services, business surveys showed. Russia's war in Ukraine has hit growth as high inflation spread across the globe.

   
 
 

Barclays to Buy Kensington Mortgage Co., Portfolio for Around $2.8 Bln

Barclays PLC said Friday that it has agreed to acquire Kensington Mortgage Co. and a related portfolio of U.K. mortgages for around 2.3 billion pounds ($2.82 billion).

The London-based lender said it will acquire the specialist mortgage lender from companies controlled by funds managed by Blackstone Tactical Opportunities Advisors LLC., and funds affiliated with Sixth Street Partners LLC.

   
 
 

Zurich Insurance to Sell Legacy Traditional Life-Insurance Back Book in Germany

Zurich Insurance Group AG on Friday said it had agreed to sell its legacy traditional life-insurance back book in Germany to specialist insurer Viridium Holding AG, in a move to shield its business from rising interest rates as central banks move to curb inflation.

The Swiss insurance giant said the deal, which includes the transfer of $20 billion in net reserves, would add 8 percentage points to its Swiss solvency test ratio--a measure to assess the capitalization of insurance companies.

   
 
 

Steinhoff International 1H Pretax Loss Widened on Higher Costs

Steinhoff International Holdings NV said Friday that its pretax loss widened in the first half of fiscal 2022, driven by higher costs and volatility in its markets.

The South Africa-based conglomerate reported a pretax loss of 237 million euros ($249.4 million) for the six months ended March 31, from a restated pretax loss of EUR225 million.

   
 
 

U.K. Consumer Confidence Falls to Record Low in June

Confidence among British households deteriorated again in June, setting a record low for the second consecutive month and adding to concerns of a pullback in consumer spending amid sluggish economic growth.

The consumer-confidence barometer compiled by research firm GfK declined to minus 41 in June from minus 40 in May, the lowest level since the survey began in 1974, missing economists' expectations of a slight increase to minus 38.

   
 
 

Ukraine Orders Withdrawal From Severodonetsk to Avoid Encirclement

   
 
 

Ukraine Becomes an Official EU Membership Candidate

European Union leaders agreed Thursday to make Ukraine an official candidate to join the bloc, opening the door to possible membership in the years to come.

The decision was agreed to by EU leaders at a summit in Brussels and fulfills one of Ukrainian President Volodymyr Zelensky's biggest requests of European countries. It also is intended to send a resounding message of support for Kyiv to the Kremlin.

   
 
 

As Europe Opens Door to Ukraine, Nearby Georgia Falls From Favor

BRUSSELS-Years before the war in Ukraine, Georgia was the victim of Russian aggression that prompted Washington and Brussels to swing behind it.

The Black Sea republic was ahead of other ex-Soviet states on democratic reforms, with ambitions to join the European Union.

   
 
 

Iran's Revolutionary Guard Names New Intelligence Chief Amid Suspicious Deaths

TEHRAN-Iran's Islamic Revolutionary Guard Corps named a new intelligence chief on Thursday, after a string of suspicious deaths of military officers and scientists raised tensions between Tehran and its regional adversaries.

Hossein Taeb, a cleric who headed the Guard's intelligence wing for more than a decade, was succeeded by Gen. Mohammad Kazemi, according to a statement on the official IRGC news website. Mr. Taeb was named an adviser to the IRGC commander, Maj. Gen. Hossein Salami.

   
 
 
   
 
 

GLOBAL NEWS

Jerome Powell Pressed Over How Fed Would Respond to Economic Slowdown

Lawmakers pressed Federal Reserve Chairman Jerome Powell over how the central bank would manage trade-offs it could confront if its interest-rate increases slow the economy sharply but don't reduce inflation quickly.

Mr. Powell on Thursday said that in such a scenario, the central bank would be reluctant to shift from raising rates to cutting them until it saw clear evidence that inflation was coming down in a convincing fashion.

   
 
 

Fed Stress Test Finds Big Banks Can Weather Severe Recession

The Federal Reserve gave the biggest U.S. banks a clean bill of health in its annual stress test, saying they would be able to continue lending to households and businesses even in a severe recession.

This year's stress test measured the 34 biggest banks' ability to maintain strong capital levels in a hypothetical recession marked by sharply higher unemployment and a steep decline in stock prices.

   
 
 

Inflation in Japan Raises Pressure on Central Bank to Reconsider Low Rates

TOKYO-Inflation in Japan stayed above the Bank of Japan's target for a second successive month, adding to pressure on the bank as it bucks the global trend and keeps interest rates low.

Overall consumer prices rose 2.5% from a year earlier in May, government data showed Friday. That matched the pace in April, which was the fastest rise since 1991, excluding periods immediately following sales-tax increases.

   
 
 

MSCI Keeps Emerging-Market Rating on South Korea, Despite Push for Upgrade

MSCI Inc. is sticking with its longstanding assessment of South Korea as an emerging market, despite the country's renewed efforts to be upgraded to a developed one.

The index provider's reluctance to reclassify South Korea, with no changes proposed in its latest annual review, could deprive local markets of tens of billions of dollars of inflows from global investors and is likely to disappoint politicians and regulators in Seoul.

   
 
 

China's Top Diplomat in Australia Says Ties Can Improve

SYDNEY-China's ambassador to Australia said he believes relations between the two countries can improve, though the protests that interrupted his speech in Sydney suggest there will be political challenges in thawing ties with Australia's new government.

"Personally, I'm still optimistic," Xiao Qian said when asked whether Australia and China would celebrate this year's 50th anniversary of establishing diplomatic ties. "It's good for both sides. It's not a one-sided kind of relationship."

   
 
 

Senate Passes Bipartisan Gun Bill Funding Red-Flag Laws, Mental Health Programs

WASHINGTON-The Senate passed the most significant firearms legislation in decades, with a coalition of more than a dozen Republicans joining Democrats to provide new tools to deter mass shootings following deadly attacks around the nation.

The 65-33 vote capped a month of negotiations, led by Sens. Chris Murphy (D., Conn.) and John Cornyn (R., Texas), who were tasked by the leaders of their respective parties with finding a compromise on one of the most contentious topics in American politics.

   
 
 

Write to paul.larkins@dowjones.com

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(END) Dow Jones Newswires

June 24, 2022 05:28 ET (09:28 GMT)

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