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EMEA Morning Briefing: Shares to Nudge Higher as Market Waits for … – Morningstar

Watch For:
OECD economic outlook; Germany industrial production index; France foreign trade, balance of payments; Italy retail sales; trading update from Inditex
Opening Call:
Shares could edge higher in Europe on Wednesday, as investors assess the outlook for interest rates ahead of next week’s meeting of Federal Reserve policy makers. In Asia, stock benchmarks were mixed; Treasury yields fell; the dollar softened; oil dipped as global demand worries resurfaced; while gold declined.
European stocks may extend mild gains on Wednesday, following the rise on Wall Street overnight, as investors await May inflation data and the Federal Reserve’s policy meeting next week.
The Fed will decide at its June meeting, which starts next Tuesday, whether to pause or again raise its benchmark interest rate.
Investors are also awaiting the May consumer-price index next week for the latest insights into the course of inflation, which could influence whether the Fed might raise, hold or cut interest rates in future meetings.
Goldman Sachs Group on Tuesday lowered its expectations for an imminent U.S. recession, citing the resolution of the debt-ceiling standoff and a more modest impact from stress in the banking sector.
The firm cut its probability that the economy will enter a recession in the next 12 months back to 25%, after raising it to 35% in March following the failure of Silicon Valley Bank.
"You’ve got a situation where people are pricing out a recession and the growth side of the equation is looking a little better, but we’ve had a big unwind of Fed rate-cut expectations for this year," said MRB Partners.
The dollar weakened in Asia, as investors await the Fed’s next policy meeting.
The dollar could come under pressure as U.S. inflation abates and investors bet on the Fed cutting interest rates by the year-end, Pictet Asset Management said.
"We retain a defensive bias by remaining underweight the U.S. dollar against gold-which is supported by central bank buying-and the Swiss franc, a safe-haven currency that is also likely to appreciate as the Swiss National Bank raises interest rates," Pictet AM said.
While market expectations for rate cuts this year are too aggressive, the Fed should at least pause its rate-rise cycle, it said. The series of rate hikes since the start of 2022 finally seem to be hitting the U.S. economy, it added.
Treasury yields lost ground, as investors weighed the economic outlook and the Fed decision next week.
Markets are pricing in a 79.9% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on June 14, according to the CME FedWatch tool.
However, chances of a 25 basis point hike to 5.25% to 5.50% in July are priced at 52.7%.
"Regarding current conditions, we expect the FOMC statement to acknowledge some slowdown in economic activity (in line with the spirit of the Beige Book, which described activity as "little changed" but with two districts with moderate declines). Elsewhere we expect little change in current conditions, e.g. inflation remains elevated, and job gains continue to be robust," said Morgan Stanley.
"For the press conference: We expect the Chair’s press conference to be heavily focused on communicating that the Fed will be on hold for an extended period of time. The Chair will also likely emphasize that the FOMC stands ready to increase rates further if economic activity and inflation are not to come in line with the Fed’s expectations for more moderation. We would also expect the Chair to acknowledge that the range of views in the Committee as to what would be the appropriate next step has widened," Morgan Stanley concluded.
Oil prices faltered in Asia, as investors weighed the outlook for oil demand.
"Significant uncertainty remains around global economic growth and the potential impact on oil demand over the forecast period," the Energy Information Administration said in its latest short-term outlook report.
Analysts still see the risks skewed toward a rally in prices in the second half "as the market tightens significantly following production cutbacks," ANZ said.
"Saudi Arabia is attempting to keep the oil price up for reasons of domestic stability, but it faces two major problems," said BCA Research.
The first is "global oil demand is proving weaker than expected because of China’s structural problems and the developed world’s tight monetary policy," and the second is that global oil supply faces "unexpected disruptions stemming from Russia’s and Iran’s geopolitical conflicts with the West," it said.
The result is oil volatility that "could include major oil price shocks but will ultimately conclude in lower prices as a result of recession," it added.
Ultimately, "oil prices are likely to weaken due to disappointments in both global and Chinese growth, stemming from China’s debt-deflation and globally tight monetary policy," BCA Research said.
Gold edged back after limited gains overnight, as investors are in a wait-and-see mode amid uncertainties over the Fed’s moves next week.
Investors await to see "what will happen with the recent stock market rally and if the disinflation process will allow the Fed to skip a rate hike next week," Oanda said.
"Demand for safe-havens have somewhat eased up and traders are waiting to see if the next market risk triggers a de-risking moment," said Oanda.
More clear direction from the Fed following the June 13-14 meeting could set the tone for the precious metal, said Commerzbank.
"The prospect of rising rates will presumably weigh on the gold price until the meeting, in other words. However, a more pronounced and lasting correction is then on the cards after the Fed’s interest rate decision — assuming our experts are right — because the market’s positioning would then turn out to have been too hawkish," it said.

Base metals, including copper and zinc, rose amid hopes of further policy support from China.
Chinese authorities have asked the nation’s banks to lower their deposit rates for at least the second time in less than a year, which means the chance of another cut to the reserve requirement ratio is also on the cards, according to the state-owned China Securities Journal, ANZ said.
This comes after Beijing introduced various measures to support the property market, such as reducing downpayments on properties and relaxing restrictions on residential purchases, it added.

Chinese iron ore prices were slightly higher, adding to recent gains as the steelmaking raw material continued its rebound from a sharp selloff since March.
The commodity will likely be able to sustain the momentum in the coming months, analysts said.
SDIC Essence Futures said a Chinese local government has unveiled new property purchase support measures.
This could stimulate housing demand and fuel more real-estate construction activities, a major source of steel and iron ore demand in China, it said.
EIA predicts record-high 2023 and 2024 U.S. oil output
The Energy Information Administration on Tuesday raised its oil-price forecasts for this year and next, and said it expects U.S. production to hit record highs as global supplies tighten following a decision by major oil producers last weekend to extend their production cuts through 2024.
The U.S. government agency also increased its forecasts for retail gasoline prices and reduced its outlook for natural-gas prices.
The U.S. isn’t in a recession – and it may not be headed for one
A much-predicted U.S. recession still hasn’t happened – and some economists are questioning whether it will happen at all.
Wall Street firm Goldman Sachs on Tuesday reduced the odds of recession in the next 12 months to 25% from 35%. Other forecasters have pushed the possible starting date for a downturn further out, toward the end of the year. And some even think the U.S. is likely to avoid a recession altogether.
Pirelli’s Italian CEO Seeks to Curb China’s Grip on Tiremaker
MILAN-Pirelli’s chief executive wants the Italian government to help him sideline a Chinese state-owned investor in the Italian tiremaker, warning that the company’s independence is at stake.
Pirelli CEO Marco Tronchetti Provera, who previously arranged the initial Chinese purchase of a large stake in the company, told a closed-door meeting with the Italian government on Tuesday that Rome must take action to block a power grab by Beijing-controlled Sinochem, according to a person familiar with the talks.
French Protesters Seek Fresh Momentum in Fight Against Macron’s Pension Overhaul
PARIS-Thousands of workers across France walked off the job and took to the streets on Tuesday in an attempt to breathe new life into a protest movement that has lost momentum since President Emmanuel Macron signed his contentious pension overhaul into law.
Protesters began mounting demonstrations in January that roiled the country and piled pressure on Macron to row back on the overhaul, which raises the retirement age from 62 to 64 by 2030. Some protests turned violent in April after Macron invoked special constitutional powers to bypass Parliament.
Destruction of Ukraine Dam Floods Front Line, Cutting Counteroffensive Options
MYKOLAIV, Ukraine-A major dam and power station in a Russian-occupied part of Ukraine were destroyed Tuesday, narrowing Ukraine’s options for a planned counteroffensive in the south by unleashing a torrent of water that caused serious flooding.
Ukraine said Russia was responsible for the destruction, which forced the evacuation of thousands from dozens of towns and villages on the Dnipro River and could create an aquatic buffer zone for Russian forces on the southeastern bank. Russia accused Kyiv of sabotaging the dam.
Chinese, Hong Kong, Iranian Firms Sanctioned for Allegedly Aiding Iran Missile Program
(MORE TO FOLLOW) Dow Jones Newswires
June 07, 2023 00:16 ET (04:16 GMT)
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