Market Wrap
stock:
European stocks fell after European Union purchasing managers' data showed a slowdown in economic activity, particularly in France, where worries among businesses are mounting ahead of elections.
“Uncertainty surrounding the upcoming elections is holding back performance of French companies,” Hamburg Commercial Bank said.
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Berenberg, speaking at the Eurosatory defence trade fair in Paris, said European arms makers should continue to enjoy strong order intake.
“The five companies we met at the event expressed bullishness about the demand outlook, particularly for combat vehicles, air defence and ammunition,” the company said, referring to BAE Systems, Rheinmetall, Babcock, Renk Group and Thales.
Berenberg said the event left him with a stronger positive feeling about BAE Systems and Renk.
US Market:
Investors are awaiting results from the U.S. purchasing managers' survey, which is expected to show that activity in both the service and manufacturing sectors eased in June.
Data so far this week showed industrial production accelerated in May, but retail sales growth was weaker than expected.
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Futures for the S&P 500, Dow Jones Industrial Average and Nasdaq 100 Index were all slightly lower. The S&P 500 briefly surpassed 5,500 for the first time on Thursday.
Benchmark U.S. bond yields fell after closing at 4.252% on Thursday.
Foreign exchange:
ING said the euro weakened slightly against the dollar after the PMI data was released and that the euro was at risk of further decline ahead of the French elections and “could continue trading below $1.07 for several days.”
ING said it expects the dollar to continue to be supported by interest rate differentials and that concerns ahead of the French election will encourage safe-haven inflows.
The Swiss National Bank and the Bank of England cut interest rates on Thursday and left them unchanged, but some saw the decision as a “delicate balance”, reinforcing the view that European central banks are “far ahead of the Federal Reserve in cutting rates, a positive development for the dollar,” ING said, adding that the DXY Dollar Index could rise towards 106.0 from the current level of 105.628 in the coming days.
The pound edged lower, ignoring data that British retail sales recovered 2.9 percent in May, as prospects of the Bank of England cutting interest rates in coming months weighed on the currency.
ING sees room for the pound to weaken toward $1.25 as the likelihood of an August rate cut increases. Financial markets are currently pricing in only about a 50% chance of an August rate cut, according to Refinitiv, leaving room for further correction.
ING expects three rate cuts this year, but the market is pricing in two.
Bonds:
Commerzbank Research said most political scenarios for the outcome of France's early general elections are unlikely to improve an already bleak fiscal outlook and would stall President Emmanuel Macron's reform plans.
“[French bond] Therefore, spreads are unlikely to return to previous ranges. [if Marine Le Pen’s National Rally party] “They will water down some of the promises and move further to the center.”
Moreover, the uncertainty premium could remain elevated for a long period after the elections due to the uncertainty of the majority, Commerzbank Research said, reiterating its view that it does not see the rising spreads as a buying opportunity and remains short French OATs against its Iberian and EU bonds.
The yield spread between French 10-year OATs and German bunds stabilised at lower levels, closing at 72.5 basis points on Thursday, after hitting just below 80 basis points last Friday, the highest level since 2017. Commerzbank Research said investors appeared to be reassured by Marine Le Pen's recent interview, leading some to speculate that buying French bonds at the height of political uncertainty could once again be profitable.
“I respect the institution. I don't want to disrupt it, just coexist with it,” she told Le Pen in a recent interview with Le Figaro newspaper.
Citi Research said the French bond market was pricing in the possibility of a hung parliament with the far-right National Rally party in a majority, but that the impact on finances would be relatively modest and President Emmanuel Macron would remain in office.
“The risk scenario is that the far-right and far-left manifestos are more forcefully implemented and the spread between 10-year OATs and German bunds could rise to 100 basis points, with a further 30 basis points widening in the worst case scenario of President Macron resigning,” Citi said.
Citi said the most market-friendly, but least likely, scenario would be a rate hike by a centre-right coalition government taking rates to 55-60 basis points or forcing the National Party to abandon most of its manifesto pledges, adding that in all scenarios periphery spreads would be above the OAT if Macron stays in, but would likely be below if he steps down.
Deutsche Bank Research said yield spreads on euro zone government bonds over German bunds, which generally widened sharply last week, have corrected slightly this week.
The firm said the 10-year French OAT-German bund yield spread saw the smallest correction compared with all other euro zone government bond spreads, lagging behind in this week's compression.
Periphery spreads have seen the largest correction, but there has been some variation across core and near-core countries, with Austria and Belgium lagging slightly behind Finland and Ireland, for example. Deutsche Bank expects volatility and headline risks to dominate in the coming weeks.
energy:
Crude oil prices are on track for a weekly gain as signs of tightening markets and rising demand boost sentiment.
“OPEC+ production cuts mean the market will tighten further going into the third quarter, suggesting there is still room for upside from current levels,” ING said.
However, uncertainty over the timing and extent of US interest rate cuts will likely restrain further price increases.
metal:
Gold futures rose but the market is still waiting for the next price drivers from U.S. economic data, Federal Reserve policy and emerging market central bank actions.
Pepperstone said gold has remained within a clear range, reflecting this patience, with some traders looking to profit from smaller movements, and he expects these levels to remain “until there is a more immediate need to reallocate higher allocations to gold in broader portfolios.”
Pepperstone said the U.S. economy is still performing well and the Fed appears to have the situation under control, but it may take time for any new trends to emerge.
EMEA Headlines
Carlsberg's $3.9 billion takeover bid for Britvic rejected
Carlsberg said it was reviewing its position after Britvic rejected an improved proposal that would have valued the British soft-drinks maker at 3.11 billion pounds ($3.94 billion).
Britvic said on June 17 it rejected a cash takeover offer of 1,250 pence per share made by the Danish brewer on June 11. The offer represented a 23 percent premium to Thursday's closing price of 1,015 pence, but Britvic said it significantly undervalued the company. The deal would have valued the combined company at $21.44 billion.
UK retail sales rebound in May on warmer weather
British shoppers returned to retail stores more than expected in May, data showed on Friday, helping sales recover after the previous month's wet weather.
Britain's retail sales rose 2.9% in May from the previous month, reversing a 1.8% decline in April, according to the Office for National Statistics, and beating the 1.5% forecast by economists surveyed by The Wall Street Journal.
UK consumer confidence rises slightly as economic outlook improves
UK consumer confidence improved slightly in June as inflation eased and people's assessment of the economy improved ahead of the general election, a monthly survey showed.
Research group GfK said on Friday that its June consumer confidence index rose to minus 14 from minus 17 in May, the highest level since November 2021. The reading beat the minus 16 forecast by economists surveyed by The Wall Street Journal.
Global News
Fed President Barkin says inflation will continue as interest rate hikes get underway
Federal Reserve Bank of Richmond President Thomas Barkin said Thursday that he sees inflationary pressures remaining in the U.S. economy but that current interest rates are enough to slow price increases, but that it will take time for the full effects of higher rates to trickle down through the real economy.
Barkin is currently a voting member of the Federal Open Market Committee, the Fed's policy-making body. He has served as president of the Bank of Richmond since 2018. The FOMC has kept its target for the federal funds rate unchanged at 5.25% to 5.50% since July 2023.
Fed President Kashkari sees signs of 'some softening' in economy
Minneapolis Federal Reserve Bank President Neel Kashkari said Thursday that the U.S. economy is showing signs of softening.
“We're seeing signs that yields are softening a bit,” Kashkari said in a speech to the Michigan Bankers Association.
French Jews are considering the unthinkable: voting for a party with an anti-Semitic past
PARIS — Serge Klarsfeld is a world-renowned Nazi hunter, Holocaust historian and a moral authority in France who has urged the country to acknowledge its dark history of anti-Semitism.
That's why many in France were shocked this week when Klarsfeld defended Marine Le Pen's far-right party, whose founders included a former Nazi paramilitary soldier. The 88-year-old Holocaust survivor said the main threat to French Jews today comes from the far left, and that he would not hesitate to vote for Le Pen's Rally National in the next parliamentary elections, even if the alternative was a left-wing coalition of parties called the New Popular Front.
Billionaires donate huge amounts to Trump, Biden
With just weeks to go until their respective conventions, Donald Trump and Joe Biden are each receiving significant financial support from just a handful of donors.
(Continued later) Dow Jones Newswires
06-21-24 0528ET
