European Midday Briefing: After Inflation, Investors Turn to U.S. Earnings

MARKET WRAPS

Stocks:

European stocks were mostly higher on Thursday, as investors continued to digest the U.S. inflation data and what it means for upcoming Federal Reserve rate decisions.

In terms of U.S. data, CMC Markets said "we are seeing evidence that forward-looking indicators are heading in the right direction with today's March US PPI numbers expected to show a further slowing of price pressures."

"The recent prices paid numbers on the ISM last week showed a reduction in inflation pressures and these should be borne out in a fall to PPI final demand from 4.6% to 3%, while core PPI is expected to slow from 4.4% to 3.4%."

Stocks to Watch

BASF's first-quarter earnings before interest, taxes and special items was driven by the agricultural business, the stronger-than-expected performance of which supported overall earnings of EUR1.93 billion, Citi said.

The preliminary result compares with consensus of EUR1.6 billion and Citi's estimate of EUR1.75 billion.

The German chemical company retained its full-year guidance which now appears relatively conservative as BASF has already achieved around 40% of the lower end of its range in 1Q, Citi said.

"We would expect upgrades to the outlook and consensus, noting the sentiment of recovery in 2H along with the announced EUR500 million cost savings to be achieved by 2024."

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Remy Cointreau should return to sales growth in the last quarter of the fiscal year, helped by uptick in Asia, though its U.S. performance is likely to remain challenged, Citi said ahead of the French cognac maker's update later this month.

The group should report organic growth of 9.1%, according to Citi's forecasts, following a dip the previous quarter as U.S. demand normalized.

Growth is likely to remain negative in that market, but strong trading in Asia will balance this out, Citi said.

Earnings results for 4Q and guidance for the new fiscal year will come in June.

Citi kept a buy rating on the stock.

Stocks on the Move:

LVMH shares rose after the luxury-goods major on Wednesday booked forecast-beating first-quarter sales, spurred by the lifting of sanitary restrictions in China and Asia-Pacific.

Read the analysts' reactions here

U.S. Markets:

Stock futures edged higher, as investors look ahead to the producer-price index with an eye to the Fed's potential path for interest rates.

Earnings season is beginning, with Thursday seeing results from companies including Delta Air Lines and Fastenal, before a wave of banks including JPMorgan Chase, Citigroup and Wells Fargo report results on Friday.

Stocks in the News

Apple is in talks with suppliers about moving production of its MacBook computers to Thailand, a further move to distance itself from China amid tensions with the U.S.

Apple is talking to companies with existing facilities in Thailand about starting to produce MacBooks there, Nikkei reported, citing three unnamed suppliers involved in talks. It currently mainly makes MacBooks in China but has already shifted some production to Vietnam.

The company has been mass-producing the Apple Watch in Thailand for more than a year, Nikkei said.

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Forex:

EUR/USD rose to a 10-week high of 1.1026, according to FactSet, buoyed after data showed a big drop in U.S. headline annual inflation and sparked heavy selling in the dollar, UniCredit Research said.

The data highlighted the contrast between the outlook for U.S. and eurozone interest rates and the analysts say it could see the euro test and exceed the year-to-date high-at $1.1035, according to Factset.

"Markets remain convinced that there is more room for the ECB than for the Fed to tighten further," it said, adding that a break above this year's peak could see the euro target $1.12.

Read U.S., Eurozone Headline Inflation Expected to Continue Falling

Read Dollar Stays Weak After Drop in US Inflation

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Sterling rose as broad weakness in the dollar following the fall in U.S. inflation offsets data showing that the U.K. economy unexpectedly stagnated in February.

Zero GDP growth during the month was below expectations for a 0.1% expansion in a WSJ poll, though this shouldn't influence the Bank of England's future decisions on whether to raise interest rates further, ING said.

"The soft dollar story is keeping GBP/USD bid near 1.2500," ING said.

Energy:

Oil futures edged lower but held on to most of the gains made following the inflation data.

Expectations of growing tightness in the market are further lifting prices after data showed U.S. inventories rose last week.

"Weakening Russian shipments, OPEC production cuts and retreating U.S. inventories are increasing prospects of a tighter market," ANZ said.

Meanwhile, Energy Secretary Jennifer Granholm said the U.S. could begin refilling its strategic stockpiles later this year, according to reports.

Metals:

Base metals and gold inched higher in Europe and a softer PPI print later Thursday would help put a ceiling over the dollar and boost risk assets and commodity markets, Peak Trading Research said.

DOW JONES NEWSPLUS

EMEA HEADLINES

UK Economy Stagnated in February After Labor Strikes Hit Activity

The U.K. economy stalled in February after public-sector strikes hit activity in the services sector, adding to concerns the economy is struggling amid sky-high inflation and rising interest rates.

The country's gross domestic product held steady on month in February, easing from an upwardly revised 0.4% rise in January, data from the Office for National Statistics showed Thursday.

LVMH Boosted by Rebound in Luxury Spending in China

PARIS-LVMH Moët Hennessy Louis Vuitton SE reported a sharp rise in quarterly sales driven by a rebound in China and strong demand for its clothing, handbags and jewelry in Europe and Japan.

The figures are an early indication that high-end shoppers in China are once again boosting makers of luxury goods now that Beijing has eased Covid-19 restrictions. Persistent disruption in China has been a major headache in recent years for the luxury industry, which had come to rely on spending by Chinese shoppers at home and abroad over the past two decades.

Tesco Sees Flat Retail Profits in FY 2024 After Posting In-Line FY 2023 Results - Update

Tesco PLC on Thursday said that it expects broadly flat retail profits in the year ahead, beating expectations, as it reported results for fiscal 2023 that were largely in line with views.

The British grocer sees retail adjusted operating profit for fiscal 2024 at around the same level as the 2.49 billion pounds ($3.11 billion) it reported for the year ended Feb. 25.

Imperial Brands Sees 1H Profit Around Flat on Year; On Track to Meet Full-Year Guidance

Imperial Brands PLC said Thursday that it is on track to meet 2023 guidance, and that first-half adjusted group operating profit should be roughly flat on year on a constant-currency basis.

The tobacco group said that, excluding the impact of its exit from Russia, first-half group net revenue is seen at a similar level to the prior-year period at constant currency, with strong combustible pricing offset by volume declines as the prior period benefited from Covid-19-related changes in buying patterns. It sees a stronger net revenue performance in the second half, driven by normalization of volume trends.

Givaudan First-Quarter Sales Fell Slightly Amid High Input Costs

Givaudan SA said Thursday that first-quarter sales declined slightly amid high input costs, but that it started the year with good momentum.

The Swiss flavor-and-fragrance company said its sales in the first three months of the year were 1.77 billion Swiss francs ($1.98 billion), compared with CHF1.78 billion a year earlier.

Bang & Olufsen Expects Covid-Related Challenges in China to Ease

Bang & Olufsen AS said Thursday that it saw good demand in its fiscal third quarter and expects challenges in China to ease.

The Danish consumer-electronics company last month lowered its fiscal 2023 guidance, blaming slower-than-expected sales in China after Covid-19 lockdowns ended, leading to a surge of infections and impacting consumer behavior and demand.

German Inflation Eased to Seven-Month Low in March, Confirming Preliminary Estimates

Germany's inflation rate resumed its downward trend in March due to sharply decelerating energy prices, but underlying price pressures remained intense.

Consumer prices increased 7.4% in March compared with the same month a year earlier measured by national standards, confirming preliminary estimates, according to data from the German Federal Statistics Office Destatis released Thursday.

France's Macron Seeks to Calm Trans-Atlantic Uproar Over Taiwan Remarks

PARIS-French President Emmanuel Macron walked a diplomatic tightrope Wednesday, seeking to calm a trans-Atlantic uproar over his recent remarks on Taiwan while also defending his push for Europe to chart its own course on foreign policy.

Flanked by Dutch Prime Minister Mark Rutte, Mr. Macron spoke at a news conference in Amsterdam Wednesday at the end of a two-day visit to the Netherlands that was largely overshadowed by a trip the French president made to China last week.

Saudi Push to Bring Syria Back to Arab Fold Faces Resistance

A Saudi-led push to bring Syria back into the Arab fold is facing resistance from some of its allies, according to Arab officials, in a setback to the kingdom's efforts to lead a broader geopolitical realignment under way in the Middle East.

Riyadh's latest plan was to invite Damascus to an Arab League summit that Saudi Arabia is hosting on May 19. The move was designed to demonstrate Crown Prince Mohammed bin Salman's diplomatic clout as rivals re-establish ties with Syria and countries such as China and Russia challenge the U.S. for influence in the volatile region. Saudi Arabia, the United Arab Emirates and some other Arab states are rekindling ties with the government of Syrian President Bashar al-Assad. Last month, Saudi Arabia also re-established ties with Iran in a deal brokered by Beijing.

Government Looking for Leaker in Ukraine Documents Probe

WASHINGTON-The U.S. government is treating the apparent disclosure of classified material surrounding the war in Ukraine as an insider's leak, people familiar with the matter say, but hasn't yet homed in on key suspects for a massive intelligence breach that has exposed the challenges of safeguarding sensitive U.S. information and tested ties with some of America's closest allies.

The bulk of the more than 60 documents, if genuine, appear to originate from the Central Intelligence Agency's Operations Center and the Pentagon's Joint Chiefs of Staff. Such documents are typically briefed to senior-level decision makers at the Pentagon in an environment protected from electronic surveillance and secured against leaks.

GLOBAL NEWS

Deposit Crisis Sets Up a Tough First Quarter for All But the Biggest Banks

Bigger is better for banks this earnings season.

A deposit run that felled Silicon Valley Bank and Signature Bank has hurt small banks much more than big ones, draining low-cost funding that has fueled their profitability in recent years.

Track How U.S. Banks Are Faring in First-Quarter Earnings

In March, banks experienced one of their worst months this century. The collapse of Silicon Valley Bank and Signature Bank sparked widespread fears about potential deposit runs and declining values of bonds and loans.

Now attention will turn to how the banks are doing and what comes next. The Wall Street Journal will break down some of the critical numbers investors will be watching in first-quarter earnings over the coming weeks. Stay tuned for further updates.

Banks Keep Pouring Cash Into Fossil Fuels. U.S. Lenders Lead the Way.

The world's biggest banks continued to channel billions of dollars into boosting fossil-fuel production capacity in 2022 despite growing calls to scale back lending in response to global warming, finds a new report.

The annual Banking on Climate Chaos report, authored by a group of nonprofits, including Rainforest Action Network, said banks provided $673 billion in finance to the fossil-fuel industry last year. Canadian banks are providing a rising share of the money, though U.S. lenders are still the dominant player.

Chinese Exports Surge as Trade With Russia and Southeast Asia Jumps

HONG KONG-China's exports bounced back sharply in March, a surprise that reflects greater demand in Asia and Europe as well as improved supply chain conditions.

Another major reason that was behind the unexpectedly strong result: A more than doubling of Chinese exports to Russia in March from a year earlier, highlighting warming economic ties between the two like-minded neighbors.

More Junk-Rated Companies Are Facing Credit Downgrades and Defaults

The prospects of U.S. companies with significant leverage or rated several notches below investment grade have turned bleaker in recent months, credit-rating firms say, and default rates for junk-rated companies could more than double by early next year.

While highly rated companies are proving largely resilient during the postpandemic economic turbulence, businesses with lower credit ratings and floating-rate debt are increasingly struggling with steep increases to debt-servicing costs and a possible recession as the Federal Reserve continues interest-rate hikes. What's more, still-steep inflation and softer demand are also expected to erode some companies' profit margins, the ratings firms said.

Property Has an Open-Ended Problem

An old design flaw in the commercial real-estate industry is back, and this time it is bigger and broader.

Property investment funds have ballooned in size since the 2008 global financial crisis, and not just in the U.S. According to the European Central Bank, eurozone real-estate funds had assets under management of 1.04 trillion euros at the end of 2022, equivalent to $1.14 trillion and up from EUR200 billion in 2007. Some 80% of these funds by value are open-ended, giving investors the option to cash out daily, weekly or quarterly.

Chinese State-Owned Enterprises Are Hong Kong's Hottest Stocks

China's stodgy state-owned companies have become the stars of Hong Kong's stock market.

At the Communist Party Congress in October, President Xi Jinping said state-owned enterprises needed to "get stronger, do better and grow bigger." Investors are taking heed. State-owned property developers are trouncing their debt-laden private sector rivals. Shares of the country's largest homegrown semiconductor maker are up by more than a third.

North Korea Fires Ballistic Missile Toward Japan

SEOUL-North Korea fired a ballistic missile on Thursday, nearly a week after the country's military stopped responding to calls on an inter-Korean military hotline and days after leader Kim Jong Un vowed to strengthen the military's capabilities.

The missile was launched at a lofted trajectory around 7:20 a.m. from an area near North Korea's capital of Pyongyang, traveling for more than 600 miles before landing in waters east of the Korean Peninsula, according to South Korea's military. Japan sent out an alert warning residents in the country's northernmost island of Hokkaido to take shelter but later said the missile didn't land in Japan's territory or its exclusive economic zone.

Donald Trump to Be Deposed by New York Attorney General

Donald Trump is set to answer questions under oath Thursday from lawyers for New York Attorney General Letitia James, according to people familiar with the matter, as her office prepares for a trial later this year on its allegations that the former president and others engaged in civil fraud.

The deposition marks Mr. Trump's second with lawyers for Ms. James, who has accused the former president, his business and three of his adult children of a decadelong scheme to falsely value real-estate assets. The lawsuit seeks $250 million in alleged ill-gotten gains, in addition to asking a judge to effectively cripple the Trumps from operating their company in New York. Mr. Trump has denied wrongdoing and said that Ms. James, a Democrat, is motivated by politics.

America's Top Hostage Envoy Pledges to Secure Evan Gershkovich's Release From Russian Prison

The U.S.'s top hostage negotiator called on Russia to allow American Embassy officials to visit detained Wall Street Journal reporter Evan Gershkovich and pledged to find a way to secure his release and that of another American, Paul Whelan.

Roger Carstens, the special presidential envoy for hostage affairs, made the remarks in a series of morning television interviews, appearing across ABC, CBS, NBC, CNN and MSNBC.

Before Evan Gershkovich, Nicholas Daniloff Was the Last U.S. Reporter Accused of Espionage by Moscow

WASHINGTON-The closest parallel to the experience of Wall Street Journal reporter Evan Gershkovich in Russia unfolded almost four decades ago, at the height of the Cold War.

Nicholas Daniloff, a correspondent for U.S. News & World Report, was accused of espionage in 1986 by the KGB, the powerful intelligence service. The FSB, the KGB's successor, detained Mr. Gershkovich while he was on a reporting trip in Russia last month and accused him of espionage-a charge that the Journal and the U.S. government vehemently deny. Mr. Gershkovich was accredited to work as a journalist in Russia by the country's foreign ministry at the time of his detention. The Journal and the U.S. government have demanded his immediate release.

White House Works to Satisfy Senate Democrats in Fed Vice Chair Search

WASHINGTON-The White House is working to secure the support of key Capitol Hill allies as officials deliberate over whom to nominate for the No. 2 job at the Federal Reserve, according to people familiar with the matter, with Democrats' slim majority in the Senate hanging over the search.

Last month, some administration officials privately identified Janice Eberly, a finance professor at Northwestern University, as the leading candidate for the Fed vice chair. But Sen. Robert Menendez (D., N.J.), a senior member of the Senate Banking Committee, has continued to mount an aggressive campaign to pressure the White House to nominate a Latino economist for the job.

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

(END) Dow Jones Newswires

April 13, 2023 06:09 ET (10:09 GMT)

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