MARKET WRAPS

Stocks:

European stocks tumbled again on Thursday as investors looked ahead to a second day of testimony from Jerome Powell after he warned that rapidly rising interest rates threatened a recession.

On Wednesday, Powell said a recession was possible and that a soft landing for the U.S. economy would be "very challenging." The Fed chief is set to continue his testimony later Thursday in front of a second group of lawmakers.

"Inflation is at the center of all this but there is also fading growth and interest rates are going up. All of that together is a horrible cocktail and you just need to step aside and wait for that to work itself out," said Hani Redha, a portfolio manager at PineBridge Investments.

Stocks to Watch:

Ubisoft Entertainment has recently been plagued by delays in releasing some of its games, leading the maker of "Assassin's Creed" to cut its guidance, but new big-budget games should help the company to post better-than-expected results in the months to come, said Deutsche Bank as it initiates the stock with a buy rating.

"We believe there is good scope for both revenue and margins to beat expectations as recent heavy development efforts finally bear fruit in the form of exciting AAA releases, and the launch of premium free-to-play and mobile games," said Deutsche Bank.

Deutsche expects Ubisoft's non-IFRS operating profit to be 18% above consensus for the fiscal year ending March 2024.

Economic Insight:

While the eurozone economy's postpandemic momentum--including a recovery in tourism over summer and large backlogs of orders in many industries--should support growth in the second and third quarters, the situation is likely to deteriorate in the final quarter, Barclays said.

Barclays expects consumption to contract at the turn of the year as European consumers feel the real income squeeze and external demand is likely to be soft. Barclays forecasts a mild technical recession in the fourth quarter 2022 and first quarter 2023.

This pattern implies annual growth of 2.8% in 2022, but only 0.5% in 2023 for the eurozone, significantly below the 2.1% consensus forecast for 2023, which is also the European Central Bank's projection.

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The U.K. economy is heading into a stall rather than a recession this year, Barclays said.

High inflation will keep squeezing household incomes and is set to put a lid on spending, but the combination of a strong labor market, healthy household finances and additional fiscal stimulus will somewhat offset the current headwinds.

"We expect the cost-of-living crisis to abate over the course of this year, as inflation has already peaked in our forecast. Next year, as inflation falls further, we see scope for growth momentum to build again, " Barclays said.

It expects the U.K. economy to contract at an annualized rate of 2% in the second quarter, and to grow by an annualized 0.8% in the third quarter.

U.S. Markets

Futures wavered between small gains and losses Thursday. Technology-heavy Nasdaq-100 futures rose 0.3% while blue-chip Dow Jones Industrial Average futures edged down 0.4%.

Economic data due ahead of Powell's comments should offer investors additional clues about whether the economy is slowing.

The data include initial jobless claims -- one of the earliest indicators of weakness in the labor market -- and a gauge of activity in the manufacturing and service sectors.

In bond markets, Treasury yields declined for a second day though remained close to their highest level in more than a decade. The yield on the benchmark 10-year Treasury note fell to 3.129% from 3.155% on Wednesday.

Forex:

The euro fell after June's French and German PMI surveys showed a worse-than-expected slowdown in manufacturing and services activity growth.

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The Norwegian krone briefly turned higher after the Norges Bank lifted its benchmark interest rate 50 basis points to 1.25% and raised its expectations for future rate hikes. Norges Bank Governor Ida Wolden Bache said the policy rate will most likely be raised to 1.5% in August.

"Prospects for a more prolonged period of high inflation suggest a faster rise in the policy rate than projected earlier," she said in Thursday's policy statement.

However, if inflation and capacity utilization fall faster than projected, the rate might be raised less than expected, she said.

Read: Norges Bank Press Release 'as Hawkish as They Come'

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The dollar is unlikely to depreciate on a sustained basis even though the market has scaled back its interest-rate rise expectations due to recession fears and inflation expectations have eased, said MUFG Bank.

The market has pared its expectations for the Fed's peak rate to just over 3.5% while the 10-year breakeven inflation rate has fallen to 2.55% from a peak of 3.04% in April, said MUFG.

Overall, recent developments have dampened upward pressure on the dollar but they aren't "sufficient on their own to trigger a deeper and/or sustainable reversal of dollar strength."

Bonds:

Eurozone government bond yields reversed early gains and tumbled after flash estimate French and German PMI managers data added to fears of a global recession.

Barclays said yields have risen notably so far this year, with the increase in peripheral yields raising fears of financial fragmentation, but the rising trend is broadly reflecting fundamentals so far.

"We believe moves so far are consistent with an environment of higher nominal growth that requires tighter monetary policy, and, in turn, some pricing of a credit risk premium."

The high level of peripheral yields is much less concerning as long as spreads remain orderly and well-contained, Barclays said, adding that the debt metrics are resilient by historical standards.

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The massive short-covering in German Bunds triggered by U.S. recession fears looks set to continue with weaker macro sentiment indicators likely, said Commerzbank.

Thursday's potential drivers include flash estimate purchasing manager data for France, Germany and the eurozone, with declines forecast by economists in The Wall Street Journal's poll.

Pantheon Macroeconomics said that factoring-in its estimate for the terminal policy rate around 1.5% and that Bund yields hit almost 2% earlier this month "the worst should be over for bruised Bund owners."

Pantheon said near-term risks in Bund yields are tilted to the downside after the more than 50 basis point leap in June.

Energy:

Crude prices fell to the lowest levels since early May as concerns mounted that the global economy is weakening.

Brent has lost more than 5% so far this week as investors worry that steps taken by the Fed and other central banks to fight inflation by hiking interest rates will undermine economic growth.

"Oil is very highly correlated to growth and it will be very sensitive to signs or anticipation of a slowdown," said PineBridge Investments.

Other News:

German Economy Minister Robert Habeck will make a statement on energy security on Thursday. The country is expected to announce a second phase of an emergency plan to keep power flowing. That may mean increasing output from coal-fired plants.

Metals:

Gold edged lower in Europe but ANZ said the threat of an economic downturn is likely to provide a floor to prices, despite central banks aggressively hiking rates to tame inflation.

OANDA puts resistance at $1860 and support at $1805, with senior market analyst Jeffrey Halley saying: "I would need to see a couple of daily closes above $1900 to get excited about a reinvigorated rally."

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Copper prices continued to fall after hitting a 16-month low on Wednesday, as macroeconomic weakness pressured markets.

"The macro environment has gone from bad to worse this week," said Peak Trading Research. "Forward-looking inflation expectations keep dropping. This is no surprise given that Powell is laser-focused on getting inflation back down to 2%."

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

Norway Central Bank Hikes Rate to Surprise 1.25% From 0.75%, Signals Next Move in August

Norway's central bank unexpectedly raised its key policy rate to 1.25% from 0.75% on Thursday, and said it expects to raise the rate further to 1.50% in August.

Analysts polled by The Wall Street Journal had expected the central bank to raise its key rate to 1.00%.

   
 
 

Ukraine Set to Be Invited to Become EU Member in Week of Summits Uniting Against Russia

Ukraine is expected to take a step closer to European Union membership as leaders of the world's liberal democracies kick off a week of summitry Thursday, seeking a show of unity against Russia's invasion despite pressure from rising food and energy prices, voter discontent and internal discord over how to support Kyiv.

The gatherings begin in Brussels, where EU leaders are likely to invite Ukraine and neighbor Moldova to begin the protracted process of entering the bloc. The 27 leaders will also debate potential responses to soaring bills for fuel and groceries that EU citizens are facing in the wake of Russian President Vladimir Putin's four-month-long war. They arrive days after France's recently re-elected President Emmanuel Macron was humbled by angry voters in parliamentary elections that cost his party a majority.

   
 
 

BMW Opens Electric-Car Plant in China

Bayerische Motoren Werke AG opened a $2.2 billion plant in China for electric cars, as the German auto maker seeks to catch up with Tesla Inc. and Chinese rivals in the country's booming electric-vehicle market.

The 15 billion yuan investment in the plant is the biggest that BMW has ever made in China, its largest market, the company said in a statement Thursday. The plant in the northern industrial city of Shenyang will be operated by BMW and its local partner and will boost the joint venture's annual output by around 18% from 2021 to 830,000 vehicles, BMW said.

   
 
 

Italy's Monte dei Paschi Plans $2.64 Billion Capital Increase to Revamp Business

Italy's Banca Monte dei Paschi di Siena SpA said Thursday that it would raise up to 2.5 billion euros ($2.64 billion), slash thousands of jobs and close dozens of branches as part of its multiyear plan to revamp its balance sheet, turning a page on a chapter that saw the lender undergo state recapitalization and the disposal of billions in bad loans.

The world's oldest bank said that it would aim to cut roughly 4,000 jobs through a voluntary exit scheme, a move Monte dei Paschi expects will create EUR270 million in savings a year from 2023 against one-off restructuring costs of about EUR800 million. It will also close some 150 branches, bringing its network to just over 1,200 branches.

   
 
 

France's Emmanuel Macron Calls for Compromise After Losing Majority in Parliament

PARIS-French President Emmanuel Macron said Wednesday he was ready to work with other parties to form a new coalition, after losing his majority in the French Parliament in elections this week.

The French leader said he was open to building an alliance with other political parties to form a new parliamentary majority. His party could also strike agreements with other political parties on individual bills.

   
 
 

Polio Virus Found in London Sewage Puts U.K. on High Alert

Polio has been detected in London's wastewater system, U.K. health authorities said, putting clinics on high alert for an infectious disease that hasn't been recorded in Britain for nearly four decades.

The U.K. Health Security Agency raised the alarm on Wednesday after it found several closely related polioviruses in sewage samples taken from a treatment facility in east London between February and May. That pattern of detection suggests that a form of the virus has been spreading locally, the agency said.

   
 
 

Rolls-Royce Offers $2,500 Payment to Workers as Inflation Bites

LONDON-Rolls-Royce Holdings PLC is offering U.K. staff a one-time payment of GBP2,000, equivalent to about $2,450, hoping the bonus will help ease pressure from union officials and employees over rising inflation while keeping a lid on the jet-engine maker's costs ahead of an uncertain economic future.

The move is one of many approaches companies are taking to address soaring inflation that has unions and workers in many parts of the world demanding higher pay. For months, private companies have been boosting salaries and wages and offering signing or retention bonuses, amid exploding post-lockdown demand and super-tight labor markets. More recently, surging prices for items from food to fuel have weighed on workers' buying power, pressuring employers to boost pay to make up the shortfall.

   
 
 

Farmers Stick With Bayer's Roundup, Undeterred by Supreme Court Decision

The U.S. Supreme Court this week denied an effort by Bayer AG to stem thousands of lawsuits alleging its Roundup weedkiller caused cancer among landscapers and residential gardeners. On Alan Meadows's Tennessee farm, it was business as usual.

As the top U.S. court declined Tuesday to hear Bayer's appeal of a 2018 jury verdict linking the company's herbicide to non-Hodgkin lymphoma in a California plaintiff, Mr. Meadows said he was spraying the chemical on his own 4,000-acre farm, which he said he has done since the 1990s.

   
 
 

U.S. Gains in Push for Exception to EU Sanctions on Russian Oil

A U.S. push to pare back one of the European Union's sanctions on Russian oil has tentatively started to gain traction within the 27-member bloc, with officials weighing whether to allow insurers to cover shipments of Russian oil if the price the oil will sell for falls under a cap.

After weeks of infighting, the EU in early June approved a ban on insuring shipments of Russian oil alongside a ban on imports of Russian oil that is set to go into effect this later year. Because many shipments of Russian oil are insured in the EU and U.K., Treasury Secretary Janet Yellen has repeatedly said she is concerned that the EU's plans could take Russian oil off the global market and further drive up prices.

   
 
 

European Parliament Backs Broader Carbon Border Tax

The European Parliament approved legislation to tax imports based on the greenhouse gases emitted to make them, a plan that is sending shudders through the global trading system.

The legislation backed by the parliament on Wednesday broadens a previous proposal for the tariff to include some chemical makers. It also sets a faster timeline for implementation than the earlier proposal, which was drafted by the European Commission, the European Union's executive arm.

   
 
 
   
 
 

GLOBAL NEWS

Fed Chair Jerome Powell Says Higher Interest Rates Could Cause a Recession

Federal Reserve Chairman Jerome Powell said the central bank's battle against inflation could lead it to raise interest rates high enough to cause a recession, offering his most explicit warning this year.

"It's not our intended outcome at all, but it's certainly a possibility, " Mr. Powell said Wednesday during the first of two days of congressional hearings. "We are not trying to provoke and do not think we will need to provoke a recession, but we do think it's absolutely essential" to bring down inflation, which is running at a 40-year high.

   
 
 

Congress Unlikely to Heed Biden's Call for Three-Month Suspension of Gas Tax

President Biden called for a three-month suspension of federal gasoline and diesel taxes-a move that is unlikely to have the support needed to pass in Congress and one economists and business leaders say would do little to address record-high gas prices.

"I fully understand that the gas tax holiday alone is not going to fix the problem, but it will provide families some immediate relief," Mr. Biden said at the White House on Wednesday. "Just a little bit of breathing room."

   
 
 

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(END) Dow Jones Newswires

June 23, 2022 05:34 ET (09:34 GMT)

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