MARKET WRAPS
Stocks:
European stocks were sharply lower on Tuesday, tracking falls in equities globally on fears of Middle East tensions escalating and prospects of U.S. interest rates staying higher for longer.
"Rising geopolitical tensions in the Middle East and expectations of higher U.S. interest rates for longer have dampened risk appetite in financial markets," IG said.
Shares on the Move
Ericsson rose around 6% after it beat expectations in the first quarter, helped by a one-off gain and stronger margins in networks, but Kepler Cheuvreux said the company's medium-term outlook remains bleak.
Economic Insight
Deutsche Bank Research updated its baseline for the ECB to a more gradual--and uncertain--easing cycle.
In both the new and previous scenarios, Deutsche Bank expects the terminal rate at 2%, but the pace of cuts is expected to be slower than previously thought.
In its new baseline, Deutsche sees 75 basis points of rate cuts in 2024, with risks skewed to 100bps, followed by 100bps of cuts in 2025 and a final 25bps cut in the first quarter of 2026.
Previously, they expected 125bps of rate cuts in 2024, a further 75bps in the first half of 2025, it said.
Market Insight
DAX must manage to regain key support at 18,200 points or it will remain in correction mode, CMC Markets said.
If the tense situation in the Middle East continues to deteriorate, a drop in prices to 17,700 and then 17,000 points cannot be ruled out, CMC said.
Developments currently speak against investing in stocks and investors are keeping their distance, but "the seasonal pattern suggests that the DAX stock market will fluctuate until mid-May and that prices will only rise again between mid-May and the beginning of June."
U.S. Markets:
Stock futures pointed slightly lower after equities tumbled in the previous session on worries over Middle East tensions and as Treasury yields surged.
Earnings are due from Bank of America, Johnson & Johnson, Morgan Stanley and UnitedHealth.
Stocks to Watch
Live Nation was falling 6.8% following a report from WSJ that said the Justice Department was preparing to sue the parent of Ticketmaster.
Tesla declined 1% premarket. Shares fell 5.6% on Monday after Elon Musk said Tesla was planning to lay off more than 10% of its global workforce.
Forex:
The ECB shouldn't worry about the euro falling if it cuts interest rates before the Fed, Pantheon said.
Economic fundamentals don't support the idea of the euro falling through a trap door if the Fed keeps rates unchanged for longer, it said.
"If the ECB moves before the Fed, it would widen the interest rate differential in favor of the dollar, driving down the value of the euro."
This, however, would stoke core eurozone inflation pressures, bringing the ECB back to fighting inflation and in turn making it more difficult to cut interest rates.
Danske Bank Research expects the relative pricing of interest-rate outlooks of the Fed and ECB to converge soon, which should pose an upside risk to EUR/USD in the short-term.
Danske Bank Research doesn't expect oil prices to be a major factor for further dollar appreciation this year, barring an unexpected shock.
Bonds:
Eurozone government bond yields were little changed in early trading, but the risk-off mood is supportive of Bunds, while the U.S.-German spread remains wide, analysts said.
"With U.S. macro data remaining resilient, this stance adds fuel to the transatlantic yield divergence," Commerzbank Research said.
The 10-year U.S. Treasury-German Bund yield spread rose above 220 basis points, a level last seen in 2015-2019, when the Fed was raising interest rates while the ECB was cutting rates and running quantitative easing, Commerzbank said.
As U.S. rates are likely to stay higher for longer and the Fed's rate-cutting cycle is expected to be shallow, yield curve steepening may still be a way off, Morgan Stanley Wealth Management said.
Behind the repricing of Fed rate-cut expectations and rising yields are "the realities that inflation is no longer slowing and has not been for the last one, three and six months."
Morgan Stanley finds most concerning that "supercore" inflation [core services ex shelter], has materially reaccelerated.
Energy:
Oil prices rose after Israel vowed to retaliate against Iran's first-ever direct attack on its territory, despite international calls to avoid further escalation.
"Oil markets are in wait-and-see mode following developments in the Middle East over the weekend," ING said.
It is still not clear what Israel's course of action or timescale will be. "The more escalation we see, the more likely we are to see oil supply from the region impacted."
"Iranian oil output is most at risk and even a strong diplomatic response from Israel's allies could hit Iranian oil exports significantly with stricter enforcement of oil sanctions."
European natural-gas prices were rising on concerns for supply disruptions amid escalating hostilities in the Middle East.
"The threat of disruption to LNG tankers traversing the Strait of Hormuz has seen buyers quickly secure spot cargoes," ANZ Research said.
Meanwhile, an unplanned outage at Norway's Nyhamna gas processing plant was cutting flows to the rest of Europe, providing further support to prices. Recent gains were also driven by persistent attacks against energy infrastructure in Russia and Ukraine.
Yet, storage levels continue to be high and are now almost 62% full, well above last year, according to industry group Gas Infrastructure Europe.
Metals:
Gold futures rose 0.2%, while base metals retreated from Monday's gains.
The precious metal's price reaction to the latest escalation in the Middle East was muted, suggesting its recent rally might finally be running out of steam, Commerzbank said.
The last rise above $2,400 was apparently seen by some investors as an exaggeration and an opportunity to take profits, Commerzbank said.
Gold could rise to $3,000/oz over next 6-18 months , according to Citi Research.
Citi raised its 2024 and 2025 gold-price forecasts by 6.8% to $2,350/oz and by 40% to $2,875/oz, respectively.
RHB Retail Research said Comex gold futures are likely to consolidate above support at $2,300/oz in the coming sessions, based on their recent price movements.
Following this consolidation, the futures are expected to make a fresh attempt to breach resistance at $2,400/oz, RHB said.
RBC Capital said it looks too early to forecast deficits for nickel and lithium markets , despite recent production cuts.
Nickel supply growth from Indonesia is likely to stay strong, underpinning RBC's expectation that prices will remain low this year.
Citi said iron-ore prices could rebound to $120/ton over the next three months as activity gradually picks up.
"Output could run higher in the short term with reports indicating China may implement curbs," Citi said.
EMEA HEADLINES
International Paper to Buy DS Smith for $7.2 Billion in All-Share Deal
International Paper agreed to buy London-listed peer DS Smith for 5.8 billion pounds ($7.22 billion) in shares, outgunning a rival bid from Mondi to form an international packaging leader.
The Memphis, Tenn.-based company is offering 0.1285 new shares for each DS Smith share held, giving it 33.7% of the combined company once the merger completes. The terms value each DS Smith share at 415 pence based on International Paper's closing price of $40.85 on March 25, the day before the companies disclosed the potential offer.
Microsoft to Invest $1.5 Billion in U.A.E. AI Firm
Microsoft will invest $1.5 billion in a technology company backed by the United Arab Emirates, a deal that includes an intergovernmental pact to ensure artificial-intelligence security as the U.S. and China increasingly compete for influence in the Gulf.
Relations between the U.S. and U.A.E. have been strained in recent years over Abu Dhabi's growing ties to China and its technology firms. The agreement between one of America's biggest tech players and Abu Dhabi-based G42 signals a pivot toward Washington for the Gulf state.
Beiersdorf Lifts Guidance After Robust Nivea Sales
Beiersdorf upgraded its full-year expectations after reporting a robust sales increase during the first quarter, driven by Nivea cream.
The German personal-care products maker on Tuesday said it now expects organic sales growth for 2024 of 6% to 8%, compared with its previous target of mid-single-digit growth.
U.K. Labor Market Cools Again, Making Rate Cuts More Likely
Unemployment ticked higher and wage growth slowed in the U.K. in the three months to February, adding to key signs that inflation is easing and making interest-rate cuts likelier in the coming months.
The unemployment rate stood at 4.2% over the period, still relatively low by historical standards but higher than it has been since the three months to August last year, according to Office for National Statistics figures set out Tuesday. It is also higher than economists had expected, according to a Wall Street Journal poll that saw the rate at 4.0%.
GLOBAL NEWS
Fitch Ratings Downgrades Outlook for Chinese State-Owned Banks
Fitch Ratings has downgraded the outlook for six Chinese state-owned banks amid concerns about the government's ability to support the sector in the event of stress. The move comes after the rating agency cut its outlook for China's sovereign credit rating last week.
Fitch on Tuesday downgraded the outlook for the credit rating of six Chinese banks to negative from stable, including Industrial & Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China, Bank of Communications and Postal Savings Bank of China.
Market Reaction to Iran Attack Tells Us Stocks Aren't in a Bubble
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04-16-24 0600ET
