European stocks were mostly higher Tuesday as investors took encouragement from a late rebound on Wall Street and as they positioned for base rate rises this week in the U.S. and in the U.K.
London's FTSE 100 edged into the red in a cautious morning session with investors gearing for an expected Bank of England interest-rate rise on Thursday.
A quarter-point rate increase is expected due to high inflation, which "will prompt a lot of chatter about recession, particularly as consumers are already under a lot of financial pressure from the rising cost of living," said Russ Mould at AJ Bell.
Gucci has scope to drive revenue growth through new product offerings, adding to the upside for parent group Kering, analysts Piral Dadhania and Richard Chamberlain of RBC Capital Markets said.
The brands first-quarter results disappointed, in part due to unfulfilled potential in its product ranges, especially in leather goods and even more especially in women's handbags, the analysts said. This should improve in the coming period as Gucci adds new items to its merchandise, fueling faster growth at the brand.
They said the rest of Kering's portfolio was enjoying good momentum.
RBC Capital Markets said around 15% of Inditex's sourcing is from China, leaving it less exposed to the effects of pandemic-related restrictions and port disruption than its biggest peers, such as H&M and Primark.
Analyst Richard Chamberlain said Inditex's focus on nearby sourcing for its fashion ranges leaves it well-positioned this year, adding that it was also better protected against a stronger dollar.
Chamberlain added that Inditex looks to be proving successful in using price rises to protect its margins without any drag on sales volumes, and should be able to gain market share thanks to its attractive product offer.
Inditex's biggest brand, Zara, seems to have raised prices in the mid-single digits this year, including by around 2% in Spain and more in other markets, according to RBC. This should help protect the group's gross margin without any effect on volumes.
RBC has an outperform rating on the stock.
The Bank of England is likely to raise interest rates again Thursday, increasing the risk of a policy mistake, said Berenberg.
In the near-term, inflation is set to exceed the BoE forecasts, but this is entirely due to the rise in commodity prices while there is evidence of a pullback in households' demand, said senior economist Kallum Pickering.
"On a policy relevant horizon--of say two years from now--the Putin shock will probably depress demand growth, which may also affect inflation dynamics over time. If we are unlucky, the U.K. is already in the early stage of a recession," Pickering added.
In this context, it would be better if officials keep policy unchanged until incoming data dictate the appropriate response.
German companies are finding it difficult to replace imports from Russia, Ukraine or Belarus, according to the latest Ifo survey.
Only 13.8% of industrial companies with problems sourcing from these countries would be able to completely replace their sources of supply in the short term. For 43.4% of the companies surveyed, this is only partially possible. A further 16.3% answered that other sources of supply weren't economically viable and 13.8% said that this wasn't possible at all, the survey said.
Changing sources of supply is a headache for many companies, said Ifo researcher Klaus Wohlrabe. "Supply chains and production processes that have been tried and tested for years often cannot be reorganized overnight."
Read also: German Labor Market Continues Showing Resilience Amid Economic Uncertainty
Stock futures rose slightly even as Wall Street prepared for an aggressive interest-rate hike from the Fed and as the 10-year Treasury hovered around 3%.
Danielle DiMartino Booth, chief executive and chief strategist of Dallas-based Quill Intelligence, and a former adviser to Richard Fisher, ex-president of the Dallas Fed, said with a 50 basis-point hike already priced in by the markets, "the focus will immediately shift to just how many half-point hikes the Fed expects to initiate over the balance of 2022."
DiMartino Booth said the window for the Fed to engineer a "soft landing" - which entails lifting interest rates to slow down inflation, without pushing the economy into a recession - likely has closed. She said the "last economic pillar standing" is the labor market, "but we're already seeing a weakening in new job postings and the beginnings of layoff announcements as companies struggle with the profit margin squeeze brought on by stagflation."
Wall Street will get a snapshot of the U.S. jobs market on Friday when the Labor Department releases the nonfarm payrolls report for April. Economists expect the U.S. to have added 400,000 jobs last month, down from 431,000 in March. The unemployment rate is expected to remain steady at 3.6%.
With the Fed expected to raise interest rates on Wednesday and the U.S. economy looking "robust" the dollar looks set to remain strong, said Commerzbank.
Despite questions over the dollar's high valuations after the DXY Dollar Index recently hit a two-decade high, the currency "remains the better alternative," said analyst You-Na Park-Heger.
"In view of the Fed meeting tomorrow and the increasingly concrete discussion about an EU oil embargo against Russia, the dollar is therefore likely to remain in demand."
A firm break for the euro below the $1.05 level against the dollar looks very likely this week as the single currency suffers from underperforming European equities and fears of a prolonged Russia-Ukraine conflict, said ING. This also comes as the dollar performs well ahead of a likely interest-rate rise by the Fed on Wednesday.
"A week with the FOMC meeting and not much action on the eurozone calendar/ECB speaker side could definitely see a decisive technical break lower [for the euro]," said ING.
The 10-year German Bund yield briefly breached 1% for the first time in almost 7 years, tracking its Treasury and gilt peers which have also risen above key levels of 3% and 2%, respectively.
"The big market moves show the market is slowly starting to price that the Fed will be able to keep inflation and inflation expectations in control through a higher real yield," said Deutsche Bank's strategists. They still see upside potential for Treasury yields from the current level.
Citi has forecast eurozone gross government bond issuance to amount to EUR109 billion in May, EUR15 billion above the average monthly supply expected for 2022.
Backflows to investors will amount to EUR68 billion in May, including EUR10 billion of coupon payments and EUR58 billion of redemptions, said rates strategist Saumesh Dutta.
He has forecast net cash requirement--gross government bond supply minus free-float coupons, total redemptions and assumed net asset purchases by the European Central Bank--to be non-supportive for eurozone government bonds at EUR24 billion.
Crude futures edged lower in Europe as expectations of an EU oil ban countered weak U.S. economic data.
EU proposals to ban purchases of Russian oil by the end of the year are expected to be circulated among member states Tuesday, the Wall Street Journal reported.
"Oil remains supported as the EU appeared to progress on a Russian crude import ban. But further gains will be limited," said SPI Asset Management.
Prices for gold and base metals were lower in European trade, on mounting economic worries over Covid-19 lockdowns in China and tightening by the Fed.
Dampening economic sentiment is still continuing to hit metal markets, with investors looking to the dollar and U.S. Treasury bonds as safe havens.
Even though nickel-price volatility has eased in recent weeks, the disconnect between Chinese and London nickel prices remains wide, said Macquarie analysts.
Chinese prices of nickel pig iron and nickel sulphate are trading at "major and unprecedented discounts" to the benchmark London Metal Exchange contract. The analysts said Chinese prices have been depressed by a jump in supply from Indonesia.
"The expected nickel surplus in 2022 is likely to be entirely in class 2 material, with the size of the deficit in class 1 [battery grade material] reduced [but] not entirely eliminated."
The economic recovery from the pandemic and the war in Ukraine has driven an unprecedented demand for fossil fuels, but this has not come at the expense of investment in green energy, said Macquarie CEO Shemara Wikramanayake at the Macquarie Australia Conference.
Wikramanayake said high energy prices were pushing business and consumers to bring forward investment into energy efficient areas like electrification.
"The weight of available capital means there is still scope for significant investment opportunities this year despite the specter of rising interest rates."
She said Macquarie was working with resources clients about how to meet the burgeoning demand for essential inputs for electrification, like copper, lithium, nickel and rare earths.
BP Takes $25.5 Billion Hit From Russia Exit
BP PLC took a $25.5 billion pretax accounting charge related to its decision to exit its Russia holdings, including its stake in government-controlled oil producer Rosneft, by far the biggest financial hit tallied by companies pulling back from the country after its invasion of Ukraine.
The London-based company said Tuesday that the charge dragged it into a $20.4 billion headline loss for the first quarter despite soaring commodity prices that poured cash into major oil companies' coffers. The loss included a $13.5 billion write-down of BP's nearly 20% stake in Rosneft that reflected its carrying value as of Feb. 27.
BNP Paribas 1Q Net Profit Rose on Higher Revenue, Backs Mid-Term Targets
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