EUROPEAN EQUITY OPEN: Choppy open as traders return from the long-weekend; US debt deal still faces challenges; Japan FX officials to meet

OVERNIGHT: Asia-Pacific stocks had mixed trading with rangebound price action. The ASX 200 and Nikkei 225 experienced losses, while KOSPI outperformed. Hang Seng and Shanghai Composite were pressured. Traders are watching tomorrow's China PMI data releases, and how European and US cash markets react to the US debt ceiling agreement. Our APAC wrap is here.

INDICES: At 08:10BST, Euro Stoxx 50 -0.2% at 4,313; FTSE 100 -0.2% at 7,609; DAX 0.0% at 15,960; CAC 40 -0.5% at 7,269; IBEX 35 -0.0% at 9,179; FTSE MIB -0.1% at 26,584; SMI -0.2% at 11,407. 

EUROPEAN OPEN: European equity markets start Tuesday trade in choppy fashion, and are mixed as traders in the UK and the US return from the long weekend. A deal was struck between President Biden and House Speaker McCarthy on the US debt ceiling; the announcement has seen US Treasuries rally in overnight trade in relief, though many still note that its passage through Congress will be challenging given extreme positions on both sides of Congress, and the Bill will need bipartisan support. We have further analysis below. This morning, data out of Spain showed flash HICP -0.2% M/M in May, lower than the expected +0.3%; the annual measure cooled to 2.9% Y/Y (exp. 3.4%) from 3.8%; the core reading printed 6.1% Y/Y, down from 6.6%. INE said 12-month inflation had not fallen to the lowest levels since July 2021. Bunds rallied on the lower than expected reading ahead of German releases due Tuesday. In the UK, data from the BRC showed UK shop price inflation rising to its highest level since 2005, with prices in supermarkets and retail chains increasing +9.0% Y/Y in May. However, food price inflation slowed to +15.4% Y/Y. Meanwhile, on the FX front, as the Japanese yen weakens to above 140.00 against the USD, Ministry of Finance top currency diplomat Kanda will make a press statement after an emergency MOF, FSA, BoJ trilateral emergency meeting, scheduled for 09:30BST.

MOVERS: BAE Systems (BA/ LN) -0.8%, Rolls-Royce (RR/ LN) -1.4%, Siltronic AG (WAF GY) +4.1%, Aroundtown (AT1 FP) -3%, ITV (ITV LN) -1%.

STOCK SPECIFICS: Of note for labour markets, Sky (CMCSA) is to cut hundreds of jobs in the UK, with losses expected to be focused on traditional business areas. Rolls-Royce (RR/ LN) said it has made no decisions on workforce changes, amid reports that it is looking to cut circa. 3k non-manufacturing jobs. In deals, TotalEnergies (TTE FP) is to sell its 50% stake within Surmont Oil Sands to ConocoPhillips (COP) for CAD 4.03bln. Superdry (SDRY LN) is reportedly in discussions to outsource the operation of its e-commerce unit to Shopify (SHOP). Whitbread (WTB LN) is reportedly exploring options for its pub/restaurant arm. Of note for supermarkets, ASDA is to acquire EG Group's UK and Ireland businesses, will form a combined group with revenue of almost GBP 30bln. Elsewhere, PM Sunak is reportedly in discussions with retailers for a price cap on basic food items, would be a voluntary agreement. In industrials, Airbus (AIR FP) rival Boeing (BA) is in talks to sell over 150 737 Max jets to a new carrier owned by Saudi Arabia’s sovereign wealth fund, Riyadh Air; Airbus may also secure a portion of the order. Separately, Cathay Pacific chose Boeing over Airbus in deal for freighter jets. India's regulators file criminal complaint accusing BAE Systems (BAE LN) and Rolls-Royce (RR/ LN) of engaging in corruption on historic deals for the supply of fighter jets to India. In autos, talks to prevent Stellantis (STLAM IM) from moving its EV plant out of Canada are reportedly at an impasse, with the Canadian government's offer falling short of the company's demands. In financials, BMPS (BMPS IM) CEO said the bank can and must partake in the creation of a "third pole" in domestic banking consolidation. In real estate, SBB (SBB SS), facing a debt crisis, is reportedly contemplating a breakup. In board room news, Nestle (NESN SW) CFO Francois-Xavier Roger to step down, LSE (LSEG SW) CFO Anna Manz named new Nestle CFO. Unilever (ULVR LN) CFO Pitkethly to retire. St James Place (STJ LN) has reportedly begun the search for a replacement for CEO. Our Full European stock specific briefings for May 30th can be accessed here and here.

US DEBT CEILING DEAL: President Biden and House Speaker McCarthy have struck a deal over the debt-ceiling. The agreement would avert a US default, suspend the debt ceiling until 1st January 2025, cap federal spending for the next two years, claw back unused COVID funds, hasten the permitting process for some energy projects, and include extra work requirements for food aid programmes. The plan now faces a push through Congress, where it will likely face objections from both sides of the aisle. Lobbying is already underway to secure votes; Biden staff have already contacted many Democrats, McCarthy expects the majority of Republicans in the House will vote for the bill, while Republican Senate Leader Mitch McConnell has also backed the deal. Secretary Yellen suggested it is likely that the Treasury would have enough funds to make around USD 130bln of payments due Thursday and Friday, but said that the US will run out of money to cover its obligations on time by 5th June, and subsequently the Treasury could begin missing payments, though it is unclear which ones. Ratings agency Moody’s has previously said that missing the X-date would see them reassess US ratings, but so long as interest and principal on bonds was being paid, a default may be avoided. Analysts at Goldman Sachs said that “reaching a deal between leaders had been the highest hurdle and this agreement eliminates most of the uncertainty regarding the impending debt limit deadline, though the legislation must still pass the House and Senate,” Goldman Sachs said, noting that the House is slated to vote Wednesday (May 31st) while the Senate could vote by Friday (June 2nd), though it would not be surprising to see procedural delays push the vote into the weekend. “Regardless, the chances that Congress allows the June 5th deadline to pass without action now appear very low,” GS said, adding that the deal itself is expected to trim GDP spending by 0.1-0.2% annually in 2024 and 2025, but FY23’s funding boost may keep overall discretionary spending slightly higher next year.

RECAP - SPAIN REGIONAL ELECTIONS: Spain Prime Minister Pedro Sanchez’ governing Socialist Workers’ Party suffers losses in regional and municipal elections as the conservative Popular Party gains control in several regions, potentially needing support from the far-right Vox. Sanchez has called for snap general elections to be held on July 23rd after his party’s heavy losses (Spain had to have an election by the end of this year). It was a boost for PP leader Alberto Nunez Feijoo, however, as his party gains support and absorbs votes from the declining Ciudadanos.

RECAP - TURKEY PRESIDENTIAL ELECTION RUN-OFF: President Recep Tayyip Erdogan secures a third decade in power, winning run-off vote with 52% against opposition candidate Kemal Kilicdaroglu. The Turkish lira slid to a record low in wake of the outcome, with uncertainty surrounding Erdogan’s economic policies cited. Analysts said Erdogan’s victory will likely see continued distortive economic policies and increased macroeconomic instability, risking currency falls and strains on the private sector. Danske Bank warned that in a scenario where Turkey ran out of foreign currency, lira’s value would likely collapse, inflation would explode and goods shortages could occur; Turkish corporates with large foreign liabilities would face rising rollover risk.

TODAY’S AGENDA:

• An interactive calendar can be found here; a pdf version can be accessed here.


• 
  EU DATA/SPEAKERS: Sentiment indicators are due in the morning, with little change expected at the headline level, though traders will be watching out for consumer inflation expectations. Some German regional inflation metrics may be released in the morning, though the national data is due tomorrow. ECB's Simkus, Holzmann, Centeno, and Villeroy are due to make remarks today.


• 
  US DATA/SPEAKERS: March housing metrics from the FHFA and Case Shiller; on the housing market, Pantheon Macroeconomics has recently said that the big picture is that home sales are no longer falling, though a sustained rebound from the current lows may be elusive in absence of an improvement in affordability, adding that “part of that improvement will come via lower home prices; that process is nowhere near complete, but it is well underway, with the Case-Shiller 20-city index down by 4.6% from its summer peak.” The Conference Board’s gauge of Consumer Confidence for May is expected to ease slightly at the headline level. The Dallas Fed Manufacturing survey for May will be eyed ahead of this week’s ISM release. The Fed’s Discount Rate Minutes are due for release in the afternoon. Fed non-voter Barkin will make remarks today; at the end of this week, the Fed goes into blackout ahead of its June 14th policy meeting, where expectations are currently split between an unchanged outcome and a +25bps rate rise.


• 
  US CORPORATE EARNINGS: Hewlett Packard Enterprises (HPE) and HP Inc (HPQ) are due to report after the bell. Daily US Earnings Estimates can be found here. Highlights for the rest of the week include: CRM, CRWD on Wednesday; DG, LULU and AVGO on Thursday. Weekly US Earnings Estimates can be found here.


• 
  WEEK AHEAD: Highlights include US jobs report, US ISM; China PMI; inflation data from EZ and AUS. Our Week Ahead briefing can be accessed here. The Fed goes into blackout at the end of this week ahead of the June 14th FOMC meeting, where markets expectations are split between an unchanged outing and a +25bps hike.

30 May 2023 - 08:11- Research Sheet- Source: Newsquawk