EUROPEAN EQUITY OPEN: Stocks start lower amid US debt ceiling impasse, Sino-US tensions, hot UK inflation

OVERNIGHT: On Wall Street, stocks Tuesday dropped, while short-term Treasury yields rose, as investors became increasingly anxious over the lack of progress in US debt limit negotiations. Our US wrap is here. In APAC trade, stocks declined amid ongoing US debt ceiling discussions, while NZ markets were in focus after the RBNZ unexpectedly signalled the end of its tightening cycle. In Japan, the first positive Reuters Tankan reading for this year did little to spur risk appetite. China indices were lower after the White House spoke out against China's Micron (MU) ban, while a lawmaker called for the Commerce Department to add Changxin Memory Technologies to the entity list and called to ensure that no US export licenses are granted to firms operating in China which are used to backfill Micron. Our APAC wrap is here.

EUROPEAN OPEN: It is a sour start to the midweek trading session, with European stocks underwater after the open following a continued impasse in US debt ceiling talks, tense US-Sino relations, some fears about a COVID resurgence in China, as well as hot UK inflation data which has seen traders increase hawkish bets on the Bank of England (see our wrap, below). On today’s agenda (more details below), UK CBI industrial trends, Germany Ifo, ECB and BoE speak, as well as the FOMC meeting minutes. Traders will also be attentive to any debt ceiling updates, with nine days to go until the perceived deadline. (see our recap, below).

RECAP – UK INFLATION: UK inflation metrics were hotter than expected in April, with the annual headline rate easing to 8.7% Y/Y from 10.1%, but above the expected 8.2%; the core measure rose to 6.8% Y/Y from 6.2% against expectations that it would be unchanged in the month. Money markets moved hawkishly, and now a +25bps rate rise at the June meeting to 4.75%, is now fully priced. The significant decrease in inflation was driven by a sharp decline in utility prices, which can be attributed to the smaller decrease this year compared to the previous year when prices were frozen under the government's Energy Price Guarantee. Utility inflation is expected to further decrease in July when energy price caps drop below the government's price guarantee. The specific cap for July-September will be announced on Thursday. Meanwhile, the increase in core inflation has pushed the annual measure beyond the previous perceived peak of 6.5% in April of the previous year, reaching the highest levels since 1992. This rise was attributed to an increase in prices for core goods, while the growth in services inflation from 6.6% to 6.9% exceeded the BoE's forecast of 6.7%. "In other words, the recent resilience of economic activity appears to be stoking domestic inflationary pressure," Capital Economics said, adding that "with inflation proving stickier than the Bank expected, it now seems all-but certain that the Bank will raise interest rates in June, and perhaps a bit further in the months after." Following the release, money market pricing now sees the UK terminal rate at just over 5.25%  in December (from around 5.00% before the release).

STOCK SPECIFICS: For the FTSE 100, IMI (IMI LN) is indicated to join the UK bluechip index, Ocado (OCDO LN) set to leave, according to a report. In financials, UBS (UBSG SW) estimates that merger with Credit Suisse (CSGN SW) could save USD 8bln by 2027 and increase EPS; the bank is considering options for the combined group's Swiss banking units, has not decided on integration or spin-offs. Legal & General (LGEN LN) bought USD 250mln of bonds in a big debt-for-nature exchange, helping Ecuador reduce its debt and support conservation efforts. UK regulators provisionally find that Citi (C), Deutsche Bank (DBK GY), Morgan Stanley (JPM), HSBC (HSBA LN), and RBC broke competition laws on UK bonds between 2009-2013, and fines may be imposed. Aviva (AV/ LN) reports that its insurance and private health segment grew in Q1. AXA's (CS FP) Venture Partners announced a EUR 1.5bln fund to invest in European and US tech start-ups, looking at companies that are expected to IPO within three-to-four years. MedioBanca (MB IM) 2023-26 strategic plan guidelines have been approved, targets revenue growth of +6%, EPS growth of +15%. Of note for the auto sector, Renault (RNO FP) and Valeo (FR FP) sign a partnership in Software Defined Vehicle development. Michelin's (ML FP) TBC Corporation is to divest its Retail network and to focus on Wholesale, Distribution and Franchise businesses. Italian government said to be keeping an eye on Sinochem's role in Pirelli (PIRC IM) shareholders' pact. In industrials, Siemens (SIE GY) CEO said it will defend and expand its market share in China. In consumer sectors, Marks & Spencer (MKS LN) reported that profits slipped 8% as higher costs weighed. In utilities, SSE (SSE LN) saw profits jump 89% Y/Y. Our full European equity specific briefings for May 24th can be found here and here.

TODAY’S AGENDA:

24 May 2023 - 08:10- Research Sheet- Source: Newsquawk

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