High inflation and tighter monetary policy seem to be the key drivers for a risk-off session. Stocks are lower in Europe this morning after a smart reversal in the US during the previous session.
Shares in London and Frankfurt are down around 1% or so. It follows a drubbing for Wall Street that saw the S&P 500 decline 2.4% and the Nasdaq drop 2.75% as investors reacted to the European Central Bank ending a decade-long experiment with ultra-easy monetary policy and look ahead to today’s important CPI inflation report for the US.
Tesla shares didn’t get any help from an upgrade to buy at UBS…maybe because a lot of it was laughable. UBS values Full Self-Driving (FSD) at $300bn (26% of its $1,100 PT), but the NHTSA releases findings on FSD crashes this month so it’s perhaps a tad early…it doesn’t work yet. And there is the 10m annual sales based chiefly on unknown models…and the Tesla bot (remember the guy in the morph suit) being a long-term profit driver despite no figures (or a product!!) to support this view. Great thread on this here.
ECB: facing serious stagflation – big bump up in inflation forecasts, growth lower, path is set for tighter financial conditions. The ECB signalled it will raise rates by 25bps in July and alluded to a 50bps hike in September. That initially seemed hawkish enough for the market as the euro rose, but as Christine Lagarde spoke EURUSD flipped and ended the session lower. The notes from the ECB said that “If the medium-term inflation outlook persists or deteriorates; a larger increment will be appropriate at the September meeting”. Clarifying this later, Christine Lagarde said this would mean the 2024 inflation projection remaining at 2.1% or worse. I find it impossible to believe that this will improve, so I’d suggest that 50bps is looking very likely for September.
Lagarde: ‘Do we expect our rate hike in July to have an immediate impact on inflation? No.’ Ok…So why not 50bps in July? “We are now on our path to exit negative interest rates soon… it is good practice… to start with an incremental increase that is sizeable and not excessive… we also want to observe how markets will operate”. Which is just word soup – there is no logic. Just a reminder of what nonsense we have to deal with today.
Italy-German 10yr spreads got wider, moving to 220bps but there was a clear signal to introducing new tools if required to address the fragmentation question. Money markets further increased bets on ECB hikes, rising from 130bps to 145bps for 2022. And there was read across for debt markets here as the UK 2-year gilt yield rose to its highest since 2008 at 1.824%.
But there is some good news on the inflation front this morning as figures show China’s producer price inflation rising at the slowest in fourteen months at 6.4% y/y from 8.0% in April. Today US CPI report is expected to rise +0.7% month-on-month, +0.5% for the core reading.
Nat gas rallied after sinking on the Texas LNG fire, with prices back to almost $9. The EIA forecast that natural gas prices will remain high through 2022 and fall in early 2023 because of more domestic natural gas production, less LNG export and domestic natural gas demand growth, and more natural gas placed in storage. More on this here. Meanwhile crude oil held around the $120 mark as the latest EIA inventory highlighted the fuel supply crunch. Gasoline stocks fell and are 10% below their long-term average, though there was a slight build in crude inventories. Fresh lockdowns in China dented sentiment a touch as WTI retreated from the $123 level to $120.
In FX, Japanese authorities have said they are worried about the depreciation in the yen. The BOJ/MOF said they would watch forex moves, impact on economy and prices even more carefully and with a sense of urgency…will take appropriate actions. Pain threshold reached –134 is the line in the sand?
Source: Neil Wilson – Markets.com