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Europe should track Asian stocks higher on hopes of easing Covid curbs. Elsewhere, the dollar, Treasury yields and gold all gained while oil dipped.
European equities look set for solid opening gains Tuesday after Asian markets were lifted by hopes of easing Covid restrictions in the region.
On Wall Street, the Dow eked out a slightly positive finish Monday, while the S&P 500 saw its gains entirely evaporate during the final hour of trading, extending a stock-market selloff following a batch of weak data from China and the U.S. that fueled more concerns about the state of the global economy.
Capital Economics said it’s possible for central banks to bring inflation down without engineering a recession, provided the rise of supply-related prices eases. “However, the difficulty of fine-tuning policy suggests they may inadvertently create a recession.”
The chances of a recession are significantly higher if there’s a fundamental shift in the banks’ expectations on inflation rates, said CE. “If that is what is happening, central banks probably will need to engineer a recession in order to squeeze activity sufficiently to bring inflation expectations back down.”
Simplify Asset Management said the Fed may be leading the economy into a recession. “The Fed is repeating the mistakes of last year,” warning that the central bank is “very focused on targeting inflation and dismissing concerns that the economy is slowing rapidly, and arguing that they should continue to hike even in the face of that.”
Simplify worries about potential damage to the economy if “this constant dynamic of stop-start behavior,” eventually leads Americans to refrain from spending on education or housing. “You’re creating conditions under which people are withdrawing from that [spending] and they may not return.”
The dollar was a touch firmer against a basket of currencies in Asia despite some momentum in regional stocks on hopes for economic-stimulus measures from China.
There’s a good possibility that Chinese policy makers could use Monday’s weak economic data as a “watershed moment” to deliver “flood-like” stimulus once the economy reopens, said SPI Asset Management’s Stephen Innes.
Goldman Sachs said the dollar typically performs well heading into recessions, including in the 1999-2001 “tech wreck,” but not in all cases.
“Further equity drawdowns, rising global recession risks, and high geopolitical uncertainty should keep the dollar supported for now, even if the longer-term outlook is negative.”
Goldman Sachs said higher FX volatility this year and a surge in the dollar reflect both cross-country divergences and the many cross-asset developments that spill over into currency markets–sharply higher bond yields, volatile commodity markets and a steep drawdown in equities.
The bank thinks the dollar is highly overvalued “but its direction will ultimately depend on the outlook for these macro cross currents.”
Treasury yields moved higher again, having pulled back Monday as concerns about global slowdown took hold.
Some analysts have argued that yields may have peaked, at least for now, after a brutal selloff in 2022 that took the 10-year rate to a 3 1/2-year high above 3.2% in intraday trade early last week.
Others see the recent pullback as a mere respite. While inflation may have technically peaked, it continues to run near its hottest in more than 40 years – and the Federal Reserve appears intent on moving aggressively to contain rate pressures, analysts said.
The earliest that “10-year yields have peaked in the cycle, relative to Fed Funds, was four months in 2000 [January peak at 6.8%, May Fed Funds peak at 6.5%],” said Kit Juckes, strategist at Société Générale.
“The past is only moderately useful when we try and figure out what the future brings, but I’d be surprised if we have seen the peak in U.S. yields; more likely, equities will find a base and as dip-buyers emerge, and we’ll get another sell-off in Treasurys.”
Oil prices dipped in early Asian trade but may rise again on hopes for Chinese demand after Shanghai announced its gradual reopening with the aim of returning to normalcy by June 1.
Crude futures erased early losses Monday, ending sharply higher, as tight supplies allowed gasoline to continue a push into record territory. U.S. prices surged to their highest since March 23, finishing up 3.4%.
Gains on Wall Street gave a bullish jolt to risk appetite in the energy commodities sphere, while moves by Sweden and Finland to join NATO added a different risk premium into the price of oil on concerns regarding Russia’s threats if NATO strengthens the Nordic countries militarily.
Crude markets also continued to ride a bullish wave for refined fuels in the U.S. as low inventories and weak refining capacity–just as a summer driving season is about to start–sparked fears of shortages.
Gold extended its advance after prices briefly drifted below the $1,800 threshold Monday.
While the Fed seems on course to carry out two 50bp rate increases at its next two meetings, should this scenario not be upgraded, gold could show further signs of stabilization, said OANDA.
Bullion should find tentative resistance at the $1,835, with $1,750 being key support if the $1,800 level breaks, OANDA added.
Base metals made solid gains on China’s measures to support the property sector, while iron ore futures rose on hopes for an aggressive ramp up in infrastructure spending once Covid-19 lockdowns are eased.
CBA said China’s daily crude steel output rose sharply in April and was only 5.2% below the peak in April 2021, suggesting that infrastructure spending was having a positive impact on demand in the steel sector.
TODAY’S TOP HEADLINES
U.N. Seeks to Ease Russian Blockade of Ukraine Grain Shipping to Avert Food Shortages
United Nations Secretary-General António Guterres is pursuing a high-stakes deal with Russia, Turkey and other nations to open up Ukrainian food exports to world markets and stave off a potential global food shortage, according to diplomats familiar with the effort.
Russia has sealed off Ukraine’s Black Sea ports to weaken the country and conquer its coast. Mr. Guterres has asked Moscow to permit some Ukrainian grain shipments in exchange for moves to ease Russian and Belarusian exports of potash fertilizer.
Cryptocurrency TerraUSD Falls to 11 Cents, Creator Announces Rescue Plan
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Turkey Lays Out Demands as Finland, Sweden Plan NATO Entry
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Turkish President Recep Tayyip Erdogan injected uncertainty into the Nordic nations’ bid to join the organization on Friday when he said Turkey didn’t view their request favorably, accusing the two countries of harboring what he said were Kurdish militants belonging to a group targeting Turkey. All 30 members of NATO must approve the entrance of any new members.
Yellen Pushes Polish Prime Minister on International Tax Deal
WARSAW-Treasury Secretary Janet Yellen pushed Poland to advance the European Union’s implementation of a global minimum tax in a series of meetings Monday, saying that the two sides discussed potentially linking the minimum tax to an overhaul of international taxation authority.
Ms. Yellen met with Polish Prime Minister Mateusz Morawiecki and Finance Minister Magdalena Rzeczkowska on Monday as she attempted to unlock Polish support for approving the 15% minimum tax on large multinational corporations. Poland is the one holdout in the 27-member EU for approving the implementation of the deal, which more than 130 countries created in talks last year.
France’s Macron Appoints First Woman Prime Minister in Three Decades
PARIS-President Emmanuel Macron of France has appointed Élisabeth Borne as prime minister, elevating the first woman in decades to helm a French government and lead his party’s charge in the coming parliamentary elections.
The choice of Ms. Borne-a 61-year-old technocrat who previously served as Mr. Macron’s labor minister-shows the pro-business president is tacking leftward before voters head to the polls in mid-June to elect members of the National Assembly. Ms. Borne was once chief of staff to Ségolène Royal, a Socialist Party heavyweight who mounted a high-profile yet unsuccessful presidential campaign in 2007.
CVC Capital Decides Against Brambles Takeover Due to Market Volatility
SYDNEY-Brambles Ltd. said that CVC Capital Partners decided against making a formal takeover proposal for the pallet supplier due to what the private-equity firm called external market volatility.
Brambles on Tuesday said that CVC wouldn’t seek detailed due diligence and that talks between the parties had concluded.