MARKET WRAPS
Stocks:
European stocks were in the red on Tuesday, weighed by political risk, and with investors wary that wider government deficits are likely in the U.S. and France, whoever wins the elections.
Jerome Powell and Christine Lagarde take center stage later in the European session, along with other global bank chiefs, as the monetary-policy world converges on Sintra, Portugal, for the European Central Bank's annual Forum on Central Banking.
Powell will take part in a moderated panel discussion with Lagarde around 1330 GMT.
Stocks to Watch
Saab's growth potential means it is too early to say that current defence spending boom is over, but its valuation is high and doesn't leave any margin of safety in the event of a possible cooling of market conditions, Kepler Cheuvreux said. It has maintained its hold rating on the stock but raised its target price to SEK245 from SEK232.50.
Kepler Cheuvreux forecast sales growth of 21% in the second quarter with margins increasing by 10 basis points, noting that order prepayments should limit the damage from higher investments and inventories on free cash flow.
"Saab must invest for growth, hence the negative free cash flow in the first half of the year and the low margin despite high organic growth."
U.K. banks have attractive valuations and look set for a solid earnings season, UBS said.
"By geography we have a preference for the U.K. banks, which offer increasing net interest income, driven by structural hedges, even as lower rates should boost the local economy, are regulated locally--vs an ECB that is not done with re-regulating the sector--, but that still trade at a meaningful discount to the sector," UBS said.
It highlighted the attractiveness of domestic banks, whose structural hedges delay the benefits of higher rates, and suggest a focus on Standard Chartered pointing to the progress achieved by current management in improving returns, risk and balance sheet efficiency.
U.S. Markets:
Stock futures fell and benchmark Treasury yields pulled back after Monday's sharp rise. JOLTS job openings data are due.
U.S. markets will have a shortened trading session Wednesday and be closed Thursday for the Fourth of July holiday. On Friday, investors will get a fresh look at the labor market with the release of the June jobs report.
Economists expect the U.S. economy added 200,000 jobs for the month, which would be a slowdown from the 272,000 added in May. Signs that the job market and inflation are cooling have bolstered hopes that the Federal Reserve will cut interest rates at its September meeting.
Forex:
The euro initially rose after the first round of French elections in the expectation the National Rally wouldn't form a majority despite winning the most votes, but it could struggle due to uncertainty ahead of the second round, ING said.
"We doubt there will be significant extra support for the common currency given the open questions ahead of the second round on Sunday 7 July," ING said.
The final result remains highly uncertain and there remains a risk of the far-right securing a majority, ING analysis shows.
ING also said the dollar is at risk of falling if Jerome Powell points to slowing inflation in a speech at the Sintra Forum in Portugal, while data could show another decline in U.S. job openings.
"There has been a tendency from Powell to be a bit more optimistic than the FOMC consensus on disinflation, and we think there are some downside risks for the dollar ahead of today's speech."
Powell speaks at 1330 GMT. JOLTS data at 1400 GMT are expected to show job openings fell to 7.950 million in May from 8.059 million in April, ING said.
Separately, ING said the Polish zloty looks the most attractive among its Central European peers, including the Hungarian forint and Czech koruna, and could rise if Poland's central bank signals this week that interest rates are likely to stay at current levels for a while.
The Polish central bank, which announces its policy decision on Wednesday followed by a press conference on Thursday, is "traditionally hawkish" in indicating rates will remain at high levels, ING said.
Monday's price action showed the euro struggled to break below the 4.300 zloty level, but ING expects it will break below this level in the days ahead.
UOB Global Economics & Markets Research said USD/JPY is likely to extend gains, based on the weekly chart.
USD/JPY's break above 160.00 last week indicates that the currency pair will probably continue to rise, UOB said, noting the next significant resistance level is at 163.00. For the currency pair to maintain its uptrend, it mustn't break below key support in the 154.75-155.60 area, UOB said, adding that this support area is set to rise in the coming weeks.
Bonds:
French government bonds look strongly priced for a hung parliament in France, Citi Research said.
Nonetheless, it suggests caution while waiting for opinion polls conducted after the withdrawal of third-place candidates are over by Tuesday evening.
Short-end eurozone government bonds look supported by an expected decline in flash estimate eurozone inflation and European Central Bank policymakers' comments at the ECB's symposium in Sintra, Portugal, Commerzbank Research said.
"Today's [eurozone] HICP is unlikely to give the all-clear, but the details together with Sintra comments could support the short end," Commerzbank said, adding that long-end eurozone bonds are expected to be moved by French bonds and Treasurys.
TD Securities has entered a long position in 10-year Treasurys at a 4.479% yield, targeting 4% on a strategic horizon, and with a stop-loss at 4.75%.
The new trade comes as 10-year Treasurys erased much of their 28 basis point gain in June, a move likely aided by rising expectations of a Republican sweep in November, which could push deficits higher, TD said.
While rates could remain choppy as investors wait for key data, TD sees a psychological resistance around 4.5% as expectations for Federal Reserve rate cuts have not changed significantly.
"The main risk to this trade is inflation remaining sticky for longer, which may delay the timing of the first rate cut."
Energy:
Oil futures edged higher as demand is expected to ramp up in the U.S. ahead of the Fourth of July holiday and as concerns mount over Hurricane Beryl.
The American Automobile Association expects to see a record number of drivers this week, forecasting travel over the Fourth of July will rise 5.2% on year.
At the same time, Hurricane Beryl isn't expected to affect operations in the Gulf of Mexico immediately, but could cause disruptions later in the week, Swissquote Bank said.
Price risks remain tilted to the upside, it added.
Steelmaking Coal
It might take some time for the impact of Anglo American's Grosvenor mine suspension to be reflected in steelmaking coal prices , Morgan Stanley said.
Prices have been soft recently due to a seasonal lull in the market. "But we would expect a months-long outage on a mine that accounts for 1.5% of the HCC [hard coking coal] export market to move the dial."
Metals:
Metal prices were mixed, with small falls for gold and copper.
Gold might be in a period of consolidation, but with the prospect of U.S. interest rate cuts in the second half inviting back ETF investors, higher prices are likely by the year-end, Saxo Bank said.
Copper reached a record high earlier this year and while current soft demand in China points to timing being off, the long-term outlook points to higher prices, Saxo Bank said.
Commodity Flows
JPMorgan Global Commodities Research said traders are pulling back their exposure in commodities.
Global flows fell to $136.9 billion through the week ended June 28, a 3.8% slide. It continues a steady fall in the amount of money flowing through commodities since May.
EMEA HEADLINES
Shell Pauses Construction of European Biofuels Facility
Shell said it will pause construction work at its biofuels facility in Rotterdam, Netherlands due to current market conditions.
The British energy major said its Dutch subsidiary will conduct an impairment review of the Shell Energy and Chemicals Park project, and that further details will be included in its second-quarter update due to be published Friday.
Sainsbury's Backs Guidance After Robust Growth in Grocery
J Sainsbury backed its guidance for fiscal 2025 after benefiting from a robust and sustained momentum in grocery sales.
The British grocer on Tuesday said it continues to expect retail underlying operating profit-the company's preferred metric, which strips out exceptional and other one-off items-of between 1.01 billion and 1.06 billion pounds ($1.28 billion-$1.34 billion).
Richemont Taps Louis Ferla as CEO of Cartier
Swiss luxury group Richemont said it has appointed Louis Ferla as chief executive officer of its jewelry brand Cartier.
Ferla will succeed Cyrille Vigneron, who decided to retire after eight years as head of the division, the group said Tuesday.
GLOBAL NEWS
Why a Potential Trump Victory Is Spooking the Bond Market
Today may be the first day of July, but November is on many investors' minds following last week's presidential debate. Bond yields tell the story.
The rematch that few people wanted between President Joe Biden and former President Donald Trump looks likely to play out in November, and that means markets are scrambling to get ahead of the eventual outcome.
Fed's Powell Takes the Stage With Other Global Bank Chiefs
Federal Reserve Chair Jerome Powell is set to speak alongside other global central bank heads on Tuesday, days after a promising inflation report.
The monetary-policy world has converged on Sintra, Portugal, this week for the European Central Bank's annual Forum on Central Banking. Powell will take part in a moderated panel discussion with ECB President Christine Lagarde and Roberto Campos Neto, governor of the Banco Central do Brasil, at 9:30 a.m. Eastern.
(MORE TO FOLLOW) Dow Jones Newswires
07-02-24 0510ET
