EMEA Morning Briefing : Stocks to Tread Water as Investors Await Fresh Cues

MARKET WRAPS

Watch For:

E.U. ECB Governing Council non-monetary policy meeting; U.K. Chancellor Jeremy Hunt appears before the Treasury Committee, Money and Credit – lending to individuals, businesses, broad money and credit, monthly automotive manufacturing figures; Consumer Confidence Index for Germany and France; Italy foreign trade; France housing starts; trading updates from Next, Pershing Square Holdings, Micro Focus International, Swedbank, MTU Aero Engines, Naturgy Energy Group

Opening Call:

Shares may tread water in Europe on Wednesday, as investors await fresh cues, with the easing of worries over the banking system. In Asia, stock benchmarks were mixed; Treasury yields were also mixed; the dollar strengthened; while oil gained and gold declined.

Equities:

European stock futures may nudge slightly higher at the open, as investors closely assess the state of the banking sector and the health of the economy.

As fear about financial distress subsides, more traders are wagering that the bank distress won’t spill over into the broader economy.

That shift showed investors wondering once again whether good news for the economy might be bad news for stock prices, because it implies the Fed may act more aggressively.

“People are waiting to see if there’s going to be another leg to this banking story, and there’s an aspect to it that no news is good news,” said Andrew Hollenhorst, chief U.S. economist at Citi.

“But if the financial-stability concerns abate a bit, the attention shifts back to inflation.”

This is a market that is stabilizing,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley’s (MS) global investment office.

But while investors regain their footing after the tumult in the regional banks sector (KRE) during recent weeks, there’s still open questions, he said.

To name a few, there’s the questions whether there’s any spillover consequences for other parts of the economy, how much higher interest rates will go, how tight lending conditions will become and what broader effect that will have.

“In the face of the unknown, the market is always going to err on the downside,” Loewengart said.

Forex:

The dollar was higher in Asia amid risk-on sentiment aided by gains across most regional equity markets and in U.S. stock futures.

“US recession bets look likely to become more entrenched in months to come, but economic surprise indices–which can have a material impact on exchange rates–could turn more positive in the short run as Main Street proves more resilient than Wall Street,” Corpay’s Karl Schamotta said.

The lack of any substantive developments in the banking backdrop has caused markets to be relatively calm by the standards of recent weeks, said NAB.

The U.S. consumer confidence index released overnight also suggests that the consumer has taken little notice of recent bank failures, NAB added.

Bonds:

Treasury yields were mixed amid a calmer tone across markets as fading tensions over the banking sector reduced demand for perceived haven assets, such as government bonds.

Higher yields on short-term Treasurys than on long-term Treasurys is a classic sign of a coming recession that equity investors may be ignoring at their peril, said Kristy Akullian, senior investment strategist at BlackRock’s iShares.

“We think the bond market and stock market are flashing very different signals, and if we had to pick one, we’d side with the bond market right now,” Ms. Akullian said.

Her team is advising a cautious stance toward tech stocks and other volatile investments.

Treasury bonds have come under pressure, and the yield curve has flattened, as traders have pulled back on expectations for an additional rate hike of 25 basis points in May, said Tom di Galoma, managing director and co-head of interest rate trading at BTIG.

“My view is that the curve probably steepened way too much,” he said.

“The economy remains pretty strong, all the data seems to indicate everything is okay.”

But he also sees potential for continued stress in the banking sector, including potentially from souring commercial real estate.

“Where there is smoke, there is fire,” di Galoma said.

“Consumers will feel the impact of the stress in the banking system over the next several months,” said Gurleen Chadha, U.S. economist at Oxford Economics.

“Credit conditions will deteriorate as banks will be tighten lending standards and reducing…