MARKET WRAPS

Stocks:

European stocks were mostly lower Tuesday, as surging oil prices heightened fears around inflation and raised further questions over how higher prices could be reined in without dragging the global economy into recession.

Investors' worries were cemented by the latest eurozone inflation data, with consumer prices rising to a record 8.1% in May. and economists expect eurozone inflation to continue its upward trend in the coming months, as energy and food prices rise due to Russia's war in Ukraine.

A worsening of supply-chain disruptions due to the conflict and Chinese lockdowns is putting additional upward pressure on inflation.

Economic Insight:

Italy's economic growth is accelerating in the second quarter after expanding by a marginal 0.1% in the first three months of the year, said Pantheon Macroeconomics.

Surveys point to a growth rate of between 0 to 0.5% from April to June, while Pantheon expects a 0.4% increase. However, the outlook is clouded for the remainder of the year particularly if the EU implements an embargo of Russian gas, Pantheon said.

"In 2H, GDP growth will take a hit, as the EU winds down imports of energy from Russia, on which Italy is relatively heavily reliant." Pantheon expects Italy's GDP to grow 2.8% for the whole of 2022.

U.S. Markets:

Stock futures wobbled between small gains and losses while Treasury yields rose steadily after a three-day break, lifted by a hawkish speech from the Fed's Christopher Waller who said he wants to keep lifting interest rates by half-point increments until he sees signs that inflation is coming down.

"In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target. And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation," Waller said.

The Waller speech also was notable for his belief that the Fed can fight inflation without lifting the unemployment rate. He said a cooling in demand spurred by monetary policy tightening will lead to a big fall in job vacancies but only a small increase in the unemployment rate.

U.S. stocks have endured a bumpy month even though they are on course to end May roughly flat. Buffeting the market are concerns that the Fed will push the economy into recession with interest-rate increases, alongside the war in Ukraine and an economic slowdown in China.

Stocks have bounced back in recent days but some investors caution that the rally will likely peter out, since the factors that drove share prices lower earlier in the month are still in play.

"There's a bit of market uncertainty just about the pretty rapid rally we've had," said Brooks Macdonald Chief Investment Officer Edward Park, "and whether that can be sustained in a world where inflation is clearly still a factor."

Forex:

The dollar has found some support as Treasury yields turned higher again and as rising oil prices dampened risk appetite, said ING analysts.

The currency's gains were limited in Europe, however, because yields were also rising around the world, especially in Europe, although the Federal Reserve's monetary tightening policy is "built on more solid foundations."

The EU's decision to place a partial embargo on oil imports from Russia will also increase concerns about risks to eurozone growth, the analysts said.

Bonds:

JPMorgan has held its 0.75% target for the year-end level of the German Bund yield, with ECB rate rises likely to be challenged by the uncertainty around the medium-term growth outlook and decent amount of global tightening already being delivered by early 2023.

The ECB's first few interest rate rises until the deposit rate reaches small positive territory are less data dependent and will likely be delivered with high confidence, JPM said.

"It is in the policy path beyond 2022 where we diverge from market expectations."

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French government bonds are unlikely to be affected by coming French legislative elections--to be held on June 12 and 19--because Emmanuel Macron's centrist alliance is likely to get the majority of seats, said JPMorgan.

The left-wing coalition is ahead in the polls for the first round but projections for the second round indicate a majority of seats for Macron's alliance.

Believing that Macron will be able to avoid a "cohabitation" with a different parliamentary majority, "we do not expect any political uncertainty discount to be priced in OATs going towards the elections," said JPM.

Energy:

Oil prices were building on Monday's gains after EU leaders agreed to back a plan banning Russian oil imports.

However, imports via pipelines, which account for around one-third of all imports, will be exempted for now. Still, the ban could see the halt of 3.5 million barrels a day of oil purchases and is likely to cause significant disruption to Russian energy flows, said DNB Markets.

"It will be a major challenge for Russia to re-route such significant volumes to other buyers."

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Oil prices will likely remain above $100 a barrel until there is some hope of a resolution to the Russia-Ukraine war, but growing demand-side concerns may put a lid on the bullishness, said DBS Group Research.

Since the war began, Brent crude has traded mainly in the $100-$120 range. With no end in sight to the conflict, DBS has raised its average Brent forecast for 2022 to $97-$102 from $95-$100 and to $90-$95 from $85-$90 for 2023.

Metals:

Metals were little changed in cautious London trade, as inflationary headwinds counteracted some positive economic data from China.

"It does seem like the market is still cautious and not entirely sold on the growth and recovery story," said Marex's Asian metals team.

Morgan Stanley said the nickel market could return to surplus in the second half, citing expectations that growth in Indonesian supply will outstrip a recovery in demand.

"If this scenario indeed plays out, the nickel price is likely to see downward pressure to its still-elevated level of $30,000/ton, and will track closer to our second-half bear case of $19,000/ton than to our $27,000/ton base case."

In terms of demand, a lot hinges on how China's EV sector rebounds from recent lockdowns, MS said.

DOW JONES NEWSPLUS


EMEA HEADLINES

Eurozone May CPI Forecast at +7.6%

The eurozone's annual rate of inflation accelerated again in May, reaching its highest level in history.

Consumer prices rose 8.1% on year in May after climbing 7.4% in April, according to a first estimate released Tuesday by Eurostat, the European Union's statistics agency. Economists polled by The Wall Street Journal had forecast eurozone inflation at 7.6% in May.


Unilever to Add Activist Investor Nelson Peltz to Board

Unilever PLC said it would add Nelson Peltz to its board and disclosed his fund now holds a 1.5% stake, moves that ratchet up pressure on the maker of Dove soap and Hellmann's mayonnaise to reinvigorate growth across its sprawling portfolio.

The investment, worth about $1.6 billion, makes Trian Fund Management LP one of Unilever's largest shareholders. Mr. Peltz said Tuesday that Unilever had "significant potential" and that he wanted to work collaboratively with the company.


Royal DSM to Combine With Firmenich in 1H 2023

Royal DSM NV said Tuesday that it plans to merge with fragrance-and-flavor company Firmenich SA to create DSM-Firmenich, with completion of the transaction and listing on Euronext Amsterdam expected in the first half of 2023.

The Dutch nutrition, health and bioscience company said its shareholders would own in aggregate 65.5% of the enlarged company, while Firmenich shareholders will hold the outstanding stake. The deal implies a market capitalization of DSM of 25.3 billion euros ($27.27 billion).


Lanxess, Advent to Buy DSM's Engineering Business in $4 Bln Deal

Lanxess AG said Tuesday that it would join with private-equity firm Advent International Corp. to buy Royal DSM NV's engineering-materials business for around 3.7 billion euros ($3.99 billion) and create a new venture for high-performance plastics.

The announcement came after the Netherlands-based DSM said earlier Tuesday that it would merge with Swiss fragrance company Firmenich SA to create a company with a EUR25 billion market cap.


Gold Fields to Buy Yamana Gold in All-Share Deal Valued at $6.7 Bln

Gold Fields Ltd. said Tuesday that it has agreed to buy Yamana Gold Inc. in an all-stock deal that values the Canadian company at $6.7 billion.

Under the deal, which has the support of the Yamana Gold board, accepting Yamana Gold shareholders will get 0.6 of a Gold Fields share for each share held, the company said.


GSK to Buy Affinivax for Up to $3.3 Bln

GSK PLC said Tuesday that it has agreed to buy clinical-stage biopharmaceutical company Affinivax, Inc. for up to $3.3 billion.

The healthcare company said that it will pay $2.1 billion upfront and up to $1.2 billion in potential development milestones and that the deal is expected to close in the third quarter.


SAS Cautions on Limited Progress in Transformation Talks

SAS AB said Tuesday that it sees pent-up demand with healthy underlying demand for business and leisure travel, but cautioned that it has made limited progress in talks with stakeholders over its transformation plans.

The Scandinavian airline earlier this year launched plans to cut annual costs by 7.5 billion Swedish kronor ($767.3 million), convert around SEK20 billion of debt and hybrid notes into common equity and raise at least SEK9.5 billion in new capital.


German Jobless Claims Fell by Less Than Expected in May

Jobless claims in Germany fell by less than expected in May as the labor-market recovery lost steam.

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