More financial "accidents" could be in the offing
STOXX 600 slides 1.6%
Banks lead fallers on contagion worries
Deutsche Bank, Commerzbank, UBS tumble
Wall Street futures lower
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MORE FINANCIAL "ACCIDENTS" COULD BE IN THE OFFING (1050 GMT)
European companies may face more financial "accidents" over the coming months due to rising interest rates, coupled with reduction in credit availability, Morgan Stanley says.
With recent market events following the failure of two mid-sized U.S. banks and the takeover of Swiss bank Credit Suisse by peer UBS UBSG.S, investors are now trying to assess eventual consequences and implications.
As central banks try to tighten the noose around inflation, analysts at Morgan Stanley led by Graham Secker, expect issues to arise around liquidity for companies in the auto financing and commercial real estate sectors. They flag likely renewed weakness in some economic indicators as well as earnings.
"These issues may not manifest themselves in the mainstream European banking sector; however, European asset markets will still be vulnerable if risks emerge from other areas," Secker said.
The Wall Street bank believes that investors should reduce cyclical exposure and switch towards more defensive stocks, which includes stocks with "more of a quality and/or growth bias".
Morgan Stanley highlights 25 stocks with compelling features like low valuation and low earnings risk during economic slowdown, which includes, Lufthansa LHAG.DE, British American Tobacco BATS.L, Volvo VOLVb.ST, and Associated British Foods ABF.L.
(Roshan Abraham)
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BANKS LEAD SEA OF RED IN EUROPE (0902 GMT)
Europe's banking shares are leading the way lower for the broader European market on Friday, with markets on the lookout for strains in the financial sector.
Shares in Deutsche Bank are down as much as 8% after a sharp jump in the bank's credit default swaps a day before, fuelling more concerns about the overall stability of Europe's banks.
Meanwhile, UBS and Credit Suisse are dropping after Bloomberg reported the company's are facing a probe by the U.S. Department of Justice into whether financial professionals helped Russian oligarchs evade sanctions.
Europe's banking index .SX7P is last down 3%, leading a 0.9% drop for the broader STOXX 600 .STOXX.
Britain's FTSE 100 .FTSE, France's CAC 40 .FCHI and Germany's DAX .GDAXI are all down around 1.2%.
The one bright spot in Europe is British budget pub chain JD Wetherspoon, whose shares are up 7% after the company returned to profit in the first half of the year.
Here's your opening snapshot:
(Samuel Indyk)
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EUROPEAN FUTURES POINTING LOWER (0736 GMT)
European equity futures are modestly lower on Friday, with financial stability concerns still lingering after central banks in Europe pushed on with further interest rate hikes, although the end of the tightening cycle appears to be getting closer.
Credit Suisse and UBS are again likely to be on watch after Bloomberg News reported the two banks are under scrutiny in a probe by the U.S. Department of Justice into whether financial professionals helped Russian oligarchs evade sanctions.
Meanwhile, U.S. Treasury Secretary Janet Yellen tried to soothe contagion fears in the U.S., saying she was prepared to take further action to ensure that Americans' bank deposits stay safe amid banking system turmoil.
"The immediate concern for market remains the US regional banks and their impact on the broader economy," says Mohit Kumar, chief financial economist Europe at Jefferies.
Euro STOXX 50 futures STXEc1 are down 0.4%, while futures on the DAX FDXc1, CAC 40 FCEc1 and FTSE FFIc1 are lower between 0.3%-0.5%.
Looking forward, flash PMIs from the euro area and UK are likely to be in focus.
(Samuel Indyk)
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BANKS QUEUE ROUND THE BLOCK AT FED DISCOUNT WINDOW(0653 GMT)
It's been a slow day in Asian markets, no doubt with everyone tired and emotional after another rough week.
Japan's flash PMI edged up to a still-contractionary 48.6, while services fared a bit better at 54.2. Analysts suspect a recession is still likely, but that's hardly a novelty for Japan.
Presumably, European and U.S. PMIs will have more bearing for monetary policy and markets.
Japanese CPI growth slowed to 3.3% y/y as expected thanks to government subsidies on energy, but inflation ex-food and energy climbed to its highest since 1982 at 3.5%.
Normally that might add to pressure for the BOJ to water down its yield curve control, but it's also less of a burning issue given the recent plunge in global bond yields.
It was notable that U.S. two-year Treasuries kept almost all of their massive gains with yields at 3.82%, having fallen an astonishing 126 basis points in 11 sessions and crushed a host of short positions in the process.
The whole yield curve from one month to 30 years is now below the overnight Fed rate, which is something you see only once in a very blue moon. While the 2-10 curve has dis-inverted markedly, that's not a sign recession is less likely. Rather, history shows the curve steepens like this just before recession arrives, as short-term yields dive in anticipation of rate cuts.
Fed futures are currently 65% for no hike in May and 85% for a rate cut in July, a U-turn that the Fed is surely hoping to avoid. And it would be extremely unlikely were it just down to inflation and the economy. But there's the banks.
Treasury Secretary Janet Yellen on Thursday tried to reassure markets that they would backstop depositors in a crisis, and it looks like there are bidders for some chunks of Silicon Valley Bank.
Yet the strains are showing in the Fed books as borrowing at its discount window as of Wednesday was a hefty $110.2 billion. Lending from the Fed's new Bank Term Funding Program ballooned to $53.7 billion, suggesting some institutions simply can't borrow anywhere else.
Even loans to foreign central banks surged to $60 billion, implying the supply of dollars through the interbank system is too expensive or just not available for some offshore banks. The Fed really is the lender of last resort.
The ECB is expected to reassure European Union leaders on Friday that euro zone banks are safe, while also pushing them to adopt a full EU deposit insurance scheme.
Key developments that could influence markets on Friday:
- Global PMIs, UK retail sales
- ECB President Lagarde is at the European Council meeting
- Bundesbank President Nagel speaks on inflation and the labour market, so expect fire and brimstone
- Federal Reserve Bank of St. Louis President Bullard gives a cosy fireside chat on the U.S. economy and monetary policy
(Wayne Cole)
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