‘INFLATION PEAK’:
When inflation peaks in Europe, pressure on long-term bond yields will ease, even as the market changes, analyst says

European stocks edged higher on Friday after a sluggish start to the day as the rally in banking stocks helped outweigh concerns over economic growth and inflation as Europe faces a deadline to start to pay for Russian gas in rubles.

Russian President Vladimir Putin has threatened to cut off gas supplies unless it is paid for in local currency from Friday – a move that could worsen an energy crisis on the continent, with Russian gas imports worth around 40 % of European consumption.

The move comes in response to Russia’s growing economic isolation following its invasion of Ukraine.

The Russian government has so far stayed up to date on its debt obligations. JPMorgan Chase & Co on Thursday processed a payment of nearly $447 million for dollar debt due in 2030.

Another deadline is tomorrow.

Worries over the fallout from the war, compounded by likely central bank tightening to control soaring inflation, saw the pan-European STOXX 600 score its first quarterly loss in two years last month.

The index rose 0.3% on Friday. Banks gained 1.1%, with Spanish lender Santander firming 3.1% after reiterating its profitability target for this year.

Since not all Russian banks have been sanctioned, markets are calm in hopes that a compromise can be made for gas payments, said Dhaval Joshi, senior strategist at BCA Research.

“If it goes to the worst case scenario where supplies are cut off, it’s not good for Europe, end of story,” Joshi said. “The markets will sell out.”

Negotiations to end the five-week war were set to resume even as Ukraine braced for fresh attacks in the south and east.

On Friday, data sets added to concerns, pointing to a slowdown in activity in Europe.

“The key question for the second quarter, maybe even the third, is when are we going to hit the peak of inflation,” Joshi said. “Because once we peak inflation, that will take the pressure off long bond yields and one of the headwinds for the markets will start to go away, but that will mean the nature of the market will change – the Long-duration stocks will do better than short-duration stocks.

“Banks, cyclicals and oil stocks that have performed well will reverse,” he said.

Tech stocks were one of the worst performers in the first quarter on inflation fears, down 17%.

They also led declines on Friday, down 0.5%.

In France, volatility could also stem from the French presidential elections this month.

However, analysts do not expect much impact as French President Emmanuel Macron is expected to be re-elected.

Among individual stocks, French restaurant and foodservices group Sodexo fell 7.9% as it tightened its forecast for full-year organic revenue growth, citing uncertainties due to the COVID-19 pandemic and to the war in Ukraine.

Eurozone inflation jumped to a record 7.5% last month.

Analysts said inflation would put pressure on the European Central Bank (ECB), which has so far been reluctant to raise interest rates.

“With Eurozone inflation still exceeding ECB forecasts, and likely to remain very elevated for the rest of the year, we believe it won’t be long before the Bank starts raising interest rates. ‘interest,’ said Jack Allen-Reynolds of Capital Economics. .

Additional AFP reporting