SEC defends Musk settlement, Eurozone inflation concerns linger

The U.S. Securities and Exchange Commission (SEC) defended the financial settlement it reached with billionaire Elon Musk regarding the case of his violation of disclosure rules when buying shares of the company «Twitter», confirming that the agreement reflects «compromises» between the two parties, and it did not see any suspicion of collusion, after the judge overseeing the case noted that the agreement raises «red flags».

The commission explained in a document submitted to the federal court in the capital, Washington, that the settlement - if finally approved - will allow Musk to publicly deny its accusations, which reflects a recent change in the commission's policy regarding decisions of defendants who reach settlements in enforcement lawsuits.

Under the agreement, a trust fund registered in Musk's name is committed to paying a financial fine of $1.5 million to settle the commission's accusations that the richest man in the world delayed for 11 days in March and April 2022 to disclose his purchase of a stake in «Twitter» shares, which allowed him to continue buying at low prices before other investors noticed.

For his part, Musk argued that this disclosure delay was unintentional, noting that he later acquired the platform entirely for $44 billion in October 2022 and renamed it «X».

Judicial Reservations

Federal Judge Sparkle Sconnanan had stated in a hearing held on May 13 that she could not «blindly endorse» this settlement. She questioned the reasons that led the commission to impose the fine on the trust fund instead of Musk directly, and why it accepted recovering only 1 percent of the alleged illicit profits, estimated at about $150 million, emphasizing the need to verify whether the settlement serves the public interest and is free from corruption or collusion.

Commission's Response

In the defense memorandum it submitted, the commission affirmed that the settlement is «fair, reasonable, and appropriate», and was not the result of any improper collusion, but rather came as a result of direct negotiations between legal counsel reflecting mutual concessions. It added that the $1.5 million penalty is the largest of its kind for such violations, and that settling the matter with the trust fund is in line with the commission's recent practices in similar cases. It pointed out that «the public interest benefits from this measure that legally restricts Musk's actions every time he operates through his revocable trust fund, which is the investment vehicle through which he manages most of his wealth».

Political Background

There was no immediate comment from Elon Musk's lawyers, who had previously accused the commission of being motivated by political reasons and violating his right to freedom of expression, citing the filing of the lawsuit against him just six days before Democratic President Joe Biden left the White House and Republican Donald Trump took office, as Musk was an advisor to the latter.

These developments come at a time when the new U.S. administration has limited some law enforcement activities against companies, with a reordering of priorities for the commission under the leadership of its new chairman, Paul Atkins. The commission has recently witnessed leadership turmoil, as the former head of its enforcement division, Margaret Ryan, resigned suddenly after only six months in office, following disagreements with the agency's leadership over the direction of the enforcement program.

A Reuters analysis of earnings call comments from listed companies in the Eurozone showed that only about a third of major companies indicated their intention to raise prices in response to the repercussions of the Iranian war, an indication that weak economic activity continues to limit their ability to pass on costs to consumers.

Investors and policymakers at the European Central Bank are trying to assess whether the Eurozone is heading towards a new wave of inflation caused by the war, similar to the one that followed Russia's invasion of Ukraine in 2022.

So far, the answer appears to be no.

The Reuters analysis, which used artificial intelligence techniques to study 175 earnings calls from companies in the Eurozone, showed that only 56 companies have raised their prices, or plan to do so in the coming months, reflecting the continued weakness of demand in the economy of the 21-member currency bloc.

This represents a clear contrast to what happened after the Russian invasion of Ukraine, when nearly two-thirds of companies raised their prices amid a strong shock in energy markets, supported by high post-pandemic consumer demand and extensive government support programs, which pushed inflation at the time to levels exceeding 10 percent.

Fundamental Difference from 2022

Commenting on the analysis results, Olli Rehn, a member of the Governing Council of the European Central Bank and Governor of the Bank of Finland, said there is «a clear difference between spring 2022 and spring 2026».

He added that the labor market has become less hot, and the pace of economic growth is significantly slower, while the strong fiscal incentives that supported the economy four years ago are currently absent.

Eurozone inflation had already reached 5.9 percent when the war in Ukraine began in February 2022, while it did not exceed 1.9 percent at the outbreak of the Iranian war. Forecasts indicate a rise to 3.2 percent in May.

This situation eases pressure on the European Central Bank to take a wide range of interest rate hikes beyond the first expected hike next week, which economists believe is primarily aimed at consolidating the bank's credibility and preventing the impact of rising energy prices from spreading to other components of inflation.

For his part, Christian Schulz, Chief Economist at Allianz Global Investors, said that these data give the European Central Bank more room to be patient.

He added: «Any further tightening of monetary policy will require clearer evidence of inflationary pressures transferring to core prices and persisting for a longer period».

Limited Price Increases Compared to the Post-Ukrainian Invasion Period

Reuters commissioned its artificial intelligence tool, «Claude Quark», to analyze the texts of 175 earnings calls that took place between April 2 and May 15, focusing on the extent to which companies were affected by rising energy costs and their plans to pass these costs on to customers.

The results showed that 105 companies discussed the impact of rising energy costs, while 91 companies linked these developments to the Iranian war.

After excluding financial institutions, which typically deal with energy shocks as a macroeconomic issue rather than a direct pricing issue, the sample included 136 non-financial companies, and 55 of them reported that they had raised prices, or intend to do so in the coming months.

These increases were mainly concentrated among companies most exposed to rising energy and raw material prices, or operating in the industrial sector, such as the German chemical group BASF and the French cable manufacturing company Nexans.

In contrast, companies targeting the end consumer appeared more cautious in passing on high costs to customers, with retailers like Delhaize pledging to maintain competitive prices, while automakers, including Volkswagen, focused on cost-cutting programs instead of price increases.

This picture differs significantly from spring 2022, when applying the same methodology to earnings calls at the time showed that 108 out of 132 non-financial companies passed on high costs to consumers, benefiting from strong demand and government financial support.

Industrial Companies More Able to Pass on Costs

The analysis indicates that companies selling their products and services to other companies are more able to raise prices compared to companies that rely on the end consumer.

Out of 33 industrial companies included in the study, 11 confirmed that they are already passing on high costs to customers, while three other companies plan to take the same step, and two companies are applying partial increases.

In the consumer goods sector, the Italian tire manufacturer Pirelli was the only company among 26 companies that confirmed adopting a full cost-passing policy, while four other companies are considering similar measures.

Carsten Junius, Chief Economist at Swiss bank J. Safra Sarasin, said that this discrepancy reflects the nature of current economic growth, which relies more on investment compared to household consumption.

He added that the accelerating global race in developing and adopting artificial intelligence technologies may make some companies less sensitive to prices, making it easier for them to pass on rising input costs to their customers.

Inflationary Pressures Have Not Disappeared Yet

Despite these indicators, economists warn against underestimating the pricing pressures that are still accumulating in some sectors.

Companies operating in the transportation sector, such as Lufthansa and Deutsche Post, have already begun to impose surcharges related to fuel prices, which could gradually lead to increased business costs across various economic sectors.

Spiros Andreopoulos, founder of the macroeconomic consulting firm Thein Ais, said: «It is too early to judge the sustainability of these pricing pressures, and it is also too early to declare the end of the crisis».

A study by the Bank of Finland indicates that the transfer of price increases in some sectors to general consumer inflation may take between two and 15 months.

Companies Benefited from Lessons of the 2022 Crisis

The analysis also reveals that European companies are now more prepared to deal with price shocks compared to four years ago.

The use of financial hedging strategies has expanded, whether through long-term contracts or derivative instruments, reducing the need for immediate price increases.

Managements of 74 companies reported having hedging programs against price volatility, compared to only 68 companies in 2022.

The use of inflation-linked price clauses, which allow for automatic price adjustments when input costs such as fuel and energy rise, has also expanded.

About a quarter of companies planning to raise prices used this mechanism, compared to 22 percent during the 2022 crisis.

Although the sample used by Reuters focuses on large companies with global operations, listed on the «Euro Stoxx» index, which may not reflect the situation of small and medium-sized enterprises, the results are consistent with European Commission surveys showing a decline in companies' expectations for selling prices in May after rising in April, while remaining well below the levels recorded in spring 2022.

European stocks rose in early trading on Tuesday, supported by positive expectations from STMicroelectronics, which boosted technology sector stocks, as investors await important inflation data later in the day, looking for indicators of the impact of Middle East tensions on the Eurozone economy.

The European «Stoxx 600» index rose by 0.7 percent, reaching 625.20 points by 07:15 GMT, while the technology sector led sectoral gains with a rise of 2.4 percent, according to Reuters.

The share price of STMicroelectronics jumped by 9.8 percent to 65.1 euros, its highest level since September 2000, after the company raised its revenue forecast for data center operations, reflecting continued strong demand driven by the boom in artificial intelligence technologies.

Shares of other AI-related companies, including Infineon and Schneider Electric, also rose by 5.2 percent and 2.4 percent respectively. In a geopolitical context, the announcement of a partial ceasefire between Lebanon and Israel, following a limited escalation of hostilities on Monday, supported market sentiment.

In contrast, crude oil prices fell by about 1 percent, as investors awaited statements from U.S. President Donald Trump regarding the continuation of talks with Iran, despite reports indicating that Tehran had suspended indirect negotiations with Washington. However, analysts believe that energy prices, hovering around $94 a barrel, will remain at relatively high levels.

The Eurozone consumer price inflation report, expected later today, is forecast to show an annual increase of 3.2 percent in May compared to the previous month.

Trader expectations also indicate a possible 25 basis point interest rate hike by the European Central Bank at its meeting next week, according to London Stock Exchange Group data.

In company stocks, the share price of Evax fell by 27 percent, after the French company announced the results of the final phase of clinical trials for its drug for treating intestinal inflammation.