European Midday Briefing: Stocks Boosted by Likely Fed Cut as ECB Move Awaited

MARKET WRAPS

European shares rallied on Thursday, tracking global gains after U.S. inflation data supported expectations for the Federal Reserve to start cutting interest rates by 25 basis points at its September meeting.

Meantime, the European Central Bank is expected to trim borrowing costs again later on Thursday as its focus continues to shift from damping inflation to supporting the bloc's faltering economy.

Markets imply the ECB will cut its main deposit rate by 25bp to 3.50%, following up a similar sized reduction in June, which was the first of this easing cycle.

U.S. Markets:

Stock futures and bond yields rose, as traders expect U.S. producer prices data to provide confirmation that the Fed can cut interest rates next week.

The PPI data are not expected to shift the needle on Fed rate cut probabilities--though traders are wary that a spike in weekly initial jobless benefit claims could impact Fed projections.

Forex:

ING said the euro should enjoy a modest bounce toward the $1.1080 area if the ECB makes a 25 basis-point rate cut today and signals a further one on December 12 rather than October.

Commerzbank said the euro could fall if the ECB prompts markets to bet on further rate cuts as soon as October.

If Christine Lagarde emphasizes data dependency for future decisions, new economic forecasts are revised lower and there's reference to inflation progress, the market could interpret this to suggest another rate cut could follow in October.

"The euro could come under pressure and presumably dip further with every weaker price or economic figure in the coming weeks."

The dollar was steady after earlier gains on the back of the U.S. CPI data.

The data seem to settle the debate over whether the Fed will start cutting interest rates by 25bp or 50bp at the September 18 meeting, in favor of a 25bp move, Deutsche Bank said.

The Fed won't want to be too aggressive given inflation is still slightly above target, and current economic data don't suggest a looming recession, it added

Bonds:

Commerzbank Research said the market is firmly priced for a 25bp deposit rate cut by the ECB, while it puts the odds for another cut in October at 35%, limiting the room for two- to five-year German government bonds to rally.

The hurdle for further falls in ECB-dated forwards looks high, it said.

"This limits the scope for Schatz/Bobl to rally on, also with oil finding a firmer footing."

Japanese rates look rich with global factors in the driving seat, SocGen said, seeing strong yield support at 0.80% for 10-year bonds.

Energy:

Oil prices rose after Hurricane Francine moved through key production areas in the Gulf of Mexico, causing producers to shut a fourth of their operations in the region that produces around 15%-17% of U.S. output.

However, Swissquote Bank said "It will take more than a hurricane or a war in the Middle East to push oil prices sustainably higher in the foreseeable future," citing still-growing demand concerns and an OPEC turning cautious.

Energy Stocks

BP shares look undervalued as it offers strong cash flow and double-digit returns at $70-a-barrel oil prices, according to Berenberg.

However, the company's 2025 targets seem increasingly difficult, and Berenberg's estimate is about 20% below market expectations for 2025-26 due to weaker commodity prices and refining margins.

A worsening outlook for oil and European gas and liquefied natural gas and refining margins will likely put pressure on earnings, cash flow and buybacks in the European energy sector over the coming quarters, Berenberg said, adding that some of this should already be reflected in share prices.

TotalEnergies and Shell remain Berenberg's top picks for the sector.

Metals:

Gold prices edged higher as traders awaited fresh U.S. inflation data.

Lithium

Lithium prices are set to bounce by 20% to 25% over the next few months on supply tightness after Chinese battery manufacturer CATL suspended certain operations, Citi said.

It said the market is likely to see investors cover their short positions and prices rally to $13,000-$14,000 a metric ton from the current level of around $11,000 a ton.

EMEA HEADLINES

Megamerger of European Banks Still Wouldn't Challenge Wall Street

Technocrats in Brussels might finally get their wish for bigger European banks. But Wall Street still shouldn't expect any real competition to emerge from this.

Shares in Germany's Commerzbank shot up 17% Wednesday after its Italian peer UniCredit disclosed that it had acquired a 9% stake in it. Investors took this as a sign that a merger between the two banks, which has been the subject of speculation for years, might actually happen.

China's Rapid Slowdown Drives World's Oil Demand Growth Downturn, IEA Says

A rapid slowdown in Chinese oil-demand growth is driving down global consumption, reinforcing expectations that demand will peak by the end of the decade, the International Energy Agency said.

The Paris-based organization forecasts this year's global demand to grow by 903,000 barrels a day from 970,000 barrels a day previously-marking its second consecutive downward revision in just two months-while growth estimates for next year were left broadly unchanged at 954,000 barrels a day. Total demand is seen at an average of 103 million barrels a day and 103.9 million barrels a day in the respective periods.

Swisscom's $9 Billion Deal to Buy Vodafone Italia Probed by Italian Competition Regulator

The Italian competition regulator opened an in-depth probe into Swisscom's $8.81 billion acquisition of Vodafone Italia.

The Autorita Garante della Concorrenza e del Mercato said it had opened a phase-two investigation on Wednesday, Swisscom said.

Roche Shares Slump on Oral Weight-Loss Drug Candidate Side Effects

Roche's stock fell after new data from an early-stage clinical trial of its closely watched oral weight-loss drug candidate prompted analysts to question the company's potential to quickly enter a booming obesity market.

Shares in the Swiss pharma giant fell 4.5% in early European trading. The stock has gained 5% year to date, having jumped 7% in July after Roche said the once-daily drug, acquired through its $3 billion-plus Carmot Therapeutics deal, helped patients lose 7.3% of their body weight within four weeks.

Higher U.S. sales help British tonic water seller shield itself from U.K. slump

Fevertree Drinks on Thursday said a push to capture the leading position in the market for ginger beer and tonic water in the U.S. helped it offset slumping sales of its upmarket soft drinks and mixers in the U.K. and Europe.

The London-listed drinks seller, which first entered the U.S. market in 2007, said its sales in America were boosted by the launch of its new 150 milliliter cans and partnerships with upmarket venues including Marriott, Soho House and Hilton Hotels.

Western Firms That Flocked to China Are Now Pulling Back

BEIJING-Many global businesses are pushing China down on their list of investment destinations and consolidating operations in the country, citing slower growth and diminishing profits.

The gloomy investment trend was the focus of twin reports this week from the European Union Chamber of Commerce in China and the American Chamber of Commerce in Shanghai.

GLOBAL NEWS

Earnings Estimates Are Forgetting the Fed. What It Means for Stocks.

Wall Street and the Federal Reserve need to get on the same page.

Here's the CliffsNotes version: Analysts are betting on a big year for corporate earnings in 2025, which suggests a strong economy ahead. Fed officials, meanwhile, are prepping for their first cut to interest rates in more than four years, to manage a slowing jobs market and cooling inflation.

What the 'Fear Gauge' Is Telling Us About the Stock Market

The Cboe Volatility Index is one of the most important metrics for interpreting Mr. Market's mood. Increased correlation among index components is a key reason why he has recently become quite jittery.

The VIX isn't designed as a "fear gauge," even if it seems to play one on TV. Instead, its calculation uses S&P 500, or SPX, options to measure the market's best estimate of volatility over the coming 30 days. An underappreciated factor in that volatility assumption is the correlation among the components of SPX. High correlations spur higher index volatilities, and vice versa.

U.S. and Chinese Militaries Find Reason to Start Talking Again

BEIJING-The U.S. and Chinese militaries are taking tentative steps to re-engage diplomatically after a two-year freeze in relations, seeking to dial back the risk of confrontation while tensions simmer over Beijing's activities in the South China Sea and its support of Russia.

Jump-starting talks between military leaders has been a priority of the Biden administration, but one that has previously faced stiff resistance in Beijing.

Blinken Signals U.S. Is Weighing Loosening Ukraine Missile Restrictions

KYIV-U.S. Secretary of State Antony Blinken signaled Wednesday that the West is considering allowing Kyiv to strike deeper inside Russian territory with Western-made weaponry, as Russia adds Iranian ballistic missiles to its arsenal.

Blinken's comments, delivered on a brief visit to Kyiv Wednesday, came also as Russia launched a counteroffensive in the Kursk border region, its first major effort to regain control of its territory that Ukrainian forces seized in a lightning attack more than a month ago.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

September 12, 2024 06:11 ET (10:11 GMT)

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