European Midday Briefing: Mood Upbeat as Fed Prepares to Meet

MARKET WRAPS

European stocks posted solid gains Tuesday as investors anticipate the Federal Reserve starting its two-day meeting.

Traders have ramped up bets that the Fed will kick off its policy-easing campaign with a big interest-rate cut, with derivatives markets showing a roughly three-in-five chance of a half-percentage-point rate cut coming on Wednesday.

That is up from 50-50 odds on Friday, according to CME Group data-and just 14% earlier last week.

Markets are pricing in a 67% probability the Fed will cut interest rates by 50bp, however there remains more ambiguity about the central bank's likely move than in recent years.

Stocks to Watch

BMW 's decision to link its China performance with a costly recall, which triggered a profit warning, might have led to an overreaction in the market, Bernstein said, as it cut its earnings targets.

"Nevertheless, we are comfortable that BMW has, in typical fashion, conservatively ranged the downside, and thus we confidently maintain our outperform rating."

Julius Baer has catalysts ahead and its shares are worth holding on to for those playing the long game, KBW said, as it raised its rating on the stock to outperform from market perform.

"While we are mindful of a weakening USD, we see various catalysts emerging and believe those with a longer-term investment horizon should start building positions."

UniCredit seems to have a formula that works and wants to replicate it with another German bank, Keefe, Bruyette & Woods said.

"The question of 'Why Commerzbank?' has been the most interesting one that we have been getting from investors," KBW said.

It noted that UniCredit's German unit HypoVereinsbank has been a success story as it has delivered strong cost-cutting and risk-weighed asset optimization.

Equita said that if UniCredit were to raise its stake in Commerzbank to up to 30% , it might open the door for friendly takeover talks, though this route might be more expensive than the immediate launch of a bid.

Italian newspaper Il Messaggero and Bloomberg reported that UniCredit could ask the ECB for approval to increase its shareholding to that limit from 9% currently.

U.S. Markets:

Stock futures edged up, while bond yields were little changed.

Retail-sales data and a report on industrial production are the economic data highights.

Stocks to Watch

Intel said it would cut more costs and further separate its chip-manufacturing and design operations. It has also struck a multibillion-dollar agreement with Amazon.com's cloud-computing arm. Intel shares rose about 6.5% in premarket trading.

Microsoft said it would raise its quarterly payout by about 11% and begin a new stock-buyback of up to $60 billion. Shares rose 1.8% premarket.

Forex:

The euro edged lower but remained above the key $1.11 level ahead of the Fed's decision, better-than-expected U.S. retail sales data or a rebound in U.S. industrial production figures, UniCredit said.

However it might face some profit-taking if the Fed cuts rates by 25bp, but this might only prevent more dollar weakness rather than trigger a complete reversal in the euro, it added.

The dollar fell as markets price in higher odds of a 50 bp Fed cut.

ING said investors might be attempting to influence the Fed's decision by pricing in higher odds of a 50bp cut, a negative for the dollar.

Former Fed member Bill Dudley last week said the Fed doesn't like to surprise markets as he made the case for a 50bp cut, ING added.

"In other words, if markets price in 50 basis points, the Fed will be more likely to deliver 50 basis points."

The dollar will struggle to recover unless U.S. retail sales are strong enough to discourage aggressive rate-cut bets, ING said.

Bonds:

Bunds will continue to take their main cues from Treasurys, while nervousness is likely to prevail into the Fed's policy decision on Wednesday, Commerzbank said.

"While the European Central Bank's near-term rate cut profile remains data-dependent, a looming, modestly weaker German ZEW survey is unlikely to fuel October rate-cut speculation, as structural weaknesses in the German economy are well documented."

Pepperstone said the Treasury yield curve has continued to steepen.

Central banks are increasingly moving to target an inflation range of 2-3%, as opposed to an explicit return to the 2% target outright, "so long as inflation expectations remain well-anchored, as they appear to be doing so at present."

Energy:

Oil prices extended the gains of the previous session, driven by U.S. rate-cut expectations, prolonged supply disruptions in the Gulf of Mexico and a substantial decline in Libyan exports as rival political factions failed to reach a deal to break an impasse over control of the country's central bank.

Estimates from the U.S. Bureau of Safety and Environmental Enforcement show that more than 12% of oil production and 16% of natural gas production remained offline in the aftermath of Hurricane Francine.

Metals:

Gold prices held steady near record highs, supported by a softer dollar and rising bets for a half-point rate cut by the Fed.

ING said that "The gold market will likely be disappointed with only a 25 bp cut."

Phillip Nova said gold enjoys a positive outlook but a further upswing may need a powerful catalyst.

Expectations for a Fed rate cut, central bank buying, and ongoing geopolitical stress in the Middle East have supported positive sentiment but new catalysts will be needed for the price to rise further, it said, although disappointing China macro data has added to concerns about a slowdown in the world's second-largest economy.

Meanwhile, three-month copper was up amid signs of a recovery in the physical market and the possibility that weaker Chinese economic data would prompt the government to introduce further stimulus measures.

Aluminum also rose due to stronger demand and supply disruption concerns in India.

EMEA HEADLINES

Flutter Entertainment Buys Snaitech From Playtech for $2.6 Billion

Flutter Entertainment said it is buying Italian gambling company Snaitech from Playtech in a cash deal valued at 2.3 billion euros ($2.56 billion).

The parent company of FanDuel and other gaming and gambling brands said Tuesday that the acquisition was in line with its strategy to invest in international markets. The deal is expected to be complete by the second quarter of next year, and boost earnings per share immediately.

Universal Music Banks on Subscriptions, Partnerships to Drive Revenue Growth Through 2028

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The world's largest music company set financial targets as part of its Capital Markets Day event in London and is forecasting a compound annual growth rate for revenue at constant currencies of more than 7%, with subscription revenue growing 8% to 10%.

Mercedes-Benz Sells out of China EV Maker as Luxury Spending Drops

Mercedes-Benz Group unwound a bet on China's electric-vehicle market, selling its remaining 10% stake in premium EV and hybrid maker Denza to BYD in the wake of disappointing sales locally.

The decision adds to challenges facing Mercedes, which has struggled to make inroads in what for years had been one of the world's fastest-growing auto markets. Luxury spending in China has taken a hit from the downturn in its property sector and a lackluster economy.

Meta Extends Smart Eyewear Partnership With Ray-Ban Maker EssilorLuxottica

Meta Platforms and EssilorLuxottica extended a partnership to develop smart-eyewear products with a new long-term agreement.

European eyewear giant EssilorLuxottica, which has teamed up with the Facebook and Instagram parent since 2019 to make the Ray-Ban smart glasses, said Tuesday that the two companies plan to collaborate into the next decade, building on their existing partnership.

GLOBAL NEWS

Fed Prepares to Lower Rates, With Size of First Cut in Doubt

The Federal Reserve is set to cut borrowing costs at its two-day meeting that ends Wednesday. The goal: preserve a solid job market now that price pressures have cooled.

The decision over whether to cut the Fed's benchmark interest rate, currently at a two-decade high between 5.25% and 5.5%, by either a larger half percentage point or by a traditional quarter point will come down to how Chair Jerome Powell leads his colleagues through a finely balanced set of considerations.

U.S. Officials Jet to Beijing Amid Flood of Cheap Chinese Exports

A group of senior U.S. officials is traveling to Beijing this week for a round of high-level meetings intended to underscore Washington's concerns over a wave of Chinese goods flooding world markets.

The American officials, led by Jay Shambaugh, the Treasury Department's undersecretary for international affairs, will hold discussions with their Chinese counterparts on Thursday and Friday, according to a Treasury official.

Federal Debt Is Soaring. Here's Why Trump and Harris Aren't Talking About It.

The U.S. isn't fighting a war, a crisis or a recession. Yet the federal government is borrowing as if it were.

This year's budget deficit is on track to top $1.9 trillion, or more than 6% of economic output, a threshold reached only around World War II, the 2008 financial crisis and the Covid-19 pandemic. Publicly held federal debt-the sum of all deficits-just passed $28 trillion or almost 100% of GDP.

Gold Just Hit a Record High. It Could Be Headed for $3000 Next.

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September 17, 2024 05:35 ET (09:35 GMT)

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