European Midday Briefing: Stocks Lower as Investors Digest Rate Decisions

MARKET WRAPS

European stocks retreated on Friday, giving back most of the previous session's gains as investors continued to absorb this week's major central bank decisions.

Mercedes-Benz cut its margin guidance for the second time in under two months amid ongoing weakness in China, sending its shares sharply lower and dragging the European auto sector down with it.

Stocks to Watch

Glencore has several paths to a share rerating, according to Jefferies.

These include an increase in capital returns from next year as a result of higher copper prices and cash flows from its Elk Valley Resources acquisition, a recognition that thermal-coal demand is likely to decline much slower than many market watchers had expected, and moving its base of operations and listing to the U.S., which would likely improve the liquidity in its shares and broaden its shareholder base.

The European luxury sector isn't expected to show appreciable improvement in 2H, Jefferies said separately, as it cuts its Burberry recommendation to underperform.

It expects greatest valuation support at Hermes and Richemont, and superior earnings resilience at Prada.

It also downgraded Swatch Group to underperform from hold, and cut its target price to 120 Swiss Francs from 170 Swiss Francs.

U.S. Markets:

Stock futures edged lower as the dust settled after Thursday's rally, and bond yields traded just shy of two week highs.

Investors will see option contracts tied to more than $5 trillion in tradeable stocks expire on Friday in the latest quarterly "triple witching" event.

Stocks to Watch

Nike's CEO will retire next month after nearly five years in the job. Donahoe's tenure has been marked by a series of missteps, and shares rose.

Forex:

The dollar edged lower in the wake of the Federak Reserve rate cut but declines have been limited as the difference between rate-cut expectations for the U.S. and elsewhere have narrowed, UniCredit Reserve said.

"Specifically, markets now expect the Fed to cut rates just roughly 30 basis points and 45 basis points more than the European Central Bank by December 2024 and July 2025, respectively, while investors were expecting much stronger rate cuts from the Fed than the ECB before this week's [Fed] decision," UniCredit said.

Sterling rose to a two-and-a-half-year high against the dollar and hits a two-year high versus the euro after stronger-than-expected U.K. retail sales data.

The data "lend some support to our view that the recent stagnation in the economy isn't the start of a renewed downturn," Capital Economics said.

Bonds:

As an increasing number of central banks around the globe start cutting interest rates, bonds should be ever more appealing for long-term investors, Societe Generale Research said.

"We see value in fixed income for investors with a sufficiently long horizon."

SocGen said in the eurozone, the 10-year Bund yield has always declined between the first and the last reduction in any cycle of interest-rate cuts.

Looking at rate-cutting cycles since the early 1980s, this fall in 10-year Bund yields has been an average of around 80 basis points.

Separately, SocGen said October is expected to be supportive for eurozone government bonds as issuance volumes will be low, and because the month usually sees country spreads tightening.

Eurozone peripheral government bonds are starting to look expensive on Citi Research's fair value model and this trend is expected to persist for now.

The supporting factors include the Fed's commitment to soft landing and relatively favorable net bond supply picture in the eurozone periphery in the fourth quarter.

"Given the current bullish market sentiment, we would refrain from fading periphery strength here," Citi said, adding that investors should be vigilant of upcoming budgets for 2025.

"Upcoming budgets are likely to highlight how eurozone government bond credit premium now accounts for current debt/GDP levels but not yet for their future trajectories."

Barclays Research recommended positioning for the 10-year Spain real yield to catch up to Italy, and expects the strong performance of 10-year Italian inflation-linked bonds versus the rest of the eurozone over the past two weeks to fade.

Energy:

Oil prices slipped and market participants are focusing on bearish macroeconomic narratives around mainland China and the U.S.--with both markets seeing a slowdown in economic activity--rather than the OPEC+ decision to extend voluntary cuts to December, BMI said.

The number of short positions held by managed money in Brent futures is higher than long positions for the first time since records began in 2011, which could prime the market for a bout of short-covering.

However, investors currently look reluctant to respond to bullish price drivers, notably shrugging off a large-scale attack on Hezbollah in Lebanon it added.

Metals:

Gold futures rose, and were hovering just below the $2,635.10 a troy ounce record after surging in response to the Fed rate cut.

Prices should be well supported in the coming months due to a weaker U.S. dollar and lower bond yields, as well as a backdrop of elevated geopolitical tensions, BMI said.

Phillip Nova said gold was likely to remain supported by uncertainties in the Middle East and expectations for further Fed rate cuts.

It sees resistance at $2,610-$2,620 and support at $2,550 -$2,560.

While some profit-taking could be around the corner that doesn't change the bullish outlook of gold in the long run, it added.

EMEA HEADLINES

Novo Nordisk's Wegovy Gets EU Backing to Treat Obesity-Related Heart Failure

Novo Nordisk said European regulators support the use of its blockbuster weight-loss drug Wegovy to help reduce heart failure in obese patients.

The Danish pharmaceutical giant said late Thursday that the European Medicines Agency backing came after the regulator also recently approved Wegovy's use to lower the risk of heart attacks and strokes in overweight or obese adults without diabetes, supporting claims that the drug yields extra health benefits beyond weight loss.

Europe's Banks Are Takeover Targets. 3 Stocks to Play Now.

A barbarian is at the gate of European banking, which remains locked within national borders despite the European Union's supposed common market. The gate is stoutly defended, though.

Andrea Orcel, CEO of Italy's second-largest bank, UniCredit, lately revealed a 9% stake in German No. 2 Commerzbank, setting the stage for a pathbreaking cross-border takeover. Maybe. "If this goes through, it could be a game changer for the whole sector," says Jennifer Cook, European bank analyst at T. Rowe Price.

How Luxury Stocks Lost Their Shine. These Are the Ones That Will Get It Back.

To steal a line from Coco Chanel, there are people who have money and people who are rich. Right now, it seems, both types have lost ardor for luxury goods such as her namesake handbags-and that is creating major problems.

By all indications, luxury-goods makers should be living the high life. The economy is growing, the stock market is hitting record highs, and the rich are richer than ever. Luxury stocks, though, are suffering. The Roundhill S&P Global Luxury exchange-traded fund has dropped 7.2% this year, dragged down by companies such as LVMH Moët Hennessy Louis Vuitton, Gucci-owner Kering, and cold-weather clothing maker Moncler. The sector's sales growth is slowing, and Wall Street worries that the sluggishness won't let up. The wealthy, it would appear, have gone AWOL.

U.K. Consumers Turn Notably Gloomier, Survey Says

Consumers in the U.K. have become significantly more pessimistic this month, pointing to weaker personal finances and economic activity, with borrowing costs set to stay high after the Bank of England chose to hold interest rates.

Research group GfK's measure of consumer confidence tumbled to minus 20 in September, well down on the minus 13 of July and August. Key future indicators on personal finances, the economy and purchase intentions all turned sharply lower, GfK said Friday.

GLOBAL NEWS

China Leaves Benchmark Lending Rates Unchanged, Defying Expectations

China unexpectedly kept its benchmark lending rates unchanged, shrugging off expectations for a cut following the U.S. Federal Reserve's larger-than-expected interest-rate reduction earlier this week.

Economic activity in China weakened across the board in August, strengthening the case for further easing to prevent the world's second-largest economy from slipping into a low-growth, deflationary scenario.

Japan's Central Bank Keeps Rates Unchanged

TOKYO-The Bank of Japan left its short-term policy rate unchanged Friday as it examines how the economy and markets are digesting its most recent interest-rate increase.

The Japanese central bank maintained its target for the overnight call rate at 0.25% after raising it to that level in July. In March, the BOJ ended the world's last negative interest rate policy and set the target at a range of 0% to 0.1%.

U.S. Officials Concede Gaza Cease-Fire Out of Reach for Biden

WASHINGTON-After months of saying a cease-fire and a hostage-release deal was close at hand, senior U.S. officials are now privately acknowledging they don't expect Israel and Hamas to reach an agreement before the end of President Biden's term.

The administration won't stop its pursuit of an agreement, seeing it as the only way to end the war in Gaza and stop a rapidly escalating conflict between Israel and Lebanese Hezbollah. The White House has previously said the warring parties have already agreed to "90 percent" of the deal's text, so hope remains for a breakthrough. But a number of top-level officials in the White House, State Department, and Pentagon argue the warring parties won't agree to the current framework.

Write to clare.kinloch@dowjones.com

Write to us at newsletters@dowjones.com

(MORE TO FOLLOW) Dow Jones Newswires

September 20, 2024 05:30 ET (09:30 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.