EMEA Morning Briefing: Sentiment May Get Lift From China's Latest Stimulus

MARKET WRAPS

Watch For:

Germany Ifo business climate index; trading update from Smiths Group, TUI

Opening Call:

European stock futures edged broadly higher tracking gains in Asian equities following China's latest stimulus measures; The dollar edged higher; Treasury yields were mixed; while oil and gold futures rose.

Equities:

Stock futures in Europe were slightly higher early Tuesday. Market sentiment could get a lift from China's latest stimulus measures to boost its flagging economy. The measures included cutting the seven-day reverse repurchase rate, which is China's main policy rate to 1.5% from 1.7%, cutting the reserve requirement ratio, or the amount of cash banks must hold as reserve, by 50 basis points and lowering the interest rate payable on existing mortgages.

"This is a step in the right direction. But it will probably be insufficient to drive a turnaround in growth unless followed up with greater fiscal support," Julian Evans-Pritchard, head of China economics at Capital Economics said.

Things were quiet on Wall Street, as traders moved on from last week's action-packed week of trading. The major indexes barely reacted to the latest mixed economic data and upbeat commentary from Federal Reserve officials.

Traders will hear from more Fed officials in the days ahead, as well as see the Fed's preferred inflation gauge reading on Friday.

With the Federal Reserve now in "easing mode, even as the U.S. economy continues to grow nicely," the path of least resistance for stocks is probably higher, DataTrek co-founder Nicholas Colas said.

Forex:

Investors are underestimating the potential strength of the U.S. dollar in taking an overly negative view on rate cuts and outcomes of America's upcoming elections, according to Deutsche Bank's analysts.

In Deutsche Bank's view, the Fed will continue cutting interest rates, but at a slower pace than markets are currently anticipating. This would instead help bolster the value of the dollar compared to rival currencies like Japan's yen or the eurozone's euro.

Meanwhile, a Trump victory could lead to a higher dollar due to a potential trade war, Deutsche Bank said and expects the euro to fall to $1.08 by year-end from $1.1108 currently.

Bonds:

French government bonds were underperforming relative to their eurozone peers as investors worry about the risks of a high budget deficit this year.

Government bond yields across the eurozone fell after weak purchasing managers data led to higher probability of an interest-rate cut by the European Central Bank in October, but the budget risks prevent French bond yields from falling as much as its peers.

"The hurdle to France adopting corrective action on the budgetary front looks to be somewhat high," analysts at Rabobank said.

Energy:

Oil futures were higher in Asia amid risks to production. The U.S. Gulf Coast is at risk of a hurricane strike by the end of the week as a patch of turbulent weather in the Atlantic consolidates, ANZ research analysts said.

British oil and gas company Shell has already curtailed production at the Appomattox project and the Stones oil field in the Gulf, they said.

"Despite the geopolitical risks supporting oil prices, the market remains cautious as the Middle East conflict has not yet significantly impacted supply," Mazen Salhab, chief market analyst for Middle East and North Africa at BDSwiss, said.

Metals:

Gold advanced on demand steadily rising following the U.S. Fed's rate cut by 50 basis points. The market has been evaluating the start of the monetary policy easing cycle, with another 50 basis points of cuts possible before the year's end and further reductions likely in 2025, said Ricardo Evangelista, senior analyst at ActivTrades.

Optimism around the outlook is growing among gold investors, as U.S. Treasury yields have softened and the dollar has weakened against other currencies, driving up prices, Evangelista said.

Against this backdrop, gold's rally may have further to go, particularly if Fed Chair Jerome Powell's comments on Friday addressing the Personal Consumption Expenditure data release aligns with dovish market views, he added.

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Copper was lower in Asia. Prices may have reached a temporary peak in the short term after Fed's rate cut, Nanhua Futures analysts said.

Investors have had ample time to adjust to the latest Fed rate cut, and the market is relatively quiet on the macro and fundamental side besides Fed's move, the analysts said.

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Iron-ore futures rose with investor sentiment getting a boost from the People's Bank of China's latest stimulus measures, including lowering rates on existing mortgages and cutting reserve requirement ratio by 50 bps.

Iron-ore prices have fallen recently, after data that showed that local governments in China cut spending as land sales income dropped, ANZ Research said.

TODAY'S TOP HEADLINES

China Unveils New Measures to Aid Ailing Economy

China's central bank announced a bundle of measures to support China's weakening economy, following a run of downbeat data that raised doubts about the country's growth trajectory.

Still, economists say that, while the new support is welcome, it won't be enough to repair China's broken housing market or pull the economy out of a deflationary rut. Beijing needs to get a firmer grip on the country's real-estate downturn and take steps to boost consumption if it is to spark a durable revival in the economy, they say.

Stocks Are Having a Great Year but Worries Remain After the Rate Cut

"Hoping for the best, prepared for the worst, and unsurprised by anything in between," is poet Maya Angelou's version of this popular advice. It's also a good approach to today's market.

Last week was yet another good one on Wall Street, with both the Dow Jones Industrial Average and S&P 500 reaching record closes on Friday and Thursday, respectively, and all three major indexes ending higher. Despite early losses to start the month, so far this year September hasn't lived up to its fearsome reputation.

Fed's Goolsbee Wants More Rate Cuts. The Economy Could Nail a Soft Landing.

Interest rates need to keep coming down for the economy to nail a soft landing, Chicago Fed President Austan Goolsbee told state treasurers on Monday.

Inflation has come down significantly, the labor market is trending weaker-yet rates remain near the highest they have been in 20 years, even after the central bank lowered its target rate by a half-point last week.

This Is a Big Key to a Healthy Jobs Market, Fed's Kashkari Says

If the U.S. wants to achieve the highest level of employment the economy can sustain, Minneapolis Federal Reserve Bank President Neel Kashkari says early childhood education is essential.

Speaking at the Greater Kansas City Chamber of Commerce Leadership Exchange in St. Paul, Minn., on Monday, President Kashkari said that the Minneapolis Fed has been studying the effects of access to early childhood education for years and has found that it is an essential component to maintaining strength in the U.S. labor market.

Iran's New President Faces a Reality Check in New York

Iranian President Masoud Pezeshkian was elected on a promise to revive his country's weak economy by convincing the West to lift sanctions on its nuclear program. At his first big diplomatic test-the United Nations General Assembly this week-he's set to walk away empty-handed.

There is almost no prospect of any serious talks over sanctions until the U.S. election is out the way, Western diplomats say. He is unlikely to score meetings with many major European leaders or President Biden. And Western officials say they have seen scant evidence that the rise of Pezeshkian-a relative moderate in Iran's system-has led to a shift in Iran's policies since he took office in July.

The Vast Hezbollah Arsenal Awaiting Israel in Lebanon

BEIRUT-Israel launched devastating attacks on Hezbollah in recent days with airstrikes and remote-control explosions that put the Lebanese militant group on the defensive and demonstrated Israel's vast superiority in intelligence gathering and technology.

A ground war between the two, if it occurs, would likely be a different story.

Telegram Founder Ignored Warnings About App's Content

Pavel Durov's legal battle with French prosecutors took the Telegram founder by surprise. But some of the app's avid users have long warned him of the need for less-freewheeling management.

Among the warnings: More than two dozen organizations wrote a letter to Durov in late 2021, asking him to implement transparent content rules and policies, develop ways for people to communicate with his company and add an appeals process for frustrated parties. Durov didn't respond, the organizations said.

Boeing Makes New Offer to Union in Hopes of Ending Strike

Boeing on Monday made a new offer to its striking machinists union in hopes of ending a walkout that is costing the cash-strapped jet maker hundreds of millions of dollars a week.

The proposal comes 11 days after Boeing's biggest union rejected a tentative contract and overwhelmingly voted to go on strike.

California Sues Exxon, Alleges Plastics Deception

California's attorney general filed a lawsuit Monday against Exxon Mobil, accusing the oil giant of misleading consumers about the recyclability of plastic products and polluting the state.

Attorney General Rob Bonta alleged Exxon violated California's nuisance laws, as well as laws prohibiting state water pollution, false advertising and unfair competition. He began a probe two years ago into petrochemical companies' role in plastics pollution, subpoenaing Exxon. The state is seeking civil penalties.

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Expected Major Events for Tuesday

05:00/FIN: Aug PPI

05:00/FIN: Aug Labour force survey, incl unemployment

07:00/CZE: Sep Business cycle survey (consumer/business confidence)

08:00/POL: Aug Unemployment

08:00/GER: Sep ifo Business Climate Index

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September 24, 2024 00:15 ET (04:15 GMT)

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