EMEA Morning Briefing: Stock Futures Seen Lower as Investors Track Mideast Developments

MARKET WRAPS

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Germany industrial production index; trading updates from Imperial Brands, OMV

Opening Call:

European stock futures were lower, taking cues from broadly lower Asian stock benchmarks; the dollar weakened and Treasury yields fell; oil and gold futures also declined.

Equities:

Stock futures in Europe were lower early Tuesday, tracking overnight declines in Wall Street as markets grappled with a mix of inflation worries, shifting interest-rate expectations, and continued volatility in the Middle East.

Following last week's hot jobs report, traders have lowered their expectations for interest-rate cuts in the near term. Fed funds futures now show an 86% chance of a quarter-point cut in November and a 14% chance of no cut at all that month. Market participants will get a double dose of U.S. inflation data with the consumer price index and producer price index on Thursday and Friday.

Earnings season will also kick off as investors await quarterly earnings from big banks to start rolling out later this week, which will put this year's rally to the test.

A highly-anticipated briefing by China's top economic planner, the National Development and Reform Commission, on Tuesday morning disappointed investors who had expected more new stimulus measures to be announced.

Forex:

Buying the dollar appears to be a good way of hedging against geopolitical risk, including the risk of escalating conflict in the Middle East, and ahead of U.S. elections, BNP Paribas strategists said. Geopolitical risk has been underpriced, while investors are positioned short on the dollar, betting on average that the currency will fall, they said.

Though BNP Paribas is positive on the euro, it considers it prudent to add dollar hedges, especially against currencies with weaker fundamentals.

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The euro may fall toward the 1.0860-1.0885 support area against the U.S. dollar, based on the weekly chart, UOB's Global Economics & Markets Research said. If the euro breaks below this support area against the dollar, the focus will probably shift to the bottom of the weekly Ichimoku cloud, which is now at 1.0810, it added.

Bonds:

Treasury yields declined after rising overnight as investors retraced bets on fast monetary easing while digesting Friday's outsized U.S. payrolls data.

The U.S. trade deficit for August due later today is expected to shrink while September CPI, due Thursday, is expected to cool slightly to 2.3% from 2.5%, in a Wall Street Journal pool, and a downward surprise could revive bets on aggressive Fed cutting.

"September's job growth was not just 100,000 better than expected, [but] it was accompanied by a big upward revision," said Chris Low, chief economist of FHN Financial in New York. "As a result, the whole economic picture looks brighter."

This week's auctions of U.S. government debt commence with a $58 billion sale of 3-year notes on Tuesday.

Energy:

Oil futures declined as the risk of an Israeli response to last week's Iranian missile strike intensified which could threaten crude supplies from the region.

"We don't see significant downside to oil prices from here," even if there were a strike on Iran that did not target oil production, Jay Hatfield, chief executive officer at Infrastructure Capital Advisors said. "Prices are depressed due to seasonal factors and there is optimism regarding demand out of China due to powerful government stimulus."

Metals:

Gold declined in Asia. Dampening expectations of a larger Fed rate cut after the unexpectedly strong non-farm payrolls report was capping precious metals' price upside, Daria Efanova, head of research at Sucden Financial said.

There is now an estimated 80% chance of a 25bp cut being priced into the market instead of 50bp, and markets are focused on the U.S. CPI report due this week, Efanova added.

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The period just before the U.S. election could prove a soft patch for base-metal prices, according to Citi analysts. "We expect to see risk taken off the table ahead of a very finely balanced U.S. election in early November," they said.

A Trump win is likely to be an immediate boost for prices, although that could be followed by a pullback on tariff risks. "A bull case here is that China eases further to counter-tariffs or Trump focuses efforts on dealmaking rather than prioritizing tariff hikes," they added.

TODAY'S TOP HEADLINES

Fed's Musalem Sees Gradual Interest Rate Cuts Ahead

Federal Reserve Bank of St. Louis President Alberto Musalem sees a soft landing ahead, aided by the central bank easing off high interest rates and strong productivity growth from the U.S. economy. Cooling inflation should clear the way for continued interest rate cuts ahead.

"I believe it will likely be appropriate to further reduce the target range for the federal-funds rate over time toward a neutral posture," Musalem said in prepared remarks for an event hosted by the Money Marketeers of New York University on Monday evening. He was referring to the theoretical interest rate which neither stimulates nor restricts economic growth.

The Fed May Not Cut Rates in November. What to Do With Treasury Bonds Now.

The best-laid plans often go awry, and that goes even for the Federal Reserve, whose rate-cut intentions were thrown for a loop by a surprisingly strong jobs report.

Everything was expected to be straightforward after the Fed cut interest rates last month. In the past 30 years, the Fed has never initiated a rate-cutting cycle without implementing at least three consecutive cuts. So, after the first reduction in rates in September, Wall Street was prepped for a smooth and steady ride lower, expecting at least a quarter-point cut in both the November and December meetings.But Friday's job report threw a wrench in the plans, with the labor market adding over 100,000 jobs more than economists had predicted. Now some traders are questioning the need for immediate rate cuts, with the CME FedWatch Tool showing a 15.5% chance of no cuts next month.The call for the Fed to revise its script has translated into stomach-churning moves in the bond market. Yields on both the 10-year and two-year government bonds have risen above the 4% level, and the benchmark curve-defined as the difference in yields between the two- and 10-year Treasuries-fell to negative levels briefly Monday morning, meaning that a short-term note offered more return than the long-term, at least for a fleeting moment. It's an anomaly known as the inverted yield curve, and it seemed the market had moved past it a month ago.

The Fed Is 'Out of Sync.' Why That's Great News for Stocks.

The Federal Reserve is cutting interest rates at a time when neither the economic nor the corporate profit skies are falling. Friday's jobs report seems to suggest that the recession and hard landing fears may be overdone. Wall Street analysts are predicting decent earnings growth for the third quarter and improving fundamentals in the fourth quarter and 2025.

This confluence of factors has led to what one strategist calls an "out of sync" interest rate policy from the Fed-and it should be very good news for equity investors.

The bull market is nearing its second birthday. Here's why it will likely continue.

The bull market in U.S. stocks is about to turn two years old, the latest milestone for a rally that has surpassed the expectations of all but the most bullish investors on Wall Street.

The S&P 500 SPX has climbed more than 60% since Oct. 12, 2022, when the index hit its bear-market closing low of 3,577.03, according to FactSet data. These gains have unfolded much faster than many financial professionals had anticipated, pushing Wall Street firms to repeatedly raise their year-end targets to keep up.

A Weakened Iran Still Has a Major Deterrent: the Nuclear Option

Israel has shown Iran's two most important deterrents against an attack-its ballistic missiles and allied militia Hezbollah-are less powerful than previously thought. Now attention is turning to whether Iran will accelerate its nuclear program to deter its biggest regional foe.

For months, Iranian officials have said that Tehran has accumulated most of the knowledge needed to build a weapon and that it might reconsider Supreme Leader Ayatollah Ali Khamenei's two-decade-old pledge not to procure weapons of mass destruction.

South Sudan's Economic Crisis Is So Bad It's Taxing Its Only Lifeline

The world's youngest country is facing one of the world's worst economic crises.

The East African country, which broke off from Sudan in 2011 after decades of civil war, is battling severe floods, a collapsing currency and a catastrophic falloff in revenue from oil, its main export.

Samsung Expects Sharp Slowdown in Third-Quarter Profit Growth

Samsung Electronics expects third-quarter earnings growth to slow sharply, hurt in part by China's oversupply of lower-end chips eating into its semiconductor margins even as the company continued to struggle to make headway in supplying more advanced chips.

The world's largest maker of memory chips and smartphones forecast a near-fourfold increase in operating profit, a significant slowdown from the nearly 16-fold surge in the previous quarter and missing street views.

Decision Time for GM in China: Stay, Scale Back or Go

General Motors, long a dominant player in China, was hoping to reinvigorate its faltering business in the world's largest car market with an influx of new models over the past two years.

Among them was the electric Cadillac Lyriq, a flashy luxury car that executives hoped would appeal to Chinese consumers who were increasingly gravitating to plug-in cars.

PepsiCo Reports Earnings Tuesday. What to Watch.

PepsiCo files its quarterly financial results on Tuesday, and investors will be watching for what management is doing to fizz up the soda stock.

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October 08, 2024 00:16 ET (04:16 GMT)

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