European Midday Briefing : Fed Rate-Cut Optimism Continues

MARKET WRAPS

Stocks:

European shares traded mostly higher on Friday as optimism continued after the Federal Reserve's signal earlier this week that rate cuts can be expected next year, though talk of cuts was off the agenda for the European Central Bank and the Bank of England.

However, Eurozone purchasing managers' data could prompt speculation about an imminent ECB rate cut , as it adds further evidence that the bloc's economy will contract again in [the fourth quarter], Commerzbank said.

A recession would be a surprise not only for most economists but also the ECB, it noted. However, with underlying price pressures still strong, the ECB is unlikely to start cutting rates before the summer.

Capital Economics said that overall, the survey points to a deepening recession and easing labor market but not yet to a turnaround in inflationary pressures.

"However, we expect that to change in the coming months as the recession drags on," it added.

London stocks were lower after better-than-expected U.K. flash PMIs, with the services and composite measures both at six-month highs, added to evidence that it remains too early for the BOE to consider cutting rates.

"It's likely that cuts are further away than investors are expecting," Hargreaves Lansdown said.

Stocks to Watch

London's real estate investment trust market outperformance compared with the direct property market in recent years has been driven by developments and, with limited market reversion, these remain important to net rental income and capital growth, Berenberg said.

Still, the risks associated with developments have increased as construction and debt costs rise, alongside a lack of visibility regarding valuation yields, Berenberg added.

"Despite this, the companies have little choice but to keep moving forward--the hope being that occupiers will accept rising rents as a means of ensuring project profitability."

Berenberg reinitiated cover on Derwent and Great Portland Estates with a hold rating, and Helical and Shaftesbury Capital with a buy rating.

U.S. Markets:

Stock futures climbed, giving the Dow industrials a shot at yet another record-high close.

The 10-year Treasury yield, which settled on Thursday below 4% for the first time since July, held fairly steady.

Stocks to Watch

Costco Wholesale reported fiscal first-quarter earnings that beat analysts' estimates and declared a special cash dividend of $15 a share. Shares were up 1.9%.

Forex:

The DXY dollar index stayed close to its lowest level in four months after the Fed this week hinted that rate cuts could be forthcoming, while they remained off the agenda for the ECB and BOE.

"The BOE made it clear that it is too early to think about rate cuts, while [ECB Governor] Ms. Lagarde was explicit as well, saying... that the board did not discuss rate cuts at all," UniCredit Research said.

Bonds:

Commerzbank Research revised forecasts for 10-year German Bund yields following the ECB meeting, now expecting it at 1.90% by mid-year and affirmed its 2% forecast for the end of next year.

"While near-term setbacks in Bunds seem likely as the less dovish ECB stance sinks in, we expect the bullish bond market backdrop to remain in place into the new year as the downside pressure on underlying inflation gets affirmed with the December core eurozone HICP," it said.

Retail investors have been a great support of Italy's government bonds and Italian households' bond holdings have room to increase further, Societe Generale Research said.

"If BTP yields remain attractive, and the Italian Treasury offers incentives, retail investors will likely retain their appetite," it said.

"But if yields decline too much too soon, households could return to more standard saving products."

Retail demand is important in taking down a part of Italy's gross government bond supply which Societe Generale Research expects to amount to EUR330 billion-EUR350 billion in 2024, in line with EUR340 billion this year.

Energy:

Oil prices were on track for a weekly recovery boosted by a broadly weaker dollar and hopes for stronger demand.

Prices regained ground after the Fed on Wednesday hinted at interest rate cuts next year--a sign of hope for economic growth and oil demand--and are now on course to break a losing streak of seven weeks.

Metals:

Base metals and gold prices rose, as a weaker dollar provided support to commodities.

BMI expects prices to be capped somewhat by weak Chinese demand and limited economic growth globally.

"On the upside, the decline in dollar strength will support metal prices in 2024," BMI said, expecting this trend to continue as rates decline.

ANZ said gold is likely to maintain its current rally in 2024, with a softening economy, falling interest rates and strong central bank demand likely to provide support.

It upped its 12-month price target to $2,200 a troy ounce, from $2,150 an ounce. "Gold looks like it will be well supported by several factors in 2024: the start of a rate cut cycle in the U.S., slowing economic growth, a weaker U.S. dollar, strong central bank purchases and elevated geopolitical risks."

ANZ added that the next technical level is $2,060 an ounce and once breached, "we would then expect technical buying to emerge, pushing prices into unchartered territory above $2,100."

EMEA HEADLINES

H&M Sales Miss Views After Warm Weather Hits Autumn Demand

Sweden's Hennes & Mauritz reported a larger-than-expected sales drop in its final quarter of the year, having previously warned that the start to its autumn season had been delayed by unusually warm weather in Europe.

The fashion retailer said Friday that sales in local currencies fell 4% in the September to November quarter versus a drop of 3.6% seen in a FactSet forecast.

Munich Re Targets Higher Profit in 2024, in Line With Expectations

Munich Re is targeting a higher net profit for 2024 than what it expects for this year, broadly in line with analysts' forecasts.

The German reinsurer said Friday that it aims to reach a net profit of 5 billion euros ($5.50 billion) next year. Analysts had estimated Munich Re 2024 net profit at EUR4.98 billion, according to a FactSet-provided consensus.

Campari in Talks to Buy Courvoisier Cognac From Beam Suntory for Up to $1.32 Billion

Davide Campari-Milano has entered into exclusive negotiations with Beam Suntory to acquire the owner of Courvoisier cognac for up to $1.32 billion, paving the way for a significant step up in the U.S. market in what the group said would be the largest deal in its history.

The Italian distiller said Thursday that the talks with Beam Suntory were aimed at acquiring Beam Holding France, which owns Courvoisier, for a fixed purchase price of $1.20 billion on a cash- and debt-free basis, with an additional payment of up to $120 million expected in 2029 upon the achievement of a 2028 net sales target.

GLOBAL NEWS

China's Economy Shows Signs of Losing Further Momentum

HONG KONG-China's economic recovery showed signs of losing further momentum as investment and consumer spending expanded slower than expected last month, fueling calls for policy makers to do more to support growth.

Meanwhile, a prolonged property downturn showed no signs of abating, as new home prices in key cities fell at a faster clip in November.

Beware the Most Crowded Trade on Wall Street: Next Year's Soft Landing

At the end of last year, investors thought recession was a done deal. The year before, they thought big tech would be immune to rate increases. And a year before that, they were convinced that paying high prices for stocks popular with the wider public would make them rich.

This December, they believe, again with absolute conviction, that the economy is heading for a soft landing and lower interest rates. Maybe this time they will be right.

EU Will Start Membership Talks With Ukraine, but Bloc Fails to Agree on Aid

BRUSSELS-In a major political victory for embattled Ukrainian President Volodymyr Zelensky, the European Union agreed to start membership talks with the country ravaged by almost two years of war with Russia.

However, the bloc couldn't reach an agreement during the summit talks for a new $54 billion long-term package of budget support for Ukraine, EU leaders said in the early hours of Friday. Talks will resume in the new year.

U.S. Presses Israel to Begin Winding Down Gaza War

WASHINGTON-National security adviser Jake Sullivan pressed Israeli leaders to shift from a reliance on airstrikes and ground assaults in Gaza toward targeted military operations and warned that a protracted conflict would make the Palestinian territory harder to govern after the war, U.S. officials said.

Sullivan's meetings with Israeli political and military leaders Thursday seemed to have made little headway addressing the growing rift between the U.S. and Israel over civilian casualties, the length of the conflict, flagging international support for Israel's campaign, and the future governance of the Gaza Strip.

Write to [e-mail]

Write to us at [e-mail]

We offer an enhanced version of this briefing that is optimized for viewing on mobile devices and sent directly to your email inbox. If you would like to sign up, please go to https://newsplus.wsj.com/subscriptions.

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

(END) Dow Jones Newswires

12-15-23 0603ET