European Midday Briefing : Powell Caution on Inflation Hits Stocks

MARKET WRAPS

Stocks:

European stocks tracked widespread losses on other global markets on Friday after Jerome Powell warned that victory over inflation wasn't assured.

Powell indicated the Federal Reserve wouldn't declare an end to its historic interest-rate increases until it had more evidence that inflation was cooling.

While Powell didn't build a case for lifting rates now, he pointed to earlier inflation "head fakes," past episodes in which price pressures ebbed for a while before surprising Fed officials by picking up again.

He said they would monitor economic conditions closely to avoid both the risk of having been "misled by a few good months of data," as well as the risk of having raised rates too high, Powell said.

Economic Insight

Eurozone business surveys in the fourth quarter, such as the composite purchasing managers indices don't point to an immediate improvement, Natixis said.

"The lack of demand is holding back the European economy. Eurozone retail sales data for September show no indication of pickup," Natixis said, adding the current correction follows very strong demand in 2021-2022.

U.S. Markets:

Stock futures were mixed, with Dow industrials futures ticking higher, while bonds stabilized. The 10-year yield edged slightly lower to trade just above 4.6%.

Forex:

The dollar hit a one-week high against a basket of currencies and the euro after Powell's warning on inflation.

"After sounding increasingly dovish at the press conference following last week's meeting and the market adjusting its expectations accordingly, he [Powell] sounded much more hawkish again," Commerzbank said.

The tide could "turn quickly" if U.S. inflation data next week are lower than expected but for now there is little on the data calendar.

Bonds:

Eurozone government bond yields could revisit their highs into the first quarter of 2024, with volatility in long-end rates staying elevated, Societe Generale said.

"The European Central Bank is likely to keep a steady hand, while the dangers of sticky inflation remain high, playing down any expectations of easier policy," SocGen said.

A post-quantitative-easing environment-where the ECB is no longer buying bonds-"will require private investors to step up and absorb a much larger amount of bonds in 2024.

"The shift towards price-sensitive investors, heightened further by the ECB's quantitative tightening, will likely exert upward pressure on various risk premia in eurozone fixed income," SocGen said.

Italian government bonds are showing no signs of downgrade anxiety, Commerzbank Research said, with Fitch due to review Italy's "BBB" rating and stable outlook later on Friday.

The increase in BTP yields versus peers could possibly be exacerbated by Italy's EUR6.75 billion-EUR9 billion BTP auction. Auction results are due shortly after 1000 GMT.

"While Fitch's slightly more optimistic assumption about Italy's trend growth could be supportive, we see a modest risk for a negative rating outlook," Commerzbank Research said.

Energy:

Crude oil futures held firm after having seen sharp losses this week, as tight fundamentals have provided a floor to prices.

Markets for now seem to have sold off their risk premium for the Israel-Hamas war, with the conflict staying regional.

"We believe that the scale of the selloff in oil is exaggerated given that fundamentals are still tight at least in the short term," ING said.

"However, fundamentals are not as bullish as originally anticipated with Russian oil exports edging higher, whilst refinery margins have also been weakening."

Metals:

Base metals and gold were flat to lower in early trading, with uncertainty around demand and the global economy weighing on prices.

"Industrial metals continue to face headwinds from weak activity in Mainland China, with the country's manufacturing PMI falling back into a slight contraction in October," BMI said.

"That being said, we have seen price support in the past week on the back of additional stimulus measures introduced by the Mainland Chinese government," BMI added.

EMEA HEADLINES

Wegovy Maker Novo Nordisk to Spend $6 Billion Boosting Production Capacity

Novo Nordisk, the Danish pharmaceutical giant that makes the blockbuster Wegovy obesity drug, said it will invest more than $6 billion to boost production capacity.

Richemont Posts Slowing Sales Growth Amid Challenging Environment

Compagnie Financiere Richemont posted a slowdown in sales growth for the first-half of fiscal 2024 due to inflation, slowing economic growth and geopolitical tensions that hurt customer sentiment.

The Swiss-based luxury company, which counts jeweler Cartier among its brands, said on Friday that it made net profit from continuing operations of 2.16 billion euros ($2.30 billion) for the first six months to Sept. 30, compared with EUR2.11 billion in the year-earlier period. Including discontinued operations, the company swung to a net profit of EUR1.505 billion, compared with a loss of EUR766 million.

Diageo Shares Tumble After Guidance Cut

Diageo shares had their worst one-day fall in more than three years after the liquor maker cut its guidance for both the short and medium term.

Shares at 0822 GMT were down 306 pence, or 9.4%, to 2,940 pence.

Scor Shares Drop After Profit Disappoints

Scor shares traded sharply lower after the French reinsurer reported a swing to a third-quarter net profit, but fell short of consensus expectations.

At 0844 GMT, shares in Scor traded 8.4% lower at EUR25.65.

UK Economy Slows, But Inflation Likely to Remain High

The U.K. economy stagnated in the third quarter for the first time this year, avoiding an expected decline.

Gross domestic product was flat between July and September compared with the previous three-month period, when the economy grew slightly, as it had in the first quarter, figures from the Office for National Statistics showed Friday.

Allianz Confirms 2023 Target After Natural-Catastrophe Claims Hit Earnings

Allianz confirmed its 2023 financial target after third-quarter profit fell, hurt by natural-catastrophe claims.

The German insurer said Friday that it made 2.02 billion euros ($2.16 billion) in net income compared with EUR2.87 billion a year earlier.

EQT Plans to Take Japan's Benesse Private in Over $1 Billion Deal

Swedish investment company EQT plans to take Japanese education services provider Benesse Holdings private in a deal valued at more than $1 billion, by teaming up with the company's founding family.

EQT said Friday that one of its funds would spend 207.95 billion ($1.37 billion) to buy Benesse shares through an tender offer as part of management buyout. EQT said the fund wants to start the tender in early February.

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

(END) Dow Jones Newswires

11-10-23 0531ET