European Midday Briefing : Rate Cut Hopes Help Buoy Stocks

MARKET WRAPS

Stocks:

European stocks posted solid gains on Friday, as fresh signs of an economic slowdown and cooling inflation has many investors convinced central banks will cut interest rates next year.

In the U.K., data showed retail sales fell again in October, with consumers still squeezed by the high cost of living ahead of the all-important festive season.

Stocks to Watch

NatWest has pushed through a period of peak pain as deposit migration stabilizes and has upside ahead, Barclays said, naming the lender as its preferred pick among U.K. banks and upgrading its rating on the stock to overweight from equalweight.

"We see the runway clearing, resilience to an intense term funding backdrop, and scope to deliver on a best-in-class structural hedge tailwind that should drive a second round of net interest margin expansion, and upside to consensus earnings."

It said NatWest is well placed to overcome term-funding risks as it has front-loaded pain by rapidly growing term deposits at lower spreads.

U.S. Markets:

Index futures nudged higher, while the ten-year Treasury yield was trading below 4.4%.

Markets have been buoyed this week by investor hopes that the Federal Reserve is done raising interest rates given cooling inflation. The S&P 500 and Nasdaq managed small gains on Thursday, despite selloffs in Walmart and Cisco, with both indexes up about 4% so far this week.

Ahead

Housing starts data is set for release, and there are a number of Federal Reserve policymakers set to speak.

There are also more earnings reports for investors to analyze, with shares of retailer Gap likely to rally after it said it didn't have to discount as much during the third quarter as inventories fell.

Forex:

Danske Bank Research expects EUR/USD to rise in the near term, reaching 1.10 on a one-month horizon, due to weaker-than-expected U.S. economic data and more positive risk appetite.

Over the next six to 12 months, however, Danske expects EUR/USD to fall, "based on relative terms of trade, real rates [growth prospects], and relative unit labor costs."

Danske forecasts EUR/USD at 1.06 in six months and 1.04 in 12 months, compared with a current rate of 1.0836.

The dollar fell following Thursday's U.S. jobless claims data, showing the currency is starting to be hurt by weaker data, a trend which should become prominent in 2024, although for now higher U.S. bond yields could continue to support it, ING said.

"This is the kind of price action we expect to see more frequently next year as tight U.S. rates finally play catch up with the U.S. economy," ING said.

"Before then, however, the FX market will be looking at U.S. two-year yields bouncing around in a perhaps 4.75-5% range and dragging the dollar with it."

Bonds:

Markets are dismissing the ECB's "high for longer" narrative and are pushing government bond yields lower, SEB Research said, adding that in this context, it considers German long-end yields as "extremely low."

A further decline in German bond yields would represent undershooting to levels that SEB Research thinks aren't sustainable relative to their longer-term policy rate prospects.

SEB Research also said Treasury yields are expected to hover in a wide range in volatile trade in the coming weeks, possibly rebounding higher as the recent decline seems stretched.

Long-dated Treasury yields might well have peaked but the further downside seems limited until new data triggers or softer signals by the Fed.

Going into 2024, SEB expects U.S. rates markets to step up their expectations of rate cuts by the Fed, causing both short- and long-end yields to ease and the Treasury curve to steepen.

Commerzbank Research said Italy's rating review by Moody's later on Friday is a major tail-risk for Italian government bonds , and it is also the most delicate rating review of the year.

"The rating-sensitivities indicate that a downgrade to non-investment grade would be premature, but the issue will be revisited next year," it said.

Energy:

Oil prices settled after their steep falls on Thursday.

The move was triggered by a combination of short selling and prices dropping below a technical level, UBS said. However, demand concerns are lingering and a build-up of crude stocks in the U.S. is adding further pressure.

Still, UBS said the market is undersupplied, and forecasts Brent to trade in a range of $90-100 a barrel.

ING said weakness in the oil market is likely to make Saudi Arabia roll over its voluntary output cut into early next year.

Extending cuts "should help erase the expected surplus and provide some support to the market," ING said, adding that "there will be growing noise around OPEC policy in the coming weeks" as the group gets ready to meet in Vienna on Nov. 26.

Metals:

Base metals were lower and gold flat, as weak demand continues to keep prices pegged back.

"Over the past month, year-to-date price averages have generally declined for base metals, dragged down by the persistence of weak global market fundamentals and dollar strength," BMI said.

It said a recovery in prices is unlikely this year and fortunes are only likely to change when the dollar starts to weaken and Chinese demand picks up.

EMEA HEADLINES

Generali Sees Signs of Slowdown After Fall in Net Profit

Assicurazioni Generali said the insurance industry might be affected by weaker demand amid signs of a global economic slowdown and reported a lower net profit for the third quarter.

The Italian insurer said Friday that net profit for the third quarter fell to 579 million euros ($628.4 million) from EUR591 million in the same period last year. Quarterly operating profit dropped 5.8% to EUR1.38 billion.

LSEG to Return $1.24 Bln via Share Buybacks During 2024; Sets Medium-Term Targets

London Stock Exchange Group plans to return 1 billion pounds ($1.24 billion) to shareholders via buybacks over next year and has set a target to grow organic revenue mid-to-high-single digit annually, accelerating after 2024.

In a statement on its website as part of its capital markets event, the stock-exchange and financial-information company said that it expects underlying earnings before interest, taxes, depreciation and amortization margin to increase over time, and for capital expenditure to fall to high-single-digit percent of revenue.

GLOBAL NEWS

What Recession? Consumers Still Have Plenty to Spend.

After two years of sustained spending, rising interest rates, and punishing inflation, American consumers are still on a roll. Consumer outlays account for about 70% of the U.S. economy, and the Covid-era spending spree has kept gross domestic product on a path of surprisingly strong growth. Real GDP grew nearly 5% in the third quarter, according to early estimates, the best showing since the fourth quarter of 2021.

The spending boom is bound to lose some vigor as savings erode and higher rates bite: Real personal-consumption expenditures are on track to rise 2.2% this year, according to FactSet estimates, below last year's 2.5% growth rate and 8.4% growth in 2021. Yet relatively healthy household finances, a resilient labor market, and substantial housing wealth suggest that consumers still have plenty of firepower and that the U.S. economy will avoid a recession next year.

Avoiding China Has Been a Winning Investment Strategy. But It Isn't Easy.

Investors in emerging-market stocks have profited this year by staying away from China.

The MSCI China Index is down 8% this year through Nov. 15, while a broader emerging-markets benchmark that excludes China has risen 8% over the same period. Chinese stocks have been weighed down by the country's shaky economic reopening, a pullback by foreign portfolio managers and an increasing reluctance among the country's small investors to buy stocks.

As U.S. Wavers on Ukraine Aid, Europe Steps Up

BERLIN-European governments are boosting their assistance to Ukraine as worries grow that Washington's failure to approve new aid could cause Ukraine to lose ground in the war against Russia.

Europe and the U.S. increasingly believe that Ukraine will struggle to win significant territory in the near term and are focusing their efforts on enabling Kyiv's forces to hold the line against Russia.

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

(END) Dow Jones Newswires

11-17-23 0530ET