MARKET WRAPS

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Trading updates from Smiths Group, Ferguson

Opening Call:

European stock futures fell, tracking Asian equities lower as bond yields and the dollar marched higher. Meanwhile, oil and gold futures declined in Asian trading.

Equities:

European stocks look poised to extend declines at Tuesday's open amid economic jitters and worries over rising Treasury yields.

S&P Global Ratings said Monday that the eurozone is expected to enter a period of low growth and high interest rates. Eurozone GDP growth is forecast at 0.6% this year and 0.9% in 2024.

"What's changed is that we now expect Germany to contract more and Spain to expand more," EMEA chief economist Sylvain Broyer said.

"We do not expect the European Central Bank to start cutting rates before the second half of 2024. Moreover, we believe that the central bank might want to accelerate the path of quantitative tightening," S&P said.

Meanwhile, economic growth in the U.K. is expected to remain muted in 2024 given high inflation and "monetary policy rates that will turn increasingly restrictive in real terms as inflation abates," said S&P. It expects U.K. GDP growth of 0.3% this year and 0.5% in 2024.

As Treasury yields rise, "we are getting to a point where 10- and 30-year rates are having a somewhat adverse effect on equities," said Tom di Galoma, managing director and co-head of global rates trading at BTIG in New York. "We got through the 4.36% level on 10-year notes overnight between Sept. 20-21 - which had been last year's and this year's highest yield - and that's when the bottom fell out. It kept going and hasn't stopped."

Di Galoma said that's "causing a tremendous amount of selling because the next stop is probably near the 4.77% level on the 10-year rate and, if we don't hold there, we could be looking at a 5.1% to 5.12% rate in the next two to four weeks."

Another factor stoking concerns about the outlook is oil prices, which have risen sharply since summer.

"Inflation seems stickier, and a lot of news has turned not as positive, " said Keith Buchanan, senior portfolio manager at Globalt Investments. That's adding to concerns that the stock market "is at a challenging level to continue to post gains" after having rallied over the past year.

"Markets walked away from last week's Federal Reserve meeting with more confidence that rates will be higher for longer, and that's putting downward pressure on equities," Buchanan said.

Meanwhile, the U.S. government is barreling toward a partial shutdown Sunday morning. While stocks have managed to withstand similar scenarios before, "there's growing concern over the potential that this could be a little bit more impactful than shutdowns in the past," Buchanan said. "The market is becoming more aware of the potential for a more drawn-out shutdown."

Read: Stock investors face a wall of worry into year's end, creating the need for protection

Forex:

The U.S. dollar edged higher in Asia amid rising Treasury yields. USD seems to be on stronger footing, partly due to the relatively higher U.S. real rates narrative asserting itself, said Mizuho Bank.

Also, recession risks from a Fed over-tightening could favor the USD, Mizuho added.

Read: Why a government shutdown could undercut the U.S. dollar rally

Bonds:

Treasury yields extended gains after long-end yields established fresh multiyear highs on Monday, as traders continued to absorb the higher-for-longer theme for interest rates in the U.S. and abroad.

The data highlight of this week comes Friday with the release of the Fed's favorite inflation gauge, known as the PCE, for August. Ahead of that, investors are wrestling with a growing list of risks, including a possible government shutdown.

"Inflation flare-up risks are growing and that still suggests the Fed might have to do more tightening despite the trajectory of the economy," said Edward Moya, senior market analyst for the Americas at Oanda.

Read: 10-year Treasury yield can keep climbing from 16-year highs, says world's largest asset manager

Energy:

Oil futures fell in Asia amid a possible technical correction.

WTI crude oil is meandering around $90/bbl after retreating from its "shooting star" candle formed around $92.50/bbl last week on the daily chart, said Matt Simpson, market analyst at City Index and https://urldefense.com/v3/__http://FOREX.com__;!!F0Stn7g!EkC-yjvlW-JwUud45wRP799dxlD1wDWUOhp7lcFMyG3fQTLJuh4QvqYZA8mzDgRdqsimHaxUz_7l0k7olQFT4mGqeRkxP3FAAV7dYAcLG8Q$ .

This is typical of corrective price action and points to tricky trading conditions ahead, Simpson added.

Metals:

Gold edged lower early Tuesday amid mostly higher Treasury yields, which diminish the appeal of the non-interest-bearing precious metal.

However, gold seems to have found major support at $1,900/oz, said Oanda. The end of the Fed's tightening appears very close and a higher-for-longer U.S. interest rates scenario has likely been priced in by most traders, Oanda added.

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Copper prices rose in Asia. Despite this session's gains, industrial metals are under pressure as investors remain wary about the challenges in China's property market, ANZ said.

"Despite many stimulatory measures to revive the real estate industry, there have been minimal impacts on reviving property demand and investment in the sector," ANZ said.

Meanwhile, investors have become increasingly concerned about inflation risks and the Fed's stance of higher rates for longer, which could further weigh on copper prices, ANZ added.

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Iron ore futures declined amid signs of weaker restocking by Chinese construction companies.

A survey by steel data provider Mysteel shows only 43% of infrastructure companies and 41% of housing firms in China are planning to restock steel ahead of the country's National Day holidays, ANZ said.

Weaker steel demand may lead to steel production cuts in 4Q and drive down iron ore demand, ANZ added.

That said, macroeconomic policies and possible replenishment of raw materials in the coming winter may provide some positive sentiment, Huatai Futures said.


TODAY'S TOP HEADLINES

U.S. Blacklists 28 Entities From China, Russia and Other Countries, Citing National Security Risks

WASHINGTON-The Commerce Department on Monday targeted 28 companies from China, Russia and other countries with export restrictions, dialing up pressure on foreign actors that could undermine American national security interests.

The addition to the export blacklist included nine firms implicated in violating existing export controls through a scheme to supply a Russian company with components to build unmanned aerial vehicles for Russia's intelligence agency, the Commerce Department said.


Why a surging U.S. dollar is about to become a problem for stock-market bulls

Analysts are ringing alarm bells over a surge by the U.S. dollar, warning it may be set to serve as another "headwind" for U.S. stocks as they struggle through a losing September.

"Since early August, the USD (U.S. dollar) has climbed above its average [second-quarter] level. That means that for corporates, the USD switched back from tailwind to headwind...and an increasing one" as investors close out the third quarter this week, said Andrew Greenebaum of Jefferies, in a Saturday note.


Why the stock market's September stumble isn't just about rising bond yields

As stock-market investors worry about the damage to equities being inflicted by a jump in Treasury yields, revisions to S&P 500 earnings forecasts may also be souring sentiment.

"After several weeks of seeing Wall Street analysts increase or at least maintain their 2023 and 2024 S&P 500 earnings estimates, the trend reversed to the downside last week," said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Monday. "This may have played an underappreciated role in last week's selloff."


Intel's Big Chip-Making Push in Germany Hits Bottleneck

MAGDEBURG, Germany-Intel says it needs 3,000 people to staff the semiconductor factory it plans to build in eastern Germany by the end of the decade. This year, the local apprentice program for chip-making technicians is training two.

The German government trumpeted Intel's planned development as a game changer, backed by federal subsidies totaling 10 billion euros-equivalent to $10.59 billion-that would help the economy pivot toward new industry. The outlay is part of a European Union effort unveiled this summer to double the Continent's share of global chip production to compete with established producers in Asia.


Saudi Arabia Agrees to Broader U.N. Atomic Agency Oversight

BERLIN-Saudi Arabia said Monday it would agree to far greater oversight of its nuclear activities, a step that could help advance negotiations with the U.S. to set up a uranium enrichment operation in the kingdom as part of a possible Washington-backed normalization agreement between Riyadh and Israel.

Speaking at the United Nations atomic agency's annual General Conference, Saudi Energy Minister Prince Abdulaziz bin Salman said Riyadh would rescind its basic oversight agreement with the Agency and implement a Comprehensive Safeguards Agreement, which gives inspectors much broader powers to inspect nuclear activities.


U.K. Regulator Tackles Bullying and Harassment in the Financial Services Sector

The U.K.'s top financial regulator has proposed actions aimed at increasing diversity and inclusion in the nation's financial services market, including measures aimed at combating bullying and sexual harassment in the workplace.

The Financial Conduct Authority published a consultation paper Monday that, among other things, outlined new proposals for financial services firms. The regulator said the proposals aim to encourage firms to take "decisive and appropriate action" against employees who engage in workplace misconduct.


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09-26-23 0016ET