MARKET WRAPS
Stocks:
European stocks edged higher in a cautious opening session, as investors turned their attention to the Federal Reserve's latest interest-rate decision.
The decision is overwhelmingly expected to see policy stay on hold. But investors will seek clues on when the central bank might shift its stance after recent inflation readings have tempered hopes for near-term interest-rate cuts.
"The recent bond market reaction could be a cause for concern for some Fed members if the slide in yields prompts financial conditions to loosen just enough to prompt an inflation rebound," CMC Markets UK said.
"That doesn't mean we will see another rate hike, no change is expected, but it could prompt the FOMC to look at their dot plots for next year and be wary of altering them in any way that could be considered dovish."
Stocks to Watch
UBS upgraded BASF to buy from sell, citing earnings growth on an improving upstream chemicals cycle, among other things.
"Our analysis suggests 4Q23/1Q24 marks a trough in BASF's global upstream chemicals utilization rates, with a consistent tightening of markets over the medium term," UBS said.
The chemical company's shares have historically outperformed peers on the European exchange by 26% in a recovery environment, UBS added.
It also has a dividend yield above its competitors and multiple ways to improve free cash flow, including reducing capital expenditures and improving working capital.
Economic Insight
The European Central Bank is determined to avoid any flare-up in core inflation, Vanguard said, forecasting no interest-rate cut until at least the middle of 2024.
"We expect gradual cuts to begin as the output gap--actual economic activity compared with potential economic activity--begins to widen and the labor market softens."
Vanguard forecasts the ECB to cut the deposit rate to 3.25% by the end of 2024 from the current 4%.
It added that for consumers and businesses, higher interest rates force prudence in borrowing decisions, increase the cost of capital, and encourage saving, while for governments, rates will necessitate a reexamination of fiscal views in the near term.
U.S. Markets:
Contracts tied to the major indexes gained modestly, while ten-year Treasury yields held steady at close to 4.2%.
The CBOE VIX Index, an option-based volatility gauge that tends to fall when investors are more bullish, closed on Tuesday's session at its lowest in more than four years.
U.S. producer prices data for November, which indicate inflationary pressures down the pipeline, will be published before the opening bell.
Forex:
Sterling weakened after data showed U.K. GDP fell by 0.3% in October, more than the contraction expected in a WSJ poll, which could cause growing speculation about possible interest-rate cuts next year, Quilter Investors said.
The BOE is expected to leave interest rates on hold on Thursday but close attention will be paid to any comments on economic weakness.
"Calls for rate cuts are likely to grow stronger should this sort of economic data persist. Interest rates are biting now and further contraction cannot be ruled out."
The Fed is expected to leave interest rates on hold in a decision later on Wednesday, and how the dollar moves afterward will depend on whether policymakers counter recent growing expectations for rate cuts next year, UniCredit Research said.
UniCredit doesn't expect the central bank to "push back firmly against recent market expectations of aggressive rate cuts," which means EUR/USD could stabilize above 1.08.
However, if the Fed suggests rate-cut expectations are overdone, the DXY dollar index should rally further above 104 and EUR/USD would retreat, albeit likely staying above 1.07, UniCredit added.
Bonds:
Gilt yields declined after the below-forecast U.K. GDP data suggested a weak economic outlook and risked raising expectations of an early BOE rate cut in 2024.
"This GDP report probably won't change [Thursday's BOE] decision, but may increase the likelihood of a rate cut earlier in 2024," Moneyfarm said.
RBC Capital Markets said the U.K.'s sale of GBP2 billion in the 3.75% October 2053 gilt on Wednesday is expected to go well, helped by the fact that it's likely to be the final re-opening of this bond.
"We like being long the bond on relative metrics into the end of its tapping cycle," RBC said.
It favors long positions in 30-year gilts against European counterparts and against shorter-dated U.K. peers via a 5-10-30-year butterfly trade, where investors bet on the shape of the curve.
Energy:
Oil futures were close to 1% lower on concerns over demand and oversupply as market watchers awaited the Fed meeting and OPEC's monthly report.
New concerns over excess supply and a slowing demand have outweighed the continuing Middle East conflict, StoneX said.
On Wednesday, the EIA will issue its weekly U.S. petroleum supply report. On average for the week ended Dec. 8, analysts expect the report to show a supply decline of 2.7 million barrels for crude.
Metals:
Base metals moved lower, weighed by a stronger dollar, but gold held steady ahead of the latest Fed decision.
Worries over copper supply have emerged, largely from Latin America where major producers are halting production. The Panama Supreme Court found earlier this month that First Quantum's contract to operate a copper mine was unconstitutional, which Sucden Financial said would mean 500,000 tons of copper being lost from the market.
Sucden added that for now prices are being led by the dollar rather than fundamentals.
Dealmaking is likely to remain a prominent feature of the global metals and mining industry in 2024, as valuations are generally very low, Jefferies said.
"The optimal time for the major miners to pursue sizable acquisitions is now. If they wait for the macro environment to improve, the window for highly accretive M&A may have already closed."
Jefferies said mining stocks continue to be deeply undervalued by investors given the time it takes to build new operations and the scarcity of high-quality mines globally.
EMEA HEADLINES
U.K. Economy Shrinks, But BOE Unlikely to Be Pushed Into Rapid Rate Cuts
The U.K. economy shrank a little more than expected in October, though likely not enough to convince the Bank of England to start cutting interest rates from their current elevated levels in the short term.
Gross domestic product fell by 0.3% compared with a month earlier, according to preliminary figures set out Wednesday by the Office for National Statistics. Economists polled by The Wall Street Journal had expected GDP to contract by 0.1%.
Inditex Lifts Profitability Outlook After Strong Earnings Growth
The owner of Zara clothing stores lifted its outlook for profitability after earnings increased in the first nine months, though sales growth has slowed in the most recent quarter.
Inditex said on Wednesday that net profit in the nine months ended Oct. 31 jumped 32.5% to 4.10 billion euros ($4.43 billion) from EUR3.1 billion in the same period last year.
Entain CEO Jette Nygaard-Andersen Steps Down
Entain said Wednesday that Chief Executive Officer Jette Nygaard-Andersen will step down from the group with immediate effect and be replaced by nonexecutive Director Stella David on an interim basis.
The FTSE 100 betting-and-gambling group said David will remain in the role until a full-time replacement has been found.
BAE Systems to Keep Managing U.S. Ammunition Plant in $8.8 Billion Deal
BAE Systems won a new 10-year contract worth $8.8 billion to manage the U.S. Army's main ammunition plant in Tennessee as efforts continue to surge production of artillery shells, missiles and other weapons, the Pentagon said on Tuesday.
The UK defense company's U.S. arm has overseen the Holston Army Ammunition Plant in Kingsport since 1999. It beat out competing bids from General Dynamics and Day & Zimmerman, according to people familiar with the Army's decision. Both operate other Army ammo facilities.
Houthi Rebel Attacks Rattle Global Shipping
Yemen's Houthi forces have attacked several commercial ships crossing through the Bab el-Mandeb strait in recent days, creating a new front in the battle between Israel and Hamas and complicating efforts by the U.S. and its allies to secure the critical shipping lane.
Houthi rebels claimed responsibility on Tuesday for a strike on the Norwegian tanker Strinda a day earlier off Yemen's coast, as the Iranian ally escalates attacks to disrupt the flow of cargoes in response to fighting in Gaza. The elevated risk of moving cargoes through the region has resulted in higher costs for shippers and also prompted some countries to rethink security measures to allow safe passage.
GLOBAL NEWS
Where Are Interest Rates Headed? What to Expect From the Fed Meeting
Federal Reserve officials are set to hold interest rates steady this week at a 22-year high and will likely project cutting them next year.
Still, they won't declare an end to rate hikes this week, even though they are growing more convinced that they have done enough to bring inflation down.
China Turns the Tables on Wall Street
China is upending how the international financial system handles debt crises in the developing world. Wall Street isn't happy.
Large bond fund managers cried foul last month when China blocked their deal to salvage investments in defaulted Zambian debt. The smackdown came just weeks after Chinese officials brokered a private debt restructuring with Sri Lanka, outmaneuvering Western governments that were trying to do the same.
Cash Is About to Be Dethroned. Bonds Are the Place to Be.
About the author: Ashish Shah is chief investment officer of public investing at Goldman Sachs Asset Management.
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12-13-23 0529ET
