EMEA Morning Briefing : Bond Market, Fed Path Worries Continue to Roil Stocks

MARKET WRAPS

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Opening Call:

Stocks may decline Wednesday as investors remain focused on global slowdown worries amid rising interest rates and the Ukraine war. Asian stocks were lower; the dollar rose; Treasury yields fell; oil and gold declined.

Equities:

European shares may open lower Wednesday, extending yesterday's downward trend as concerns persist over turmoil in the U.K. bond market and the Fed's tightening pace.

"This is an awful stock market environment that is grappling with a weakening economy, uncertainty over earnings and how long the Fed's tightening will last, and sentiment issues with an extremely risk averse investor psychology," said David Bahnsen, chief investment officer at The Bahnsen Group.

"While we believe a recession is inevitable, it's impossible to factor this into an actionable stock market view because we don't know how much recession risk is already priced into markets," he said.

"There is a significant chance that by the time we are in a recession, markets will already be pricing in the recovery, as markets are forward looking."

Forex:

The dollar gained slightly in Asia.

The BOE's insistence on stopping its emergency bond-buying program by the end of this week despite turmoil in the bond market and continuing liquidity issues faced by pension funds has rattled investors, MUFG Bank said.

The Japanese yen fell to a new 24-year low against the dollar early Wednesday, breaching the levels seen prior to the Japanese government's yen-buying intervention on Sept. 22.

The dollar rose to Y146.23, its highest level since August 1998.

Bonds:

Treasury yields broadly pulled back early Wednesday, after the two-year and 10-year bonds advanced to two-week highs on Tuesday and the 30-year yield hit its highest since 2014.

Traders were looking ahead to reports and data as potential catalysts for the next moves, with the U.S. producer prices data for September and the minutes of the Fed's last meeting due later in the day and U.S. September consumer-price index due Thursday.

"We update our rate forecast using a probabilistic approach and illustrative scenarios for the fed-funds rate and term premia," Deutsche Bank said.

"We take the [Deutsche Bank U.S. economics] team's funds rate forecast as our baseline and view the balance of risks as skewed towards more persistent inflation and higher policy rates."

"We project a peak 10y UST of 4.2% this quarter vs. our prior forecast peak of 3.85%," it said.

Read: As investors hasten to the exit, $68 billion flees U.S. bond funds in 2022

Energy:

Oil futures declined in Asia amid resurgent global recession fears.

These fears have returned amid the bond rout and a strong USD, CMC Markets said.

WTI crude oil futures have been eyeing the 50-day moving average following the past two-day drop, and a break below this level may take oil prices lower, CMC added.

However, Commerzbank said the OPEC+ decision to cut production underscored tightness in physical markets and should help keep crude prices supported.

"That said, concerns about demand in view of the sharply rising interest rates in the U.S., the escalating energy crisis in Europe and the zero-Covid policy in China should preclude any more marked upswing," it said.

Commerzbank updated its year-end forecast for Brent to $95 a barrel from $90. It sees Brent at $100 a barrel by the end of 2023, versus a previous forecast of $95, due to an expected supply deficit and persistently low inventory levels.

Metals:

Gold prices were lower early Wednesday.

The precious metal remains vulnerable to further selling pressure as no one wants to abandon strong USD trade, given the current macroeconomic backdrop, Oanda said, adding that gold could struggle as USD could easily be supported given developments such as the intensifying Russia-Ukraine war.

"Where gold concludes this week will most likely be influenced by the U.S. inflation data on Thursday," FXTM said.

"A red-hot CPI report will almost certainly reinforce aggressive rate hike bets, ultimately boosting the dollar and Treasury yields -- at gold's peril," it said.

"Such a development may drag the precious metal towards $1,655, $1,615, and $1,600."

However, "an inflation report that misses expectations could offer space for gold bulls to fight back, opening a path back toward the psychological $1,700 level," it added.

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Iron-ore futures were lower in Chinese trading, extending their recent losses.

The steel-making ore could remain under pressure in the near term, Haitong Futures said.

Domestic traders were likely turning more conservative on their demand projections for 4Q, when officials typically implement power-usage curbs and production restrictions for steel makers, it said.

Iron-ore looks to lack "future momentum," it added.

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Aluminum prices fell in Asia, extending a downturn this week as investors expect another aggressive interest-rate increase by the U.S. Federal Reserve before the end of the year.

Global monetary tightening could prevent aluminum prices from enjoying any sustained rebound, Haitong Futures said.

While the metal recovered some ground earlier this month amid supply concerns due to LME's potential restrictions on Russian metals, the unfavorable macroeconomic environment means aluminum's upside remains limited, it said.

TODAY'S TOP HEADLINES

Biden Says Very Slight Recession Is Possible, but He Doesn't Anticipate One

WASHINGTON-President Biden played down the likelihood of a recession during a television interview Tuesday, and said if there is one it would be "very slight."

"I don't think there will be a recession. If it is, it will be a very slight recession. That is, we'll move down slightly," Mr. Biden said during a CNN interview. He later said: "Look, it's possible. I don't anticipate it."

Fed's Mester says there's been no progress on inflation, so interest rates need to move higher

With little or no progress made on bringing inflation down, the Federal Reserve needs to continue raising interest rates, Cleveland Fed President Loretta Mester said Tuesday.

"At some point, you know, as inflation comes down, them my risk calculation will shift as well and we will want to either slow the rate increases, hold for some time and assess the cumulative impact on what we've done," Mester told reporters after a speech to the Economic Club of New York.

Saudi Arabia Defied U.S. Warnings Ahead of OPEC+ Production Cut

RIYADH, Saudi Arabia-Days before a major oil-production cut by OPEC and its Russia-led allies, U.S. officials called their counterparts in Saudi Arabia and other big Gulf producers with an urgent appeal-delay the decision for another month, according to people familiar with the talks. The answer: a resounding no.

U.S. officials warned Saudi leaders that a cut would be viewed as a clear choice by Riyadh to side with Russia in the Ukraine war and that the move would weaken already-waning support in Washington for the kingdom, the people said.

LVMH Sales Rise as U.S. Tourists Splurge in Europe

PARIS-LVMH Moët Hennessy Louis Vuitton SE said Tuesday its third-quarter revenue rose 27% as U.S. tourists spent freely in Paris and other European capitals and Covid-19-related disruptions eased in China.

LVMH posted revenue of EUR19.76 billion ($19.26 billion), beating expectations. The conglomerate's fashion and leather-goods division-which accounts for almost half of its revenue-posted a 27% increase in sales to EUR9.69 billion for the three months ended in September.

Intel CEO Pushes to Further Separate Chip-Design, Production Arms

Intel Corp. plans to create greater decision-making separation between its chip designers and chip-making factories as part of Chief Executive Pat Gelsinger's bid to revamp the company and boost returns.

The new structure, which Mr. Gelsinger disclosed in a letter to staff on Tuesday, is designed to let Intel's network of factories operate like a contract chip-making operation, taking orders from both Intel engineers and external chip companies on an equal footing.

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Expected Major Events for Wednesday

04:30/NED: Aug International trade

05:00/FIN: Aug Balance of Payments

06:00/ROM: Sep CPI

06:00/UK: Aug Index of production

06:00/UK: Aug UK trade

06:00/UK: Aug Index of services

06:00/UK: Aug Monthly GDP estimates

06:00/ROM: Aug Industrial production

07:00/TUR: Aug Industrial Production Index

08:00/BUL: Jul Trade with EU Member States - preliminary data

08:00/BUL: Aug Trade with third countries - preliminary data

08:00/EU: Sep Long term interest rates statistics

09:00/EU: Aug Industrial Production

11:30/UK: Sep NIESR Monthly GDP Tracker

16:59/AUT: Oct OPEC Monthly Oil Market Report

23:01/UK: CBI and PwC Financial Services Survey

23:01/UK: Sep RICS Residential Market Survey

All times in GMT. Powered by Onclusive and Dow Jones.

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

(END) Dow Jones Newswires

10-12-22 0015ET