EMEA Morning Briefing : Stocks Seen Higher on U.S. Rebound

MARKET WRAPS

Watch For:

EU PPI; OECD CPI; trading updates from Ryanair, Frasers Group, Compass Group

Opening Call:

A Wall Street rally should support gains by European shares on Tuesday. In Asia, stock benchmarks advanced, though markets in China and Hong Kong are closed. The dollar weakened slightly; Treasury yields fell; while oil and gold rose.

Equities:

Shares in Europe look poised to build on a Wall Street rally and broad gains across Asia.

Overnight, U.S. stocks seemed to benefit from the bad-news-is-good-news dynamic that has occasionally buoyed equities. Growing warnings about a potential U.S. recession were accompanied by renewed chatter about the possibility of a Fed pivot, suggesting a risk that investors are "again underestimating the Fed's resolve as it seeks to tackle inflation," said Deutsche Bank.

"It is fair to say that the market is now wondering aloud if all this talk about getting inflation under wraps is something they, at the Fed, could adhere to in the context of a lot of stresses coming into the market," said Tom Porcelli, chief U.S. economist for RBC Capital Markets. "It's a completely fair thing for the market to wonder about. I don't want to make a lot out of one day's moves, but the commentary from people we are talking to is also a reflection of that."

"There's no question the Fed wants to get inflation under control," Porcelli said. "The bigger question is, 'Are they under autopilot until inflation moves back to a level they are comfortable with or do other factors come into play that could derail their plans?'"

Traders and analysts said stocks were technically overdue for a short-term bounce anyway after a brutal selloff, but they still expressed caution.

Read: Stocks may continue falling even after Fed pivots

Forex:

USD has fallen back moderately as Treasury yields have fallen and risk sentiment has improved, said RBC Capital Markets.

However, caution should continue to prevail in the near term, given that the U.S. nonfarm payrolls report is due Friday, RBC added.

Read: U.S. dollar's dominance tends to hurt these sectors of the stock market less

Bonds:

Treasury yields continued falling after pulling back sharply on Monday following the U.K. government's withdrawal of planned tax cuts, bolstering British bonds, and data showing a slowdown in U.S. manufacturing activity.

Yields on gilts fell back and the British pound rose after the U.K. government scrapped plans to cut taxes for the wealthiest earners, canceling one of the main components of a debt-funded budget that had roiled financial markets.

The Bank of England was forced to step in last week to buy gilts and arrest a surge in yields that had threatened to tank pension funds.

The volatility surrounding the U.K.'s fiscal woes also underlined concerns about liquidity in the Treasury market, analysts said.

Energy:

Oil futures rose early Tuesday, buoyed by the prospects of a potential output cut by OPEC+ at its meeting Wednesday.

Expectations are high that the group will deliver the biggest reduction in crude-oil production since the beginning of the Covid-19 pandemic, said Oanda's Edward Moya.

The gathering will be the group's first in-person meeting since 2020, which means they are likely to go big and reduce production by more than 1 million barrels a day, he said.

Metals:

Gold prices rose in Asia, and are likely to be supported by lower Treasury yields.

The weaker-than-expected ISM index of U.S. manufacturing activity released overnight has pushed Treasury yields lower and raised the possibility of a lower Fed rate-increase trajectory, which is positive for the precious metal, said SPI Asset Management.

Sevens Report Research said "the fundamental backdrop is getting less bearish" for gold "as Treasury yields and the dollar may be approaching a peak."

However, "if we do not see a peak in yields and the buck," investors should expect the precious metal to tumble to new lows, Sevens said.

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Copper futures edged lower in Asia amid continued worries over China's economy.

The Chinese government's recent pledges of further stimulus have failed to quell concerns over the economy, and the country continues to battle against outbreaks of Covid-19, said ANZ.

Focus may now shift to China's 20th National Congress in Beijing, which will kick off Oct. 16, for a possible change in its zero-Covid policy, ANZ added.

TODAY'S TOP HEADLINES

U.S. Seeks to Further Restrict Cutting-Edge Chip Exports to China

The Biden administration is preparing new export controls on semiconductors and the machines to make them, the latest push in its effort to deny China the ability to make the fastest, most cutting-edge circuitry possible, according to people familiar with the situation.

The administration in recent weeks has already placed new restrictions on some U.S. exports of chips used for artificial-intelligence calculations and manufacturing equipment used to make some of the most powerful number-crunching chips.

Top Fed Official Warns of More Persistent Price Pressures

Despite some signs of easing inflation, underlying price pressures have too much momentum and will likely require a period of higher interest rates, a top Federal Reserve official said Monday.

The economy is already seeing some of the effects of the Fed's efforts to slow demand, including higher borrowing costs and mortgage rates and falling stock prices, which "have become significantly less supportive of spending," said New York Fed President John Williams in remarks prepared for delivery Monday.

Crypto Could Threaten Financial System, Federal Risk Panel Warns

WASHINGTON-Risks tied to cryptocurrencies could grow rapidly and eventually threaten the broader financial system, a panel of senior U.S. officials warned Monday, calling for tougher oversight of digital assets.

The Financial Stability Oversight Council, chaired by Treasury Secretary Janet Yellen, said the crypto industry remains small compared with the overall financial system, but that could change quickly and exacerbate potential systemic risks.

London Heathrow to Drop Daily Passenger Cap After Chaotic Summer

LONDON-London Heathrow Airport has told airlines it will lift a cap on passenger numbers at its terminals later this month, according to people familiar with the decision, ending one of the most extraordinary measures the aviation industry put in place this summer to deal with a surge in travel and a shortage of workers.

The cap, which limits daily departing passengers from its terminals to 100,000 a day, won't continue beyond Oct. 29 when the official summer flying season ends, people briefed on the matter said.

French Prosecutors Open Corruption Probe Into Top Macron Aide

PARIS-A top aide to French President Emmanuel Macron was placed under formal investigation for allegedly violating conflict-of-interest laws involving his family ties to a Swiss-Italian shipping company that fell under his purview while he was a senior finance official.

Prosecutors say they opened the probe after anticorruption group Anticor filed a complaint targeting Alexis Kohler, Mr. Macron's chief of staff. Anticor alleges that Mr. Kohler failed to disclose his relationship with Mediterranean Shipping Co., which is owned by a relative, and helped defend the company's interests when he worked for the APE state holding agency between 2010 and 2012, a spokeswoman for the group said.

Nvidia Closing Offices in Russia, Ceasing All Activities There

Nvidia Corp. moved to cease operations and close its offices in Russia, saying it could no longer operate effectively in the country because of recent events related to the invasion in Ukraine.

The chip maker on Monday said it would withdraw from Russia after it had previously suspended shipments to the country. It had maintained a presence there to support employees and their families. It joins a suite of other companies that have exited Russia since its invasion in February.

Concerns About Credit Suisse Mount After Debt Slide

Credit Suisse Group AG came under renewed pressure over its financial health after the value of its riskiest bonds sank and the cost to insure against default rose sharply.

Investors and analysts called on the Swiss banking giant, which combines a Wall Street presence with a global specialty in managing rich people's money, to move faster with cost savings and fresh investor capital to reassure markets.

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Expected Major Events for Tuesday

06:00/ROM: Aug PPI

07:00/SPN: Sep Unemployment

09:00/EU: Aug PPI

10:00/FRA: Aug OECD CPI

14:00/DEN: Sep Foreign Exchange & Liquidity

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

(END) Dow Jones Newswires

10-04-22 0016ET