EMEA Morning Briefing : Stocks to Slide Again as Global Rout Continues

MARKET WRAPS

Watch For:

EU Industrial Production; UK Producer Prices, Monthly Inflation, House Price Index; IEA Oil Market Report; G7 Trade Ministers Meeting; updates from Inditex, Tullow Oil

Opening Call:

A brutal selloff on Wall Street following the hotter-than-expected inflation data will drag European stocks deep into the red again on Wednesday. In Asia, stocks broadly slumped; the dollar dipped following its post-CPI surge; Treasury yields extended gains; and oil and gold prices edged lower.

Equities:

European equities face a further selloff on Wednesday, after technology stocks led the U.S. market to its worst day in more than two years following the unexpected uptick in August consumer-price inflation.

The Dow closed nearly 1,300 points lower, with losses for all three major indexes accelerating in the final hour of trade and causing volatility to surge. The Cboe Volatility Index rose more than 16% to 27.79.

"Misses on both headline and core are disappointing as this bout of inflation proves to be anything but 'transitory,'" Cliff Hodge, Chief Investment Officer for Cornerstone Wealth said.

"Unfortunately for markets this print will reinforce the need for the Fed to remain aggressive and will likely keep a lid on risk assets over the foreseeable future."

Forex:

The dollar eased back slightly in Asia having surged on Tuesday, with the WSJ Dollar Index posting its biggest gain since March 2020. The index closed at 101.68, just one hundredth of a point below a more than 20-year-high reached Sept. 6.

Nomura said the Fed will jack rates up by a full percentage point at its meeting next week.

"The August CPI report--with broad-based strength across both monthly core goods and core services inflation--suggests a series of upside inflation risks may be materializing. While the Fed did not raise rates by 100 basis points at the July meeting, contrary to our expectations, we think recent data will encourage policymakers to revisit whether they should increase the pace of rate hikes, considering the Fed's commitment to data dependence."

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NZD/EUR is on the brink of breaking support of 0.60 as unique European factors lessen the blow to the euro in the face of the dollar's resurgence, ANZ said.

"The technical picture is looking precarious now, below 0.60 puts 0.5890 in focus," ANZ said.

Bonds:

Treasurys continued to sell off following August's inflation surprise.

On Tuesday, the 2-year yield carved out another almost 15-year high, while the 10-year yield posted its largest one-day jump since Sept. 6, reaching its highest level since June 14.

The inverted gap points to investors' fears that persistently high inflation will prod the Fed to tighten to the point that a recession would be unavoidable. Odds of a rare 100-basis point hike next week are increasing, with no major economic data releases expected before the FOMC meeting.

Piper Sandler said "there's scant offset to the stickier parts of inflation," and the Fed "will be full speed ahead on tightening [with] even a chance they go 100bp next week."

Energy:

Oil prices were a touch higher in Asia, clawing back some of Tuesday's losses, as the dollar's surge slowed.

CBA said traders will keep watch on developments related to China's National Congress meeting on Oct. 16.

"The big change to watch out for is any relaxation of China's Covid-zero policy that has weighed heavily on China's economy this year."

Commerzbank said if the IEA, in its monthly report later Wednesday, warns of considerable oversupply on the oil market, "sentiment could quickly shift again: in this case the market would probably test whether OPEC+ is really willing to defend higher oil prices by cutting production."

Metals:

Gold futures extended losses on concerns the U.S. inflation surprise will feed the likelihood of higher Fed rate rises.

"Gold is in the danger zone again and could see another run towards the summer lows," OANDA said. "If gold breaks below $1,700, not much support is there until the $1,650 region."

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Base metals also lost ground, weighed by the strong dollar.

CBA said the dollar and U.S. 10-year real yields have broadly weighed on mining and energy commodity prices since the start of June, which may continue to spur further weakness.

TODAY'S TOP HEADLINES

Inflation Report Keeps Fed on Aggressive Rate-Rise Path

The acceleration in inflation last month clinches the case for the Federal Reserve to lift interest rates by at least 0.75 percentage point at its meeting next week and raises the prospect of hefty increases continuing in coming months.

Fed officials had suggested they were prepared to make their third consecutive increase of 0.75 point next week even if inflation had cooled in August, as many economists were anticipating.

Private-Equity Investors Plan to Stay the Course in Volatile Market

Investors have plenty of reasons to stay the course with their private-equity commitments despite challenges like labor shortages, rising inflation, higher interest rates and political polarization, speakers at a conference said.

"We do want to keep investing through this cycle, as it's proven out time after time after time that that's a proven strategy," said Maurice Gordon, head of private equity at Guardian Life Insurance Co. of America, which ended 2021 with $10.7 billion in capital.

Rio Tinto, Baowu Agree Joint Venture to Develop $2B Australian Iron-Ore Project

Rio Tinto PLC said it has agreed to form a joint venture with China Baowu Steel Group Corp. Ltd. to develop the $2-billion Western Range iron-ore project in Australia's Pilbara region.

The Anglo-Australian mining company and China's state-owned Baowu, its biggest iron-ore customer, also intend to sign a sales agreement for Baowu to buy almost half of the mine's production over a roughly 13-year period. Rio Tinto wants to develop the project to help sustain production of the company's core Pilbara Blend iron-ore product from its existing Paraburdoo mining hub.

Ukraine Seeks More Arms, Closer Ties to West After Taking Ground From Russia

KHARKIV, Ukraine-Ukrainian forces looked to maximize gains from a lightning-quick offensive in the country's northeastern Kharkiv region, making a diplomatic push for more weapons and deeper security ties with Western allies.

A top aide to Ukrainian President Volodymyr Zelensky and Anders Fogh Rasmussen, former chief of the North Atlantic Treaty Organization, said Tuesday they were drafting a proposal to shore up ties between Kyiv and its Western allies with the aim of guaranteeing the flow of weapons, intelligence, financial aid and training to the country. The document, they said, won't include a commitment similar to Article 5 of the NATO alliance, which requires allies to intervene militarily if a member is attacked. Instead, the officials said the document is modeled on guarantees between the U.S. and Israel, which ensures the flow of support is steady and unwavering.

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Expected Major Events for Wednesday

05:00/FIN: Aug CPI

06:00/SWE: Aug CPI

06:00/ROM: Jul Industrial production

06:00/UK: Aug UK producer prices

06:00/UK: Aug UK monthly inflation figures

07:00/SVK: Aug CPI

07:00/SVK: Aug Core & net inflation development

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

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

08:00/FRA: Sep IEA Oil Market Report

08:00/BUL: Aug CPI

08:30/UK: Jul UK House Price Index

09:00/EU: Jul Industrial Production

09:00/GRE: Jul Labour Force Survey

15:59/UKR: Jul Trade

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

09-14-22 0022ET