MARKET WRAPS
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EU general government deficit and debt; Germany Bundesbank monthly report; UK public sector finances, retail sales; trading updates from Deliveroo, InterContinental Hotels, London Stock Exchange, Renault, EssilorLuxottica
Opening Call:
Shares may open lower in Europe on Friday amid continued worries over aggressive central bank rate hikes. In Asia, stocks mostly declined; Treasury yields, the dollar and oil futures rose; while gold prices edged down.
Equities:
European shares may fall on Friday, tracking losses on Wall Street overnight as investors weighed the latest batch of corporate earnings and the question of how aggressively central banks will raise interest rates to moderate inflation.
European stocks had shrugged off the UK political turbulence on Thursday amid upbeat trading on Wall Street. UK Prime Minister Liz Truss resigned following economic and political chaos caused by her tax-cutting budget.
"Truss's great political gamble has spectacularly backfired, but not before wreaking significant damage on the UK economy," Hargreaves Lansdown analyst Susannah Streeter said.
"It will take considerable time before the risk premium attached to UK assets fades away, following the financial nervous breakdown which followed the mini-budget."
U.S. stocks finished with their second straight loss Thursday, as yields on the 10-year and 2-year Treasury notes advanced to their highest levels in more than 14 years, causing early earnings-inspired gains in equities to evaporate.
Christoph Schon, senior director of applied research at Qontigo, said the current correlation between stocks and bonds is really of concern to multi-asset investors.
"Stocks and bonds (are) moving in the same direction, which we haven't really had in a very long time," said Schon. "We would see those brief moments when stocks and bonds would fall together. Normally it didn't last more than a few weeks. Now, this has been going on for many months."
Forex:
The dollar strengthened in Asia on prospects for aggressive Fed tightening.
Fed officials have continued to ramp up their hawkish tone, with the market now expecting the Fed to raise rates to above 5% in 1H 2023, said MUFG Bank.
Bonds:
Treasury yields rose early Friday after carving out more highs overnight, as traders continued to factor in higher interest rates.
The renewed climb in Treasury yields came after U.K. Prime Minister Liz Truss's resignation sent the pound higher and data released on Wednesday showed U.K. consumer prices rising at a 40-year high of 10.1%.
Markets are pricing in a 99.9% probability that the Fed will raise interest rates by another 75 basis points to a range of 3.75% to 4% on Nov. 2. The central bank is mostly expected to take its fed-funds rate target to between 5% and 5.25%, or even higher, by next March, according to the CME FedWatch tool.
"Bond investors are accepting the idea of two more 0.75% increases by the Fed," which would lift the fed-funds rate target to between 4.5% and 4.75% by December, according to Bryce Doty, senior portfolio manager and vice president of Sit Investment Associates.
"Regardless of the ever-changing, near-term expectations for rate increases, expectations for cuts in the second quarter of 2023 remain constant," Doty said.
"Either the Fed recognizes what a mistake it is to destroy jobs when there is such a labor shortage like we've never seen before and pause(s) or continue(s) to raise rates aggressively, creating a massive hard landing resulting in an abrupt about-face on rates."
Energy:
Oil gained slightly in Asia, after the U.S. benchmark futures contract settled higher amid a report that China could ease quarantine requirements for inbound visitors.
Despite a recent announcement of the U.S. releasing a further 15 million barrels of crude from the Strategic Petroleum Reserve, Goldman Sachs expects "limited downside from current price levels" for the commodity from U.S. energy policy, partly due to a recent surprise decision by OPEC+ to cut output.
Bloomberg on Thursday reported that Chinese officials were debating whether to ease quarantine requirements for visitors to the country.
An easing of the quarantine rule would be an incremental change but it may signal the potential for a revival of economic growth.
"By reviving an economy beset by Covid restrictions, such moves could provide a lifeline to China's struggling airline industry," said Harry Altham, an energy analyst at StoneX Group.
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Wholesale gas prices in Europe look set to remain high for some time, Fitch said, adding European governments are working to minimize rises in consumer energy prices.
"Consumer prices have still yet to reflect the approximately six-fold rise in wholesale gas prices since prices began to climb in April 2021."
Energy will continue to pressure eurozone CPI despite ongoing government intervention, Fitch said. The eurozone saw inflation rise 9.9% year on year in September, with energy prices accounting for 4.2 percentage points of the increase.
Metals:
Gold inched down in Asia amid continued pressure from high U.S. Treasury yields and a strong dollar.
The prospect that the Fed "might be in a position to tighten aggressively beyond the winter" may lead to further weakness for the precious metal, Oanda senior market analyst Edward Moya said.
"It looks like a matter of when will gold break the September lows but for now it is stabilizing as it seems it will need a fresh catalyst to send prices below the psychological $1,600 level," he added.
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Prices of aluminum rose amid signs of rising demand.
The price of the metal rose after a surprise spike in orders to withdraw the metal from London Metal Exchange warehouses, ANZ said.
ANZ thinks the latest data suggests that demand remains high, while the Biden administration is also considering potential options such as sanctions on Russia's top aluminum producer.
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Chinese iron ore futures rose, as steel-mill production remains stable and the average daily hot metal output is still high.
Although strong demand for iron ore propped up its prices, steel-mill profits continue to shrink after the recent decline in prices of steel, which might lead to weaker iron ore prices, Baocheng Futures said.
TODAY'S TOP HEADLINES
Japan Finance Minister Reiterates Concerns Over Yen's Rapid Fall
Japan's finance minister on Friday reiterated concerns about the yen's rapid falls and his readiness to intervene in the foreign-exchange market.
"There is no change at all in our stance that we will take appropriate action, if there are any excessive moves" in the currency market, Shunichi Suzuki said at a news conference.
U.K. Government Is High-Profile Casualty in World of Higher Borrowing Costs
LONDON-U.K. Prime Minister Liz Truss's resignation is a stark reminder of how high inflation and rising interest rates have changed the game for politicians and narrowed their room to maneuver.
For the past decade, low inflation and ultralow interest rates gave governments around the world room to spend more and pile on debt without alarming investors. Those days are over.
Fed's Harker: Inflation shoots up like a rocket, comes down like a feather
Inflation will only come down slowly over the next 14 months despite the Federal Reserve's strong resolve to cool it down, said Philadelphia Fed President Patrick Harker, on Thursday.
"We...need to recognize that this will take time: Inflation is known to shoot up like a rocket and them come down like a feather," Harker said, in a speech to the Greater Vineland, New Jersey, Chamber of Commerce.
Japan's Consumer Inflation Remained at 3% in September
TOKYO-Japan's overall consumer inflation rose 3% from a year earlier in September, exceeding the Bank of Japan's 2% target for six consecutive months, government data showed Friday.
The figure matched a 3% annual increase in August. Consumer prices excluding fresh food and energy prices rose 1.8% from a year earlier in September.
EU Leaders Push Forward Plans to Tackle High Gas Prices
BRUSSELS-European Union leaders pushed discussions on whether to pursue an emergency limit on natural-gas prices to their energy ministers after marathon negotiations over how to tackle the energy crisis brought on by Russia's squeeze on gas supplies.
The European Council issued a set of conclusions early Friday morning saying leaders had agreed to accelerate their efforts to reduce energy demand, secure supplies and bring down prices. They also called on energy ministers and the bloc's executive body to "urgently submit concrete decisions" on a range of measures to achieve those goals, including a possible emergency gas-price cap.
Ukrainians Urged to Ration Electricity as Russian Missiles Target Energy Infrastructure
KYIV, Ukraine-Russia's attempts to destroy Ukraine's heating and power capacity has added a new dimension to the conflict, with Moscow seeking to erode the resilience of Ukrainian civilians even as the Kremlin attempts to regain the initiative against Kyiv on the battlefield.
Kyiv says the systematic destruction of power stations and heating infrastructure across the country over the past 10 days aims to bend Ukrainians' will by causing a humanitarian catastrophe as temperatures drop.
Snap Stock Falls as Sales Growth Shrinks, Advertisers Cut Spending
Snap Inc. posted a further slowdown in sales growth and signaled the digital-ad market could remain lackluster for some time, sending its shares sharply lower in late trading.
Snap, in an investor letter Thursday, said it is operating on an assumption of no revenue growth this quarter from the year-ago period , even though it has seen about 9% growth so far for the period . Analysts surveyed by FactSet have been expecting almost 7% growth for the fourth quarter
Microsoft in Advanced Talks to Increase Investment in OpenAI
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10-21-22 0014ET
