European stocks fell as investors gave a downbeat response to Chinese economic data, though oil stocks gain as crude prices increase.
Data out Monday showed China's economy grew 4.9% in the third quarter from a year prior, a slowdown from the second quarter's 7.9% rate. Power shortages and supply-chain problems added to the impact of Beijing's efforts to rein in its property and technology sectors.
The slower growth data are "a reminder that China is expected to lose some of its momentum, but also how these global issues like the energy crisis and supply chain issues will filter through to global growth," said Edward Park, chief investment officer at U.K. investment firm Brooks Macdonald. "There's just a bit of rebasing of expectations for China and the rest of the world."
"We're in a mid-cycle slowdown," said David Chao, global market strategist for the Asia Pacific ex-Japan region at Invesco, adding that Chinese markets were in for continued uncertainty and volatility in the near term. Still, he added: "Keep in mind the government has many tools to propel the economy forward."
All eyes remain on inflation, with attention in Europe focused on comments from Andrew Bailey over the weekend, after the Bank of England governor said the central bank would act to curb inflation.
Inflationary fears were stoked by higher commodity prices, as oil continued its apparently inexorable march higher.
Shares on the move: French banks' stocks have flown under the radar recently, but investors should see this as an opportunity to increase their exposure, as their returns potential makes them attractive, Deutsche Bank analysts said.
The German bank expects Societe Generale, Credit Agricole and BNP Paribas to signal higher payouts in their new mid-term targets and calculates a dividend yield of 7%-8% for the three banks over 2021-23, excluding potential catch-up dividends.
This is a premium of about 40% over European banks, Deutsche Bank noted.
"In our view, consensus estimates reflect a conservative view on shareholder payouts, given the ample capital buffers in place at all French banks, coupled with a vastly improved profitability outlook, and limited alternatives for the excess capital," it said.
Stock futures edged lower after data showed that China's economic growth slowed sharply in the third quarter, and investors weighed the risk to global growth from stickier-than-anticipated inflation, supply-chain problems and heightened demand for energy.
A strong start to earnings season has underpinned hopes that companies can weather mounting challenges. Albertsons and State Street are set to report quarterly results before the market opens.
U.S. industrial production data for September, due at 9:15 a.m. ET, is expected to show a seventh consecutive monthly increase. The measure of output at factories, mines and utilities has been buoyed by strong consumer demand for manufactured goods, though supply-chain disruptions and a semiconductor shortage could curtail auto production and drag down headline figures.
Investors have raised their expectations on the Fed lifting interest rates following better-than-expected U.S. retail sales data on Friday, and this should continue to support the dollar, ING said.
"The strong release prompted one of our preferred metrics of Fed tightening expectations--the 1m USD overnight index swap priced three years' forward--to jump to a new high for the year," ING analysts said.
"This is a dollar positive, especially against low-yielding currencies with dovish central banks and against energy importers," they said. The Dutch bank expects the DXY dollar index to remain higher on Monday, trading in the range of 94.00 to 94.50.
The euro remains one of the preferred funding currencies as the European Central Bank maintains a loose policy stance at a time when other major central banks are looking to withdraw stimulus, ING said.
"Clearly, the ECB is on a very different chapter in the monetary normalisation story than, for example, the Bank of England," ING analysts said. "We favor EUR/USD pressing the lower end of its 1.1525-1.1625 trading range."
Bitcoin, the world's largest cryptocurrency by market value, gained 4.1% from its 5 p.m. ET level Sunday to trade at $61,932.69. The U.S.'s first bitcoin exchange-traded fund is expected to start trading Tuesday.
The different policy paths that the Bank of England and the European Central Bank seem to be taking point to moderate strength for the pound against the euro, said Commerzbank.
"If ECB and BOE deliver what their governors are promising--i.e. rate hikes in the UK and at least a gradually expansionary monetary policy on the Continent--,what will matter going forward is which point of view seems more plausible over the coming months," said Commerzbank's Ulrich Leuchtmann.
The longer the accelerated inflation level persists, the more attractive the BOE's stance is likely to seem, he said.
The Turkish lira fell to a record low versus the dollar as the country's central bank is expected to cut interest rates further at Thursday's meeting despite elevated inflation.
The lira's recent slump is unlikely to prevent Turkey's central bank from lowering its policy rate again on Thursday after last month's 100 basis points cut, Commerzbank's Ulrich Leuchtmann said.
"The bank is no longer interested in the effects of its interest rate policy on exchange rates, inflation and in the end the stability of the Turkish economy." Ultimately the bank's decisions are taken by President Recep Tayyip Erdogan, who wants lower rates, Leuchtmann said.
European core government bonds sold off early Monday on what KBC Bank attributes to the fact that high inflation readings continue to weigh on sentiment. "Core bonds remain in sell-off mode this morning as you can't look beyond the uncomfortably high inflation stories," KBC said.
It added that European money markets continue to pull forward a first interest rate rise by the ECB towards the end of 2022 or early 2023.
U.K. borrowing costs rose Monday after Bank of England governor Andrew Bailey said over the weekend that the central bank will "have to act" to curb price pressures despite the uptick in inflation likely being temporary.
The yield on the 10-year benchmark gilt rises almost four basis points to 1.140% relative to Friday's close, according to FactSet.
Bailey warned that higher energy prices means inflationary pressures will last longer.
German Bunds seem torn between factors that drive yields in opposite direction, said Commerzbank's rates strategists. Comments from the ECB aiming to soothe fears of early tightening points to lower Bund yields, while bearish lift-off adjustments in the US and the U.K. push Bund yields higher.
"The coming days should show whether the bullish correction in European markets has scope to resume," said Commerzbank's rates strategists.
They added that a further acceleration of ECB rate hike expectations would risk undermining the credibility of the ECB's forward guidance which would probably trigger verbal interventions.
Weaker-than-expected Chinese gross domestic product data released this morning are weighing on market sentiment, primarily challenging European cyclicals and highly volatile corporate credit, said UniCredit.
"Within European corporate credit, Automobiles & Parts and Basic Resources may face headwinds, given their substantial exposure to China, " analysts at the bank sais, adding that technical support from moderate new-bond euro supply coupled with bond purchases by the ECB should limit the downside pressure.
Given their improved metrics and appealing returns versus the cost of funding, the Italian bank said it sticks to its recommendation to hold a bigger allocation to both sectors than the benchmark at this stage.
Brent crude oil rose with prices having begun their rise during Asian trading hours with coal prices rising there too. That suggests the Asian power crunch is back on investors' minds, said OANDA's Jeffrey Hally.
"With no signs of the China energy crunch alleviating soon, and with the rest of Northern Asia and Europe competing for scarce energy supplies, particularly gas, the price environment for oil remains constructive," he added.
European benchmark gas prices were down 2.5% at EUR91.31 per megawatt hour, after slipping on Friday in a move that "suggests the market has started to price in an expected normalization of Russian flows," said Goldman Sachs's Samantha Dart.
Copper prices rose to their highest level in five months as stockpiles dwindled and the energy crunch raises concerns about supply. LME copper stock levels have been dropping almost constantly since August and currently stand at their lowest level since June.
"Focus remained on the tightening spreads as traders scramble for metals, " said brokerage Marex.
Concerns about energy-related production shutdowns are also pushing investors to bet on higher prices still to come. Speculators increased their net-long bets on all LME base metals except nickel last week, with the net long in zinc jumping 30% last week, the brokerage said.
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