European Midday Briefing : Caution Dominates as Focus Back on Big-Name U.S. Earnngs

MARKET WRAPS

Stocks:

European stocks dropped on Tuesday after mixed Asia trading and ahead of an expected slightly lower open on Wall Street.

However, heavyweight mining and oil stocks gained as crude-oil prices ticked higher, but overall, the previous day's positive sentiment dimmed.

"Today sees markets turn back towards U.S. earnings as a driver of sentiment, with a host of top tier names due to report," Scopemarkets.com said.

European Central Bank

The European Central Bank is expected to signal that market expectations of early interest-rate cuts are premature, and summer is a more adequate time for the start of easing, Santander CIB said.

"For this week's meeting, we expect the ECB to continue pushing back on expectations for early rate hikes, signalling 'the summer' as the most likely start of the easing cycle."

Meantime, Pimco said the ECB is likely to maintain its data-dependent approach at Thursday's meeting, while new macro forecasts should provide further insights at the March meeting.

"Market forecasts currently point to rate cuts of around 140 basis points this year, starting around April and concluding with a final [deposit] rate of 2% in 2025."

U.S. Markets:

Dow industrials futures wavered, after the index closed above 38000 for the first time on Monday.

Benchmark Treasury yields rose back above 4.1%, while Bitcoin held below $40,000, as excitement around the launch of the first U.S. bitcoin ETFs waned.

Today will bring a bonanza of big-name earnings.

Johnson & Johnson, Procter & Gamble and Verizon are among the companies set to report earnings this morning. Netflix results are due after the close.

Later this week, investors will parse a wave of economic data that includes the Federal Reserve's preferred inflation gauge and the first reading of fourth-quarter GDP.

Forex:

The euro hit a one-week high against the dollar, helped by improved risk appetite on reports that China was considering a large stimulus package to support struggling stock markets, ING said, adding that whether the euro's gains continue will depend on further gains for equities.

"The direction of travel today for the pair will mostly be a consequence of whether Western stock indices will be able to keep the positive mood shown by Asian equities and FX."

Danske Bank Research remains positive on the outlook for the dollar.

"We anticipate the potential for a dollar rally in 1Q, given the ongoing trend of scaling back rate cut expectations among G10 central banks, which could lead to general risk-off sentiment in markets."

The dollar has had a strong start to the year, emerging as the best performer in the G10 space, and negative economic data surprises outside the U.S., such as the recent weak data from China, could act as potential catalysts for a dollar rally, Danske said.

It forecasts EUR/USD at around 1.05 on a 12-month horizon.

The yen gained against the dollar after the Bank of Japan left its policy unchanged, helped by comments from Governor Kazuo Ueda indicating that the central bank was moving closer to raising rates, MUFG said.

However, sustained yen strengthening looks unlikely for now, MUFG added, noting that Ueda refrained from indicating the exact timing of an exit from negative rates while uncertainty remains over how widespread wage hikes will be.

"While we expect the BOJ's exit from negative rates to encourage a stronger yen...recent price action has highlighted that it is still likely premature to expect the yen to strengthen on a more sustained basis."

Bonds:

Bunds seem to have found a firmer footing ahead of the ECB, but larger outright moves in yields, the bond curve or in spreads remain unlikely, Commerzbank Research said.

The data calendar is light, leaving the focus on eurozone purchasing managers figures on Wednesday, while the Bank of Japan's wait-and-see stance is unlikely to give the European market a new direction, Commerzbank said.

Energy:

Oil prices edged up following fresh attacks by the U.S. and the U.K. against Houthi sites in Yemen and after Ukraine's drone attack on a Russian fuel terminal in the Baltic Sea over the weekend.

Metals:

Base metals rose on improved sentiment following a Bloomberg report that Chinese authorities were considering a package of measures to stabilize the stock market.

Top metals consumer China "will remain key in driving the general trend of the whole complex, most likely resulting in rangebound moves," Sucden Financial said.

Meanwhile, gold edged higher as the dollar softened while investors awaited economic data and central bank decisions this week.

Battery Metals

Wood Mackenzie is forecasting a glut of lithium, cobalt, nickel and graphite to continue for several years.

It said automakers are likely sitting on large stockpiles of battery cells for EV sales that failed to materialize. Citing the China Automotive Battery Innovation Alliance, they say only 387 GWh of the 747 GWh of power batteries produced in China in 2023 were installed into products.

"With storing batteries being an expensive business, automakers may have a more cautious appetite for purchasing cells in 2024," Wood Mackenzie said.

EMEA HEADLINES

Ericsson Sees Network Challenges Continuing in 2024

Ericsson expects challenges in the mobile-network industry to continue this year as customers remain cautious about spending and as the investment pace normalizes in its key Indian market.

The Swedish telecommunications-equipment company said sales in its key networks unit fell 23% in the fourth quarter, with sales momentum in India slowing, while North America had a 50% drop in sales.

Sanofi to Buy Assets From Inhibrx in Deal Valued at Up to $2.2 Billion

Sanofi plans to buy assets from biopharmaceutical company Inhibrx in a deal valued at up to $2.2 billion.

Sanofi will acquire the assets and liabilities associated with Inhibrx's INBRX-101 therapy, the companies said Tuesday.

AB Foods Backs Primark Views After Positive Christmas Sales, Higher Prices

Associated British Foods backed its fiscal 2024 expectations for its retail arm Primark, driven by a further improvement in a key margin, after reporting increased sales in the run-up to Christmas.

The British conglomerate said Tuesday that it continues to expect Primark's adjusted operating profit-which strips out exceptional and other one-off items-margin to be above 10%, with further improvement dependent on levels of consumer demand.

Swatch Group Posts Higher 2023 Earnings After Rise in Sales

Swatch Group reported an increase in net profit on the back of higher sales.

The Swiss watchmaker said Tuesday that it made 869 million Swiss francs ($999.8 million) in net profit for 2023, up from CHF807 million a year prior, on sales that grew 5.2% to CHF7.89 billion.

Gucci Owner Buys Fifth Avenue Property in New York City for $963 Million

The owner of Gucci and Yves Saint Laurent is acquiring property comprising multi-level luxury retail spaces in New York City's Fifth Avenue for almost $1 billion, expanding its retail locations in one of the world's most iconic avenues.

Kering said Monday that it had agreed to pay $963 million for the roughly 115,000 square foot property in a push aimed at securing what it called highly desirable locations for its fashion houses. The group recently acquired property on Avenue Montaigne and Rue de Castiglione in Paris, France.

GLOBAL NEWS

BOJ Keeps Rates Unchanged as It Examines Wage, Price Trends

TOKYO-The Bank of Japan kept its policy rates unchanged on Tuesday as it waits for more solid evidence of improving wage and price trends.

The Japanese central bank decided to maintain short-term interest rates at minus 0.1%. It said it would continue to set 1% as its reference point for the upper bound of the 10-year Japanese government bond yield. In October, the bank decided to make the 1% level a reference instead of a hard cap.

BlackRock Warns Markets Not Appreciating Worsening Geopolitical Backdrop

SYDNEY-The world's largest investment manager BlackRock has warned of further deterioration in the geopolitical backdrop for financial markets in 2024, adding that asset markets aren't fully appreciating the risks.

"We expect deeper fragmentation, heightened competition and less cooperation between major nations in 2024," BlackRock said in a note to clients.

Small-Cap Stocks Look Like Winners. It's Time to Buy.

The bigger they come, the harder they fall-unless you're talking about the stock market, where it's the smaller they are, the bigger they fall. But after the recent decline, it's time to buy small-caps.

While the S&P 500 was busy hitting new all-time highs, the S&P Small Cap 600 had fallen 7.1% from its late December peak through Jan. 18, The index, which has an average market capitalization of about $3 billion, had been hit as investors walked back their expectations that the Federal Reserve would aggressively cut interest rates. What's more, the S&P 600 doesn't include the fast-growing, high quality Big Tech stocks like Nvidia or Meta Platforms, to bolster the index when nothing else seems to work.

U.S. and U.K. Launch Major Strike on Houthi Sites in Yemen

WASHINGTON-The U.S. and U.K. launched strikes against eight Houthi targets Monday, the two countries said, in a continuing bid to stop the Yemeni rebel group's attacks on ships transiting the Red Sea.

The strikes marked the second major assault by a joint force of the two countries and the eighth time overall that the U.S. has targeted the group, which is armed, funded and supported by Iran.

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

(END) Dow Jones Newswires

01-23-24 0532ET