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European Midday Briefing: Fears Over Rate Hikes, Growth Hit Shares Again

09/01/2022 | 05:49am EST

MARKET WRAPS

Stocks:

European shares fell sharply on Thursday as growing concerns about aggressive rate rises and a weak global economic outlook continued to shadow markets.

"Markets have been playing a familiar theme, with risk assets losing further ground as investors price in more rate hikes over the coming months," said Henry Allen, strategist at Deutsche Bank.

U.S. nonfarm payrolls data due on Friday should provide the next big driver for expectations of Fed monetary policy. Meanwhile, news of a Covid-19 lockdown in Chengdu, China, highlighted concerns about slowing growth in the world's second biggest economy.

Stocks to Watch:

Shares in Swatch and Richemont were sharply lower after the Chinese city of Chengdu announced a lockdown to contain an outbreak of Covid-19.

The roughly 21 million residents of the capital of Sichuan province will go into lockdown from Thursday evening, adding further evidence that the return to normal life in China won't be linear but subject to a stop-and-go rhythm dependent on the government's zero-Covid policy, Equita said.

Swatch and Richemont have some of the luxury-goods sector's highest exposures to China.

Economic Insight:

The eurozone manufacturing sector is expected to face further loss in activity in the coming months, Accenture said.

Data from the latest purchasing managers survey suggest eurozone manufacturing output and new orders for goods contracted in August, figures that fail to provide optimism for the sector, Accenture said.

"Recession challenges are growing, as economies continue to face drawbacks from high inflation, growing uncertainties and rising interest rates."

Eurozone manufacturing PMI came in at 49.6 in August, down slightly from 49.8 in July and below the 50.0 mark that separates growth from contraction.

---

Morgan Stanley's analysts see the odds marginally in favor of a 75 basis-point interest-rate rise at the European Central Bank's meeting next week in light of a higher inflation forecast with a later peak.

"The key decision at the upcoming meeting will be between a 50bp or 75bp hike," MS said, seeing this as a very close call, with good arguments on each side. "But ultimately [we] think those advocating for a larger hike will prevail as September offers the best opportunity to send a clear signal of determination."

After the September meeting, a string of smaller increases are expected to follow leading to a 2% terminal rate in March 2023, MS said.

U.S. Markets:

Stock futures fell, putting the major indexes on course to fall for a fifth consecutive day, as investors awaited data on the jobs market and U.S. factory activity.

Worries about tech stocks gave fresh incentive for bears to extend the latest slide.

Shares in Nvidia and Advanced Micro Devices, which together command a weighting of 4.1% in the Nasdaq 100, slumped in premarket trade, after the U.S. government restricted sales of certain products to China.

Yields on U.S. government bonds reached their highest level since June. The yield on the benchmark 10-year Treasury note rose to 3.208%, from 3.131% on Wednesday.

Forex:

The ECB is likely to raise interest rates more aggressively at its next meeting on September 8 but that may not give the euro much of a boost, Ebury said.

Given recent communications from ECB members and this week's higher-than-expected August eurozone inflation data, the central bank could lift rates by 75 basis points, according to Ebury.

"Whether this would be enough to trigger a material rally in the euro seems increasingly unlikely, barring some favourable news in energy markets."

---

Foreign investors are dumping gilts, causing sterling to weaken, ING said, with GBP/USD falling overnight to a 29-month low of 1.1568.

Foreigners sold GBP16.5 billion in gilts in July, the most since July 2018, according to the latest Bank of England data.

Underperformance of gilts versus sterling swaps suggests mounting concerns over gilts, either due to the BOE's quantitative tightening plans or fears over the next U.K. prime minister's fiscal policy, ING said.

"A fiscal risk premium looks to be going into GBP." GBP/USD may retest the March 2020 flash-crash low of 1.1415 and EUR/GBP could rise to 0.8720, ING said.

Read: Fears Over UK Economic Outlook Seen Hitting Pound

---

The dollar is still strong after the softer-than-forecast ADP report, as the Fed remains committed to fighting high inflation, Swissquote Bank said.

The Fed is so determined to curb inflation that it's willing to accept a slowdown in the economy and the jobs market, Swissquote said.

"It's also important to note that in period of high stress, like the one we are going through today with the pandemic, the war and the energy crisis, the dollar becomes the go-to asset of investors."

The dollar will eventually correct lower, although the timing is unclear, Swissquote added.

Bonds:

The risk-reward for bearish trades and short non-core eurozone government bonds isn't as good as two weeks ago but the upcoming ECB policy meeting could add a new leg to selloff in German Bunds and to a weakening in peripheral bonds, Morgan Stanley said.

"We believe that the hawkish ECB meeting next week will add to the other headwinds fuelling the next wave of Bund sell-off to our 2% target and peripherals cheapening."

---

Pictet Wealth Management has raised its year-end forecast for the 10-year gilt yield to 2.8% from 2%, taking it above its 2.6% projection for the 10-year Treasury yield, reflecting inflation concerns.

"The raised forecast is due to the severity of the inflation problem in the U.K., which will push the BOE to tighten policy in order to maintain its inflation-fighting credibility."

Further upward pressure on U.K. short-term rates could lead the slope of the U.K. 10-to-2-year yield curve to invert further, Pictet said.

Energy:

Oil futures extended losses into a third day, as fears about central bank tightening and weak demand continued to drag on prices.

Risk assets have been hit by expectations that global central banks will keep raising rates and keep them at elevated levels for the foreseeable future. That is adding to fears that demand for oil is being undermined by weak global growth and lockdowns in China.

"The market continues to battle with demand worries, including local Covid related lockdowns in China," DNB Markets said.

Read Barrons.com: Oil Prices Have Fallen. OPEC Cuts Could Drive Them Up Again

Metals:

Base metals and gold were lower, as sentiment about the global economy continued to dim.

"The macro environment has gone from bad to worse this week," Peak Trading Research said.

"Investors are nervous about the hawkish Fed, higher interest rates, weak Chinese market sentiment, and the possibility of a big 75 basis point ECB hike next Thursday."

DOW JONES NEWSPLUS


EMEA HEADLINES

U.N. Inspectors Set to Cross Front Line to Reach Russian-Held Nuclear Plant

KHARKIV, Ukraine-United Nations inspectors set off on the final part of their journey to the Russian-controlled Zaporizhzhia nuclear-power plant on Thursday despite intensifying fighting along their route, for which Ukraine and Russia blamed each other.

To reach the facility, the 14-member team from the U.N.'s International Atomic Energy Agency must travel 75 miles from the Ukrainian city of Zaporizhzhia, across the front line with Russian forces to the town of Enerhodar.


Rio Tinto Agrees In-Principle Deal to Acquire Turquoise Hill

SYDNEY-Rio Tinto PLC said it has agreed terms with Turquoise Hill Resources Ltd. to acquire the remaining shares in the Mongolia-focused copper miner that it doesn't already own.

Rio Tinto said it has agreed to pay 43 Canadian dollars (US$33) in cash to acquire all of the outstanding shares of Turquoise Hill, representing an improvement on its most recent offer of C$40 per share.


Pernod Ricard to Buy Back Up to EUR750 Mln in Shares After FY22 Profit, Sales Jump

Pernod Ricard SA on Thursday said that it would buy back up to 750 million euros ($754.1 million) in shares after it reported a jump in sales and profit for fiscal year 2022.

The French drinks maker said that the new buyback will run in financial year 2023 and will be in the range of EUR500 million to EUR750 million. It also proposed a new dividend for the current year of EUR4.12, up 32% from financial year 2021.


Eurozone Unemployment Rate Ticked Down in July

The eurozone unemployment rate declined slightly in July, in a sign of a resilient labor market even as an economic recession looms.

The eurozone jobless rate decreased to 6.6% in July from an upwardly revised 6.7% in June, according to data from the European Union's statistics agency Eurostat released Thursday. The reading matches economists' consensus forecast in a poll by The Wall Street Journal.


Lufthansa Pilot Union Calls for Strike on Sept 2

Deutsche Lufthansa AG's pilot union has called for an all-day strike on Sept. 2, which will include flights departing from German airports for Lufthansa and Lufthansa Cargo, the German airline said Thursday.

The union is asking for a 5.5% salary increase until the end of the year, as well as an inflation adjustment, the company said. Lufthansa had already offered a 900-euro ($904.90) increase to base salary for pilots at Lufthansa and Lufthansa Cargo, it said.


Impala Platinum Lower FY 2022 Gross Profit Fell Due to Operational Issues, Cuts Dividend

Impala Platinum Holdings Ltd. on Thursday posted a lower gross profit for fiscal 2022 as sales fell due to operational issues, and said it is reducing its dividend payout.

The South African platinum miner reported a gross profit of 41.28 billion South African rand ($2.41 billion) for the year ended June 30, down from ZAR53.45 billion for fiscal 2021.


Barclays Sells Remaining Absa Group Shares for $622.6 Mln

(MORE TO FOLLOW) Dow Jones Newswires

09-01-22 0548ET

Stocks mentioned in the article
ChangeLast1st jan.
ABSA GROUP LIMITED -0.47% 194.9 End-of-day quote.27.76%
ACCENTURE PLC -0.42% 291 Delayed Quote.-30.84%
ADVANCED MICRO DEVICES, INC. -1.25% 69.63 Delayed Quote.-51.26%
AUSTRALIAN DOLLAR / BRITISH POUND (AUD/GBP) -0.01% 0.55367 Delayed Quote.2.68%
AUSTRALIAN DOLLAR / EURO (AUD/EUR) 0.44% 0.64448 Delayed Quote.0.17%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) 0.39% 0.68007 Delayed Quote.-7.37%
BARCLAYS PLC 1.71% 159.48 Delayed Quote.-16.15%
BRENT OIL -1.31% 75.46 Delayed Quote.-1.85%
BRITISH POUND / EURO (GBP/EUR) 0.37% 1.1637 Delayed Quote.-2.38%
BRITISH POUND / US DOLLAR (GBP/USD) 0.36% 1.22781 Delayed Quote.-9.76%
CANADIAN DOLLAR / BRITISH POUND (CAD/GBP) -0.56% 0.597797 Delayed Quote.2.56%
CANADIAN DOLLAR / EURO (CAD/EUR) -0.14% 0.69571 Delayed Quote.0.06%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) -0.21% 0.73388 Delayed Quote.-7.41%
COMPAGNIE FINANCIÈRE RICHEMONT SA 0.08% 123.3 Delayed Quote.-10.04%
DEUTSCHE BANK AG 1.18% 10.14 Delayed Quote.-9.04%
EURO / BRITISH POUND (EUR/GBP) -0.40% 0.85925 Delayed Quote.2.46%
EURO / US DOLLAR (EUR/USD) -0.04% 1.05503 Delayed Quote.-7.55%
IMPALA PLATINUM HOLDINGS LIMITED 1.35% 212.06 End-of-day quote.-5.75%
INDIAN RUPEE / BRITISH POUND (INR/GBP) -0.59% 0.009873 Delayed Quote.0.40%
INDIAN RUPEE / EURO (INR/EUR) -0.11% 0.011497 Delayed Quote.-1.87%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.21% 0.012127 Delayed Quote.-9.45%
LUFTHANSA 0.06% 7.717 Delayed Quote.24.79%
MORGAN STANLEY 1.00% 89.57 Delayed Quote.-11.08%
NASDAQ 100 0.16% 11655.28 Real-time Quote.-28.69%
NASDAQ COMPOSITE 0.09% 11089.75 Real-time Quote.-29.17%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.67% 0.64186 Delayed Quote.-7.09%
NVIDIA CORPORATION 0.59% 172.81 Delayed Quote.-41.62%
PERNOD RICARD 0.11% 186.35 Real-time Quote.-11.99%
RIO TINTO PLC 0.95% 5835 Delayed Quote.18.15%
SWISSQUOTE GROUP HOLDING LTD 4.23% 133.2 Delayed Quote.-36.26%
THE SWATCH GROUP AG 2.31% 261.6 Delayed Quote.-8.35%
TURQUOISE HILL RESOURCES LTD. 0.93% 42.935 Delayed Quote.104.52%
UK 10Y CASH -0.04% 3.1825 Delayed Quote.237.40%
US DOLLAR / BRITISH POUND (USD/GBP) -0.35% 0.814438 Delayed Quote.10.81%
US DOLLAR / EURO (USD/EUR) 0.03% 0.94784 Delayed Quote.8.16%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) 0.16% 62.5 Delayed Quote.-16.54%
WTI -2.28% 70.509 Delayed Quote.-3.72%
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