European Midday Briefing : Hawkish ECB Comments Dent Mood

MARKET WRAPS

Stocks:

European stocks were lower on Tuesday as worries grow that early interest-rate cuts look increasingly unlikely after comments from European Central Bank policymakers.

"Investors are turning risk averse once again, as Donald Trump's strong victory in Iowa and hawkish comments from European policymakers raise fears of a resurgence in volatility," IG said.

Meanwhile, this week is the last chance for the Federal Reserve to signal to the market ahead of its next interest rate announcement on Jan. 31, SEB said.

After the European close the Fed's Christopher Waller will speak at an event at the Brookings Institute, an American think-tank based in Washington, DC, which SEB said may be worth keeping an eye on.

Stocks to Watch

Rolls-Royce

Rolls-Royce has several mechanical tailwinds that should drive up cash and operating margins over the next three years, Berenberg said. Still, in order to achieve medium-term guidance it must simultaneously improve pricing, cost and reliability without any material operational or end-market-driven issues, which history suggests will be difficult to achieve, it added.

Berenberg cut its rating on the stock to sell from hold and raised its target price to 240 pence from 100 pence.

Nordic Banks

Jefferies remains cautious on Nordic banks due to weaker net interest income trends, and in a sector context it sees better value elsewhere. It lifted Handelsbanken's price target to SEK81 from SEK80 and SEB's to SEK121 from SEK117, keeping both at underperform.

It raised DNB Bank's price target to NOK202 from NOK198 and retained a hold rating. Swedbank, Nordea and Danske Bank are all rated hold.

Economic Insights

Agricultural Commodities

Prices of agricultural commodities including wheat and corn as well as fertilizers will likely trend higher amid continued disruptions to global freight flows through the Red Sea due to attacks from Houthi militants, BMI said.

The most at-risk commodities are grains from Europe to Asia markets and Asian sales of rice to Europe and the Middle East, it noted.

"Overall, we consider the disruptions to shipping at the start of 2024 to be supportive of current agricultural price levels," BMI said.

U.S. Markets:

Stock futures were lower and Treasury yields traded around 4% ahead of more bank earnings.

Morgan Stanley and Goldman Sachs were set to post earnings, as well as PNC Financial Services.

Stocks to Watch

Microsoft officially passed Apple on Friday to reclaim the title of the world's most valuable public company. In premarket trading, Microsoft declined 0.2%. Apple was down 1.6%.

Boeing was down 1.3% premarket after the much-anticipated return of 737 MAX deliveries to China was hit with further delays following an emergency incident onboard an Alaska Airlines flight earlier this month.

Forex:

The euro is expected to move in a range against the dollar in the near term and to weaken in the medium term, Danske Bank Research said.

"While our forecast for the Fed and the ECB suggests upside risk to the cross in 1Q, we stress that a broader central bank pricing could prove to be more crucial for EUR/USD," it said, adding that it sees levels above 1.10 as temporary.

Danske maintained a strategic case for a lower EUR/USD in the medium term.

Sterling weakened after U.K. data showed wages continuing to slow from elevated levels.

This should reassure the Bank of England that risks of more persistent inflation in the U.K. are easing, MUFG said. "It will encourage the U.K. rate market to price in earlier and deeper BOE rate cuts in the year ahead, weighing on the pound."

Danske Bank Research said that sterling hasn't moved a great deal against the euro over the past month, but a relatively weaker performance of the U.K. economy than that of the eurozone will eventually weigh on the pound.

"We expect the U.K. economy to perform relatively worse than the euro area and expect relative growth outlooks and central bank pricing to weigh on sterling."

Danske expects EUR/GBP to rise to 0.89 in six to 12 months, compared with 0.8620 currently. For now, however, the global investment environment suggests there's little "meaningful difference" between sterling and the euro, it added.

Energy:

Oil prices edged higher but current sentiment is divided between concerns over weaker economic growth and escalating tensions in the Middle East following fresh attacks from Houthis on U.S. ships.

Recent attacks in the Red Sea were fuelling fears of a broader regional conflict in the Middle East, but oil production hasn't been directly affected so far, limiting further price gains, according to analysts.

"Crude oil is rangebound, torn between new bullish geopolitical risks and worsening global growth and demand prospects," Peak Trading Research said.

Metals:

Copper and most other base metals were lower on a stronger dollar and renewed concerns over China's demand outlook after the country left its key policy rates unchanged.

"The appetite across the [London Metal Exchange] remained lacklustre, as volatility is being sold across the board," Sucden Financial said.

"Moreover, the [People's Bank of China] has kept the one-year interest rate unchanged at 2.5%. Muted economic performance and a potential for another weakness in the yuan are the most likely reasons for the rate pause."

EMEA HEADLINES

German Economic Outlook Improves on ECB Rate-Cut Hopes

Germany's economic outlook brightened unexpectedly in January, as expectations of lower interest rates in 2024 helped boost sentiment, according to a monthly survey published Tuesday.

The ZEW Indicator of Economic Sentiment over the next six months ticked up 2.4 points on month to 15.2 in January, better than expectations of a decline to 12.0 in a consensus of economists polled by The Wall Street Journal.

Shell to Sell Nigeria Subsidiary for Up to $2.4 Billion

Shell said it agreed to sell Nigerian onshore subsidiary Shell Petroleum Development Company of Nigeria, or SPDC, for up to $2.4 billion.

The London-based energy major said Tuesday that it will receive $1.3 billion initially, with the buyer-a consortium of five companies-additionally paying up to $1.1 billion, mainly relating to prior receivables and cash balances, with the majority expected to be paid at completion of the deal.

U.K. Wage Growth Cools Again

Unemployment stayed steady in the U.K. in the three months to November but growth in average pay continued to slow, adding to signs that inflation will continue to ease in the new year.

The rate of joblessness stayed at 4.2%, unchanged from the previous three-month period, according to figures set out Tuesday by the Office for National Statistics, in line with the rate expected by economists, according to a poll by The Wall Street Journal. But average pay growth, excluding bonuses, experienced a sharp deceleration, rising 6.6% compared with a revised 7.2% figure for the three months to October, marking a slowdown unmatched since the pandemic era, the ONS said. It was also a slightly sharper slowdown than was expected by economists.

Ocado Sees Further Revenue Growth Supported by Volumes

Ocado Group said it expects revenue to further increase in fiscal 2024 supported by volume growth after a record Christmas performance.

The online grocer and retail-technology specialist on Tuesday said it expects revenue growth for the year ending Nov. 26 to be in the middle-to-high single digits.

GLOBAL NEWS

Houthis Turn Their Sights on U.S. Ships, Vow to Keep Attacking Red Sea Targets

Fresh attacks targeted American ships in the Middle East, days after the U.S. led a round of strikes meant to blunt the capability of Iran-backed Houthi rebels to hit ships transiting the Red Sea.

Late Monday, Iran's Islamic Revolutionary Guard Corps claimed an attack targeting what it called Israeli spy bases in Iraq in retaliation for Israel's killing of its commanders and allies, adding to tensions in the region about the potential for the war in Gaza to trigger a broader regional conflict.

ETFs Make Bitcoin's Problems Even Worse

The new wave of U.S. bitcoin ETFs risk being doubly bad for investors.

As holders of bitcoin they undermine the very purpose, and so the long-term value, of a cryptocurrency. And as ETFs launched at a moment of popularity they might be repeating the mistake of many past thematic funds by buying at a peak.

Donald Trump Routs Rivals in Iowa Caucuses

WEST DES MOINES, Iowa-Donald Trump won the Iowa caucuses Monday night with the largest margin in the history of the first Republican presidential nominating contest, cementing an early victory in his defiant bid to return to the White House.

The Associated Press declared Trump the winner roughly a half-hour after the caucuses convened. The call came so quickly that at some caucus locations, attendees hadn't even finished making speeches of support for the various candidates.

Having Conquered Iowa, Trump Sets Sights on New Hampshire and Haley

MANCHESTER, N.H.-Fresh off a record-setting victory in Iowa, Donald Trump shifted attention to his next target in the GOP nomination hunt: a New Hampshire primary that Nikki Haley hopes will stall the front-runner's momentum.

Haley was edged out for second place in Iowa by Ron DeSantis, who once predicted he would win there. She is seen as stronger in New Hampshire and will seek to tap in to this state's more centrist electorate in the Jan. 23 primary. Her argument: Trump did a good job as president, but the controversies that surround him hurt the GOP's chances of defeating President Biden in November.

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01-16-24 0552ET