European Midday Briefing : Mounting Rate Cut Hopes Help Support Stocks

MARKET WRAPS

Stocks:

European shares rose on Tuesday on mounting optimism that interest rates will be cut this year.

Oil and gas majors advanced after crude futures jumped on rising tensions in the Middle East. This followed news that Iran had sent a warship into the Red Sea after U.S. attacks on Houthi Islamists over the weekend.

Stocks to Watch

Lufthansa is likely to underperform its peers on long-haul pricing, particularly in Asia, and GTF aircraft-engine problems could hurt profit margins, Citi said, cutting its recommendation to sell from neutral.

"The pricing tracker shows that Lufthansa underperforms peers on long-haul Asia. We believe this is due to Frankfurt airport lifting restrictions on Chinese airlines in summer 2023 and has led to more competition," Citi said, citing its own analysis of pricing data.

Moreover, about 8% of the German carrier group's fleet is expected to be hit by aircraft groundings due to the GTF engine problems which, combined with limited pricing power, suggests higher risk to its 2024 EBIT margin target of around 8%.

U.S. Markets:

Futures for the S&P 500 and Dow industrials pointed to minor gains while Nasdaq-100 futures edged lower. Meantime, Treasury yields inched higher.

2023 ended with a rally in most assets, spurred by growing belief that the Federal Reserve is about to start cutting interest rates. Derivative markets place a high likelihood on the first cut coming as soon as March. On Wall Street, optimism abounds about the prospects for the stock market in 2024.

U.S. economic updates set for release on Tuesday include the S&P manufacturing PMI for December, and November construction spending.

Forex:

The inversion of the Treasury yield curve and the weakness of the dollar have likely gone too far in the near term, although this week's data releases are unlikely to prompt a reversal of this trend yet, Danske Bank Research said.

For now, the market will probably look for confirmation of the disinflationary trend to justify an inverted money-market curve and the weaker dollar, Danske said.

Treasury bill supply hitting the market from the end of January could prove the trigger for a reversal in front-end rates and EUR/USD, Danske said.

Bonds:

Bond markets enter the new year at ambitious valuations, with 10-year Bund yields trading around 2% and almost 165 basis points of ECB interest-rate cuts priced in for 2024, Commerzbank Research said.

"Bond market valuations appeared ambitious already ahead of Christmas and 10-year Bund yields reached their 2023-lows at 1.89% before sharply rebounding in the volatile trading sessions between the holidays, which were also characterized by low futures turnover."

Gross and net government bond issuance in the eurozone is expected to remain at record highs in 2024, Barclays Research said. It forecast gross supply at around EUR1.32 trillion this year, roughly unchanged versus 2023.

"This sticky gross issuance volume is because the improvement in deficits is offset by higher refinancing requirements and a decline in bill stock."

Barclays forecasts net government bond supply in the eurozone at near EUR460 billion, approximately EUR65 billion lower than in 2023.

Barclays also said the U.K. Debt Management Office is expected to maintain a heavy supply of gilts in the fiscal year 2024/25 mainly due to a higher amount of redemptions in that period.

Energy:

Oil prices rose close to 2% after attacks on ships in the Red Sea by rebel Houthi forces added to worries that the war in Gaza could spread further into the Middle East.

The U.S. destroyed three boats carrying militants supported by Iran on Sunday after a Maersk-owned container ship came under attack from Houthi forces late on Saturday.

Maersk is still planning to ship via the Red Sea and Suez Canal in the near term, according to a company schedule released earlier on Monday.

Metals:

Base metals and gold edged higher, supported by a weaker dollar.

The dollar fell 2.1% last month, helping to lift commodity prices, according to Peak Trading Research. This trend is likely to continue depending on how the dollar moves, Peak added.

Markets will be looking to U.S. jobs data, with a series of releases lined up this week.

"Bond markets are pricing a very dovish Fed this year, with the first interest-rate cut projected by March, and six more cuts penciled in by the end of 2024."

EMEA HEADLINES

Netherlands Blocks ASML Exports of Some Chip-Making Equipment to China

The Netherlands has blocked chip-equipment manufacturer ASML's exports to China of some lithography systems, which are essential to making advanced microprocessors, in a partial license revocation following U.S. export restrictions.

The Netherlands-based company said Monday that the Dutch government recently partially revoked an export license for shipping the NXT:2050i and NXT:2100i lithography systems to China in 2023.

Iberdrola's Avangrid Ends $4.3 Billion Deal With PNM Resources

Iberdrola's U.S. renewables subsidiary Avangrid has ended a merger agreement with power company PNM Resources after rejecting a bid to extend the deadline of the $4.3 billion deal reached in October 2020.

The Spanish energy company said Tuesday that Avangrid-which is 81.5%-owned by Iberdrola and houses its U.S. renewable-energy assets as well as electric and natural-gas utilities-terminated the deal after conditions for closing it weren't met in the timeframe the parties agreed to.

U.K. Shop-Price Inflation Held Steady in December, Report Says

Annual U.K. shop-price inflation was unchanged in December, with growth at the lowest rate since June 2022, a report by NielsenIQ and the British Retail Consortium showed Tuesday.

Prices at U.K. stores were up 4.3% on year in December, matching November's rate and below the three-month average rate of 4.6%.

GLOBAL NEWS

China's Private Factory Activity Expands for Second Month

A private gauge of China's factory activity expanded at a faster clip in December, contrasting with the official index, which fell deeper into contraction.

The China Caixin manufacturing purchasing managers index rose to 50.8 in December, up slightly from 50.7 in November, according to data released Tuesday by Caixin Media and S&P Global.

Optimism Abounds on Wall Street This New Year

Wall Street is feeling sunny about the stock market as the calendar flips to 2024.

Last year's widespread skepticism proved to be misplaced. Stocks rose through much of 2023, powered by the rise of artificial intelligence and an economy that stayed stronger than nearly all of Wall Street had anticipated. The recession that investors had largely agreed was imminent never came.

Shale Is Keeping the World Awash With Oil as Conflicts Abound

A surprise surge in American oil and gas production and exports is helping to keep the world stocked, blunting the impact of widening conflict in the Middle East that has crimped key shipping lanes.

When Iranian-backed Houthi militants began launching missiles and drones at ships crossing the Red Sea near Yemen in October, many feared disruption to the vital shipping lane would drive up energy prices. But oil and gas prices this past month have sunk about 5% and 23%, respectively.

Western Anxiety About Chinese EVs Could Prove Self-Defeating

China hawks have the upper hand in the political battle over electric vehicles. They should be wary of overplaying it.

The rules for getting a tax credit on EV purchases in the U.S. changed recently. One difference will help stimulate sales: The credit, worth up to $7,500, is now available at the point of sale rather than at the end of the tax year, meaning it can be used as part of a down payment. Other changes will have the opposite effect. Among new sourcing requirements designed to foster a North American supply chain, battery components manufactured in China, the world's largest supplier, now make models ineligible.

Israel Reshuffles Forces, Prepares for Long-Term Conflict in Gaza

TEL AVIV-Israel began preparations for prolonged fighting in the Gaza Strip, reshuffling forces as it weighs how to sustain lower-intensity fighting over the long term.

Israel's top general said that it would take at least several more months to destroy Hamas's military capabilities in the enclave.

U.S. Navy Destroys Boats Controlled by Iran-Backed Militias in Red Sea

The U.S. Navy destroyed three boats carrying militants supported by Iran after they attacked a containership in the Red Sea, while Iran-allied militias struck a U.S. base in Syria, raising the risk that the war in Gaza could drag the U.S. into broader tensions in the region.

On Saturday evening, the Maersk Hangzhou, a Singapore-flagged container vessel that operates between Europe and Asia, came under missile attack, the U.S. said. Four boats later approached the vessel, shot at it and attempted to board it, according to Danish shipping giant Moller-Maersk, which operates the containership.

Write to [e-mail]

Write to us at [e-mail]

We offer an enhanced version of this briefing that is optimized for viewing on mobile devices and sent directly to your email inbox. If you would like to sign up, please go to https://newsplus.wsj.com/subscriptions.

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

(END) Dow Jones Newswires

01-02-24 0532ET