European Midday Briefing : Oil Prices Surge After Airstrikes on Houthi Rebels

MARKET WRAPS

Stocks:

European stocks rose on Friday, as oil prices jumped after a U.S.-led coalition launched strikes on Houthi rebel targets in Yemen.

The coalition launched more than a dozen strikes late Thursday , officials said, two days after the Yemeni rebel force defied an ultimatum to halt its attacks on Red Sea shipping.

The higher energy costs added to higher-than-expected U.S. inflation data, which pointed to a bumpy last leg of disinflation, Saxo Markets said. That in turn could see central banks acting more slowly to cut interest rates.

A U.S. rate cut in March looks increasingly unlikely, MUFG said. "It seems a difficult backdrop for the [Federal Reserve] to shift its rhetoric in order to provide guidance on a possible Fed rate cut in March."

Shares on the Move

Global shipping stocks rose after the strikes on Houthi rebel targets in Yemen.

"Several shipping stocks have advanced in Asia, and even before the strikes overnight, we'd already seen a significant rise in freight costs as a result of the attacks in the Red Sea," Deutsche Bank said.

European luxury stocks traded lower after Burberry cut guidance, citing slowing demand for luxury goods.

Burberry said the slowdown in luxury demand was having an impact on its current performance , and that it experienced a deterioration in the key December trading period that would lead to an adjusted profit for the fiscal year ending in March below its previous expectations.

U.S. Markets:

Stock futures traded mostly higher as Wall Street awaited quarterly earnings reports from some of the biggest banks.

Major banks including JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are set to report quarterly results.

Stocks to Watch

Exxon Mobil rose 0.8%, Chevron gained 0.8%, and U.S.-listed shares of BP were up 1% as oil prices climbed.

Tesla declined 2.2% in premarket trading after it said it planned to halt production at its Berlin factory for two weeks as the conflict in the Red Sea continues to disrupt transport ships.

Forex:

The euro could weaken against the dollar near term as markets trim U.S. rate-cut expectations after Thursday's inflation data, Societe Generale Researchsaid.

U.S. money-market pricing of a March rate cut--which assigns a 68% probability--is premature, it said.

"EUR/USD has already tested 1.10 twice [this year] without managing to break upwards," SocGen said.

"While we maintain a bullish EUR/USD forecast (towards 1.15) this year, downside risks will likely prevail in the near term."

Bonds:

Strong performance by eurozone peripheral government bonds is expected early this year after strong demand from investors for syndicated deals year-to-date, but heavy issuance ahead is likely to eventually weigh on their performance, Societe Generale Research said.

Given heavy supply this year and more long-dated syndicated transactions as well as larger auctions expected, SocGen expects supply fatigue to build eventually, putting pressure on yields and spreads.

Inflation-linked government bond issuance in the eurozone is expected to fall to EUR51 billion in 2024 from EUR66 billion last year, which would imply the lowest share of linkers in euro bond issuance since 2009, Citi Research said.

This forecast decline is driven by Germany's decision to discontinue linker issuance as well as Citi's assumption that Italy might favor issuing BTP Valore instead of BTP Italia to cater retail demand.

German Bund yields are undoing the late-2023 rally as markets scale down early rate cut expectations,Societe Generale Research said.

"We see more upside to Bund yields, in outright terms and vs swaps, driven by a gradual re-building of term premia as the free float of sovereign paper continues to grow."

Energy:

Oil prices jumped after the airstrikes against Houthi rebels in Yemen .

The strikes heightened fears of a wider conflict in the Middle East and came shortly after Iran seized an oil tanker off the coast of Oman, adding to concerns over global shipping disruptions.

"Geopolitical risks continue to grow in the Middle East," ING said.

"The Gulf of Oman is very near the Strait of Hormuz, a critical choke point for oil flows. [...] more significant disruptions to oil flows in this region will be much more alarming for markets."

Metals:

Metal prices traded higher after U.S. CPI data showed inflation rose more than expected, challenging market hopes for interest-rate cuts early this year.

Meanwhile, the latest trade data from top metals buyer China revealed exports beat expectations in December , a sign that demand could be picking up, while imports also rose.

EMEA HEADLINES

U.K. Economy Grew More Than Expected, Though Recession Risks Remain

The U.K. economy expanded by more than expected in November, driven by services-sector growth, though the question of whether or not the economy fell into a recession in the second half of 2023 remains on a knife edge.

Gross domestic product rose by 0.3% from a month earlier, according to figures published Friday by the Office for National Statistics. Economists polled by The Wall Street Journal had expected GDP to grow by just 0.2%.

Airbus Shatters Record for Jet Orders as Demand Soars

LONDON-Airbus, the world's biggest plane maker, smashed its near-decade old record for the highest number of orders in a single year, as airlines scramble to secure the limited availability of new aircraft.

The company said it had booked 2,319 gross orders last year, more than twice the number in 2022 and 29.1% higher than its 1,796 record set in 2014.

GLOBAL NEWS

Deflation Worries Deepen in China

HONG KONG-China's consumer prices fell for a third straight month in December, underscoring the challenges Beijing faces in reviving its economy as deflationary pressures persist.

An index of prices charged by Chinese manufacturers, meanwhile, contracted for a 15th straight month. That is a source of growing concern for U.S. and European officials, as some Chinese business owners look to unload more low-cost goods on the rest of the world, competing with Western brands.

Nikkei's Hot Run Continues; Hits Fresh 34-Year High

The Nikkei Stock Average rose to a fresh 34-year high, underpinned by expectations for the Bank of Japan to maintain its super-loose accommodative monetary policy stance and a weaker yen.

Japan's benchmark index advanced 1.5% to 35577.11 on Friday, reaching its highest closing level since February 1990, after hitting near 34-year highs for the past three days. The index gained 6.6% for the week, the largest weekly gain since the week ended March 18, 2022, according to FactSet.

Hunt for Critical Minerals Draws World Powers to Saudi Arabia

RIYADH, Saudi Arabia-The U.S., China and Russia are racing to secure critical metals needed to power the energy transition away from fossil fuels. Their latest battleground: oil-rich Saudi Arabia.

Government officials and top mining executives descended on Riyadh this week to tap in to the gusher of cash the Saudis are pouring into mining investments. The kingdom is positioning itself at the center of a "super region" extending from Central Asia to the Middle East and Africa, which it says holds at least a third of the world's natural resources, including critical minerals.

Iran Seizes Oil Tanker Linked to U.S. Sanctions Dispute

The Iranian Navy said it had seized an oil tanker off the coast of Oman that has been at the center of a dispute between Tehran and Washington, raising the stakes as a U.S.-led coalition launched strikes on rebel targets in Yemen.

The seizure came as Secretary of State Antony Blinken wrapped up a weeklong tour of the region aimed at cooling tensions there, especially in the waters of the Middle East, where attacks have risen since the Israel-Hamas war began.

Israelis Express Outrage at Genocide Accusation in U.N. Court

TEL AVIV-When South Africa presented its case in The Hague on Thursday that Israel is committing genocide in Gaza, many Israelis saw an accusation that turned the victim into the perpetrator, negating the Holocaust and the atrocities committed against them by Hamas on Oct. 7.

South Africa argued at the International Court of Justice that Israeli military operations in Gaza are intended to wipe out Palestinians as a distinct group. Israel has rejected the accusation and is expected to rebut it at a hearing at the United Nations court on Friday.

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

(END) Dow Jones Newswires

01-12-24 0538ET