MARKET WRAPS

Stocks:

European stocks struggled for momentum on Wednesday, with investors weighing the prospect of another sharp rise in interest rates by the Federal Reserve as it bids to curb inflation.

Investors see a small chance of a larger rate rise of a full percentage point. A few analysts have said last week's report showing high inflation could force central-bank officials to debate the merits of the larger move. But others think surprising the public with a larger rate rise could fuel questions over the central bank's broader strategy and tactics.

"They would only go for 100 if they saw a fundamental change in where they thought the economy and inflation were going, and I doubt one month's data was enough to do that," said William English, a former senior Fed economist who is now a professor at the Yale School of Management.

"You could do 100 if you really wanted to stamp your foot and say, 'This is unacceptable.' To me, it doesn't seem like they need it."

Market sentiment took a further knock after Vladimir Putin raised the threat of a nuclear response in the Ukraine conflict and ordered a partial mobilization of the Russia's reservists, in a major escalation of the war.

Haven assets were in demand, with government bonds and the dollar making strong gains.

Read: Putin Orders Draft of Reservists for War in Ukraine

Stocks to Watch:

Expectations for European banks' earnings are trending upward despite looming recession risks, Citi said, adding that it is overweight on the sector. Higher interest rates across major economies are the main factor behind this.

Banks such as NatWest, HSBC, Standard Chartered and Commerzbank have enjoyed the best earnings momentum so far this year thanks to their rates sensitivity, and this is well understood by the market, but there are other names where Citi sees upside potential.

It advises investors to bet on banks that lead in their home market, are exposed to higher rates, have strong asset quality, can promise sizeable capital returns and trade at a relative discount. Lloyds, Societe Generale and UBS are its top picks.

Read: Italian Bank Stocks Could Come Under Pressure Amid Election

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Luxury spending is more resilient than one might think, according to Jefferies.

While revenue growth should slow from its pandemic-recovery peak in the near term, it should settle at the previous years' rate of around 7% annually, with the sector's best performers continuing to outstrip its laggards, Jefferies said, pointing to brand appeal as the key to success.

It added that there is ample evidence that luxury consumers are getting younger, and that status and self-gratification continue to be vital to spending on luxury goods.

U.S. Markets:

Equities were on course for muted open on Wall Street as traders expressed worries over tightening monetary policy and heightened geopolitical tensions in Europe.

The CBOE Vix index VIX, an option-derived gauge of expected S&P 500 volatility, rose 1.4% to 27.6, signaling increased nervousness amongst traders.

"Central banks are demonstrating greater resolve to fighting inflation, and increasingly willing to sacrifice growth to get there," Citi said.

Forex:

The euro is unlikely to materially extend its losses versus the dollar even if the Fed raises interest rates decisively and upwardly revises its rate projections, UniCredit Research said.

The Fed's decision and indications won't be enough to drag EUR/USD below the year-to-date low of 0.9865, it said.

"Asset managers have increased their EUR exposure since the end of August, suggesting that the recent EUR/USD fall was probably considered a buying opportunity, which might also help explain the limited downside below parity the pair has showed up to now."

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The dollar rose to its highest since 2002 against a basket of currencies and should stay supported after a likely 75-basis-point Fed rate increase, coupled with new 'dot plot' forecasts for future rises, ING said.

The dot plot forecasts should see the terminal rate, or interest-rate peak, in the 4.25-4.50% area in 2023, ING said.

"A hawkish hike today by the Fed will keep front-end rates supported and a very inverted yield curve should continue to endorse the dollar's good momentum for now, largely to the detriment of pro-cyclical currencies."

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The pound slid to its lowest against the dollar since March 1985 on prospects of a large interest-rate rise from the Fed and concerns about upcoming U.K. fiscal spending announcements, ING said. This is despite the prospect of the Bank of England raising interest rates on Thursday.

"The pound may remain volatile today," he says.

Reports that Prime Minister Liz Truss may push for tax cuts "may ease some concerns about the clouded U.K. economic outlook, but also fuel doubts about the sustainability of expansionary fiscal policy."

Read: Riksbank's Big Interest-Rate Rise Could Make BOE's Move Big Too: Insight

Bonds:

The selling pressure on German Bunds looks set to subside after 10-year yields tested the 1.95% intra-day high from June on Tuesday, Commerzbank said.

There appears to be several market participants who look to buy Bunds at levels close to the European Central Bank's inflation target, it said.

Given this and investors' short-base in Bunds, Commerzbank expects Germany's EUR4 billon auction of the 1.70% August 2032 Bund to fall on "fertile ground." Auction results are scheduled at 0930 GMT.

Read: Markets Look Fairly Complacent on Italian Political Risk: Citi

Energy:

Oil prices jumped close to 3% after Putin escalated his drive to add parts of Ukraine to Russia, raising new concerns about oil supply from the country.

Putin said he would use "all the means at our disposal" against "nuclear blackmail" as he partially mobilized reserve troops to fight in Ukraine. The comments follow Ukraine advances in the past few days that retook large areas of captured territories.

Oil is on track for its first quarterly decline in more than two years at the end of the month.

Producers are already warning that supplies may tighten quickly when the world economy recovers. The head of Saudi Aramco said Tuesday that spare production capacity will quickly be used up if demand increases.

OPEC already is struggling to meet its own targets for output.

Metals:

Base metals were mixed on the LME as traders awaited the Fed and what is expected to be another sizable interest rate hike.

Exinity said a 0.75-percentage point increase is largely priced in but a smaller than expected hike would likely drag on the dollar while a large one could accelerate the greenback's rally and weigh on metals and gold.

DOW JONES NEWSPLUS


EMEA HEADLINES

Germany to Nationalize Ailing Uniper After Russian Gas Cuts

BERLIN-Germany will nationalize Uniper, seeking to save the country's largest gas importer that was hit hard by Russian natural-gas cuts to Europe.

The German government said Wednesday it would take a 99% stake in the energy giant and inject in 8 billion euros, equivalent to around $8 billion. Berlin will acquire the stake of Uniper's parent company, Finnish utility Fortum Oyj.


Aveva Agrees to GBP9.48 Bln Takeover By Schneider

Aveva Group PLC said Wednesday that it has agreed to a 9.48 billion pound ($10.79 billion) takeover by its major shareholder French energy management and automation group Schneider Electric SE.

Under the deal, accepting shareholders of the U.K. engineering and industrial-software will get 3,100 pence in cash for each share held. The offer price is a 41% premium to Aveva's closing price of 2,192 pence a share on Aug. 23, the day before Schneider disclosed that it was considering a possible offer for the rest of Aveva that it didn't already own.


Putin Orders Draft of Reservists for War in Ukraine, Threatens Nuclear Response

MOSCOW-In a major escalation of the war in Ukraine, Russian President Vladimir Putin raised the threat of a nuclear response in the conflict in Ukraine and ordered reservists to mobilize, as Moscow seeks to buttress his army's flagging manpower and regain the offensive following stinging losses on the battlefield.

"Russia will use all the instruments at its disposal to counter a threat against its territorial integrity-this is not a bluff," Mr. Putin said in a national address that blamed the West for the conflict in Ukraine, where he said his troops were facing the best of Western troops and weapons.


U.K government borrowing almost twice higher than forecasted

U.K government borrowing hit GBP11.8 billion ($13.4 billion) in August - GBP5.8 billion more than was estimated in May by the Office for Budget Responsibility.

The Office for National Statistics also revealed that central government debt interest payable was GBP8.2 billion last month, the highest August figure since monthly records began in 1997.


Novartis to Petition US Supreme Court on Gilenya Patent

Novartis AG said Wednesday that it plans to file a petition with the U.S. Supreme Court to review the decision by a U.S. appeals court governing the validity of a patent regarding its multiple-sclerosis drug Gilenya.

The Swiss pharmaceutical company said the U.S. Court of Appeals for the Federal Circuit refused to hear its petition and it would therefore take up the issue with the country's top court.


World Leaders Seek to Address Barriers to Food

NEW YORK-World leaders called for donating more money to fight hunger and lifting barriers to food and fertilizer trade to address what they fear will be a prolonged period of food insecurity linked to Russia's war in Ukraine.

At a special food meeting on the sidelines of the United Nations General Assembly, representatives from the European Union, Africa, and the Americas sought to draw attention to signs that the world's food supply may face even bigger challenges in the future. They cited climate change, rising prices for energy and fertilizer and poor harvests linked to conflicts, including the one in Ukraine.


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09-21-22 0547ET