European Midday Briefing : Stock Gains Muted as U.S. Inflation Data Eyed

MARKET WRAPS

Stocks:

European stocks were mostly higher on Monday as traders cheered a new record close for the S&P 500, but gains were muted, as investors prepared for this week's release of the first big U.S. inflation report of the year.

Stocks to Watch

AB Foods' Primark and B&M are likely to offer the highest earnings visibility in the sector in 2024, along with the prospect of further strong cash returns, as sales volumes are expected to do much more of the heavy lifting given disinflation and price stabilization, RBC Capital Markets said.

The sector, which has seen steady growth over the past 20 years, is benefiting from a change in consumer behavior as spending switches toward value-for-money offers, it highlighted.

"Customers remain value conscious, and discounters have been helped by improved merchandising standards, an increasing appeal to entry middle shoppers."

Both companies have room for space growth, enabling them to boost volume and secure better terms with suppliers.

Economic Insight

D anske Bank Research said its baseline scenario sees three interest-rate cuts of 25 basis points each by the European Central Bank this year, with risks skewed toward four rate cuts. This view is based on a resilient labor market, yet, subdued growth and a continued disinflationary process.

"This will likely prompt a rate cutting cycle starting in June 24, with cuts of 25bp per quarter, i.e. 75bp by year end. We find risks skewed towards 100bp worth of cuts this year, with an additional rate cut in July ."

Markets price in 115bps of ECB rate cuts this year, according to Refinitiv.

U.S. Markets:

Stock futures hovered, while benchmark Treasury yields fell, but held above 4.1%.

Monday's schedule is low on earnings and economic data, with Arista Networks among the bigger names set to report.

Earnings season will reignite on Tuesday, when results are due from Coca-Cola and Shopify..

Forex:

EUR/USD is unlikely to move much until the release of U.S. inflation data, DZ Bank Research said, although a number of speeches by ECB and Fed officials later on Monday could spark some limited movement.

NatWest Markets said the dollar could hold up well in the near term, supported by slowing global growth and U.S. bond yield levels that are still high,

It's wary that the recent bout of dollar weakness looks premature, given the global growth backdrop. The dollar is likely to weaken in the second quarter, closer to when the Federal Reserve starts cutting interest rates, NatWest said.

Morgan Stanley Research said the dollar's movements are "highly correlated" to moves in U.S. government-bond yields and auctions by the Treasury of 10- and 30-year bonds have an influence on the currency.

Morgan Stanley also said the U.K. budget on March 6 could boost sterling further if it is both larger than expected but also viewed as sustainable.

Longer term, increased predictability in fiscal and trade policy, credibility in price stability and potential GDP growth could see meaningful inflows to U.K. assets given their steep discount versus peers, bolstering sterling in the process.

Energy:

Oil prices edged lower as traders continued to closely monitor the latest developments in the Israel-Hamas war , while volumes were subdued, with major Asian markets closed for the Chinese New Year.

Investors' focus this week will be on monthly reports from OPEC and the IEA, as well as key U.S. inflation data for cues on interest-rate cuts, according to analysts.

Metals:

Base metals were mixed with gold flat, as the Chinese New Year dragged on investor sentiment.

Asian markets saw little metals trading with China, Singapore, Hong Kong and Japan among several other hubs on holiday.

Looking further ahead, the release of U.S. consumer price index data on Tuesday is prompting further caution in the market, with investors preparing to scrutinize the data for more hints as to the Fed's plan for rate cuts, analysts said.

EMEA HEADLINES

Galp Expects Lower Earnings This Year

Galp Energia warned of lower earnings this year after limited refining activities weighed on results in the fourth quarter.

The Portuguese oil and gas company said Monday that it expects adjusted earnings before interest, taxes, depreciation and amortization to reach around 3.1 billion euros ($3.34 billion) in 2024 after posting EUR3.56 billion for last year. Adjusted Ebitda fell 8% in 2023 on year, Galp said.

EQT Consortium Launches $1.64 Bln Bid for French Digital Music Company Believe

A consortium of investors including private-equity company EQT have agreed to make a 1.52 billion euros ($1.64 billion) takeover bid for French digital music company Believe.

The consortium, which also includes investment firm TCV and Believe's founder and chief executive, said Monday that they will pay EUR15 a share and have already agreed to buy 71.92% of the company from certain existing shareholders.

Atos Shares Fall After S&P Downgrades Ratings Again

Atos shares fell Monday after S&P Global Ratings lowered its ratings for the French IT company for the third time in less than a year, saying the group could face challenges or delays in addressing its liquidity shortage.

At 0910 GMT, Atos shares traded 1.3% lower at EUR2.45. The stock is down roughly 65% since the year began.

GLOBAL NEWS

Stocks Are at Records, but Are They Expensive? These Models Have an Answer

Stocks are setting repeated highs, reigniting a perennial debate among investors about whether they are too expensive.

The S&P 500 has climbed 5.4% to start 2024 and closed above 5000 for the first time Friday, its 10th record of the year. The Dow Jones Industrial Average has risen 2.6%, setting 11 records along the way.

The Fed Is Right to Be Patient on Rate Cuts

The Federal Reserve under Chair Jerome Powell might never live down its misguided insistence on "transitory" inflation, and its delayed decision to raise interest rates to slay the beast. Now, some Fed watchers think the central bank is making another policy mistake by waiting too long to start cutting rates, thereby risking a hard landing for the U.S. economy.

High interest rates tighten financial conditions and exacerbate the housing market's affordability crisis. They also stifle clean-energy investments and stress household balance sheets, says Rakeen Mabud, chief economist at the Groundwork Collaborative, a progressive economic advocacy group. "It's pretty clear to me that the Fed needs to cut rates immediately," Mabud says, and he isn't alone.

NATO Leader Blasts Trump's Suggestion He Would Encourage Russian Invasion of U.S. Allies

President Biden and NATO leaders on Sunday denounced presidential candidate Donald Trump's latest comments that he would encourage Russia to invade U.S. allies that don't contribute sufficiently to military defense.

"NATO remains ready and able to defend all Allies," said NATO Secretary-General Jens Stoltenberg in a statement. "Any suggestion that allies will not defend each other undermines all of our security, including that of the U.S., and puts American and European soldiers at increased risk. I expect that regardless of who wins the presidential election the U.S. will remain a strong and committed NATO Ally."

Hamas Military Compound Found Beneath U.N. Agency Headquarters in Gaza

GAZA CITY-Hidden deep below the headquarters of the United Nations' aid agency for Palestinians here is a Hamas complex with rows of computer servers that Israel's armed forces say served as an important communications center and intelligence hub for the Islamist militant group.

Part of a warren of tunnels and subterranean chambers carved from the Gaza Strip's sandy soil, the compound below the United Nations Relief and Works Agency buildings in Gaza City appears to have run on electricity drawn from the U.N.'s power supply, Israeli officials said.

Pakistan Sees Imran Khan Followers Protest Over Allegations of Election Rigging

RAWALPINDI, Pakistan-Former Prime Minister Nawaz Sharif held talks Sunday with other parties to form a new government in Pakistan, as followers of jailed opposition leader Imran Khan took to the streets to protest the alleged rigging of this past week's election.

Thursday's election, in which no party won a majority and which has been marred by allegations made by Khan's party of vote tampering after official results were heavily delayed, has left Pakistan's next government and the country's stability in question. Sharif held negotiations Sunday with both of the parties he would need to form a coalition government, but no agreement was announced.

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

(END) Dow Jones Newswires

02-12-24 0532ET