European Midday Briefing : Stocks Dip Ahead of Fed; Kering Warning Sinks Luxury Sector

MARKET WRAPS

Stocks:

European shares were in negative territory on Wednesday ahead of a key Federal Reserve meeting, although losses were restricted.

Investors are awaiting the Fed's latest interest-rate decision and economic projections. A policy change isn't expected, but investors are looking for an update on the potential timing of future rate cuts.

Meantime, Christine Lagarde said the European Central Bank will be able to lower its key interest rate in June if forthcoming data on inflation and wages comes in line with its projections.

The luxury sector led the losses in Europe after Kering warned that first-quarter sales were expected to decline due to a steep sales drop at Gucci, raising concerns about demand in Asia-Pacific.

"Weakness in Asia has been a recurring leitmotiv of the recent updates," Bernstein said.

"The bad news on Kering is company specific, but is also a good reminder that consumer confidence and discretionary spend in China is soft."

U.S. Markets:

Futures tied to the Dow industrials, S&P 500 and the Nasdaq-100 were little, while yields on benchmark Treasury notes were on hold ahead of the Fed.

Stocks to Watch

Intel was rising 4.5% after the company said the Commerce Department has proposed up to $8.5 billion in direct funding to the chip maker.

Intel said the funds will support building new chip factories in Arizona, New Mexico, Ohio, and Oregon. The company also expects to be eligible for federal loans up to $11 billion and to receive a tax credit benefit on up to 25% of more than $100 billion in qualified investments.

Forex:

The dollar was higher ahead of the Federal Reserve decision on speculation that the central bank could tweak forecasts to signal just two rather than three rate cuts this year following recent strong inflation data.

However, the dollar's gains could be curtailed if the Fed doesn't accompany any changed forecasts with a "marked shift in tone" away from Jerome Powell's recent statement that policymakers are "not far" from cutting rates, MUFG said.

A "reasonably balanced Fed communication," as MUFG expects, "should help curtail further U.S. dollar buying and weaken the current positive momentum," particularly if rate forecasts are unchanged.

Sterling could weaken on Thursday if those Bank of England policymakers who voted to raise rates last month switch to voting for unchanged rates, potentially increasing the chance of a rate cut as early as June, Ebury said.

"With markets not fully pricing in the first rate cut until August, this could pave the way for some weakness in sterling, as investors mull a start to easing at the bank's June meeting."

Ebury expects another three-way split, with one vote for a cut, two for a hike and the rest for no change. However, there's a "distinct possibility" of no votes for a hike this time.

Bonds:

The lack of momentum of Treasurys and Bunds at the yield highs suggests that markets are reluctant to renew rate-cut euphoria in the absence of notable downside surprises in inflation data, Commerzbank Research said.

"Markets will get their first impulse this morning form U.K inflation data, where a sizable decline is expected, while today's European Central Bank Watchers Conference or FOMC meeting seem unlikely to revive the momentum," Commerzbank said.

J.P. Morgan Research stays neutral on U.S. duration outright and long in five-year/30-year steepener positions, and it sees risks for the dollar skewing moderately higher ahead of the Federal Reserve's monetary policy meeting.

Little change is expected in the FOMC meeting statement, but risks are skewed to a hawkish delivery on the projections that raise the risk of 2024 and long-run medium dots moving higher, JPM said.

Energy:

Oil prices slipped after a strong session on Tuesday, likely due to profit taking as the dollar gains strength and yields rise.

As Brent prices have now already reached Goldman Sachs's summer peak forecast of $87 a barrel and modestly overshot its estimate of fair value by around $4, the bank expects spot prices to consolidate.

"We do however still see value in oil and especially oil products given the attractive 10% annualized Brent roll return, and the geopolitical hedging benefits [highlighted by disruptions to Russian refineries]."

South Sudan's oil exports are halted due to disruptions along export pipelines through crisis-stricken neighbouring Sudan, threatening supplies from a key regional producer, Michael Lueth, the information minister said.

A lack of heating facilities have clogged some of the pumping stations, preventing exporters from pumping crude through the 1,000-mile pipeline to Port Sudan on the Red Sea.

Metals:

Metals were mixed with the strong dollar ahead of the Fed meeting prompting something of a correction across the base complex, providing much needed relief following a rally in prices in recent days, Sucden Financial said.

EMEA HEADLINES

U.K. Inflation Cools in February, Closing in on Bank of England's Target

The U.K.'s annual rate of inflation fell to its lowest level since September 2021 in February, and is on course to hit the Bank of England's target over the coming months as home energy prices are set for another large drop.

Consumer prices rose 3.4% in February compared with the same month of 2023, a slowdown from 4.0% in January, data from the Office for National Statistics showed Wednesday. It was also slightly cooler than expected, with economists expecting inflation to fall to 3.5%, according to a poll by The Wall Street Journal.

Prudential PLC Sees Progress in Meeting 2027 Goals

Prudential PLC reported higher adjusted operating profit for 2023 and said it has seen progress in achieving its 2027 growth goals.

The insurance-and-investment business said Wednesday that its 2023 IFRS-adjusted operating profit was $2.89 billion, up from $2.72 billion in 2022, thanks to lower central costs and higher earnings from Eastspring, its asset management business.

Lonza to Buy U.S. Manufacturing Facility From Roche For $1.2 Bln

Lonza agreed to buy a manufacturing facility in the U.S. from Roche for around $1.2 billion in cash as it seeks to boost growth of its biologics division.

The deal, due to close in the second half subject to customary conditions, is expected to increase sales growth, the Swiss life-sciences company said Wednesday, raising its mid-term target for 2024-28.

GLOBAL NEWS

How Has the Fed's Outlook Changed? Here's What to Watch Today

For investors, the big question hanging over this week's meeting of the Federal Reserve is whether it will wait a little longer to cut interest rates because of recent, firm inflation readings.

The Fed, though, has a different preoccupation: If it waits too long, will it inadvertently cause a recession?

Private Equity Cautiously Steps In to Back Troubled Banks

Private-equity firms have invested billions to prop up lenders hurt by the turmoil in regional banking, hoping to improve on a mixed record of backing troubled institutions during prior banking crises.

The banking turbulence set in motion by Silicon Valley Bank's failure opened a rare chance to invest in a sector that is often a difficult fit for buyout firms, fund managers say. Private equity has invested in at least 11 commercial banks in the U.S. since the start of last year, according to data provider PitchBook.

Trump Claims 2024 Will Be Rigged, Putting Republican Turnout at Risk

After making years of unfounded claims that the 2020 presidential election was stolen from him, Donald Trump is dialing up warnings that there could be an even bigger theft this time around, a tactic that threatens to complicate Republican turnout efforts.

"Too Big to Rig." That is the phrase Trump began unveiling in recent weeks, including in an appearance in Greensboro, N.C. His campaign also has printed signs with the slogan to hand out to supporters. The idea behind the pitch is this: Trump needs a lead so large that no one can take it away.

Europeans at Odds Over Sanctioning Iran for Weapons Transfers in Middle East

The European Union is pushing back against a French-German drive to target Iran with sanctions over its provision of missiles and other military hardware to its regional allies, with senior EU officials saying new sanctions could undercut diplomacy with Tehran.

France, Germany, the Netherlands and five other EU countries wrote last month to EU foreign-policy chief Josep Borrell, saying the bloc should adopt a sanctions regime that allows them to target "Iranian actors which arm, fund, advise and instruct" pro-Iran regional militias, as well as the groups themselves, according to a letter seen by The Wall Street Journal.

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

(END) Dow Jones Newswires

03-20-24 0655ET