MARKET WRAPS

Stocks:

European stocks posted solid gains on Tuesday, tracking advances in other global markets, as sentiment continues to improve.

Optimism over U.S. earnings and as investors continued to cheer the U.K. government's decision to reverse controversial tax cuts has helped lift most major stock markets but analysts remain cautious.

"There's still a strong feeling of a bear market rally about trading over the course of the last week," said Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA.

"From the post-U.S.-inflation rebound to what has now been a strong start to the week--in part driven by the U.K.'s decision to no longer shoot itself in the foot--nothing about this screams sustainable."

Stocks to Watch:

Publicis is likely to see a consensus upgrade on the back of strong third-quarter results, Citi said.

The advertising company delivered a material beat, underpinned by another acceleration in cumulative revenue growth from 2019. Although the Citi doesn't expect the upgrade for consensus to be massively significant in magnitude, it said it would be surprising because of its direction.

"On an underlying basis, the market would have been expecting downgrades, we think," Citi said.

Economic Insight:

Goldman Sachs has cut its growth outlook for the German economy this winter and in the first half of next year.

For the third quarter, Goldman Sachs now expects that the economy contracted by 0.3% quarter over quarter versus remaining flat previously. Further out, the bank has slashed its forecasts for the fourth quarter to a 0.6% GDP drop and a 0.7% decline for the first quarter, from previously expected 0.4% and 0.6% contractions, respectively.

Goldman Sachs now expects a deeper four-quarters recession, instead of a recession of three quarters. For the year 2023, Goldman Sachs forecasts a 1.1% GDP decline, instead of a 0.7% contraction.

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Market expectations of interest rate rises by the Bank of England have declined in anticipation and in affirmation of the U.K. government's fiscal U-turn, but this hasn't impacted the market pricing of European Central Bank rate rises, according to some analysts.

"Market hike expectations declining in the U.K. didn't drive back the expectations of ECB tightening of 75bp in the meeting coming up next week," Danske Bank said.

Markets are pricing more than 72 basis point interest rate rise at the ECB's Oct. 27 meeting, and a total of 140bps increase in the remainder of this year, according to Refinitiv.

U.S. Markets:

Stock futures rallied as investors awaited a batch of big-name earnings. Results are due before Wall Street opens from Goldman Sachs, among others.

Industrial production data are also due and are expected to register an increase in September.

The yield on the 10-year Treasury note declined to 3.996% from 4.012% on Monday.

Forex:

The dollar's recent falls are likely to prove temporary due to prospects of the Fed continuing to raise interest rates and while the global economy looks shaky, increasing demand for safe-haven assets, MUFG said.

"We see the broader dollar selloff as just a temporary correction lower while the Fed remains committed to tighter policy and fears over a hard landing for the global economy remain in focus."

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Sterling has turned lower, and MUFG said the U.K.'s weak economic fundamentals should limit its scope for further gains after the U.K. government reversed plans for unfunded tax cuts.

"It is likely that financial conditions will remain tighter than prior to the mini-budget, undermining economic growth in the U.K.," MUFG said.

Tightening fiscal policy, including cutting spending, will increase the likelihood of a recession, while reducing support for energy costs from April could result in inflation remaining higher for longer.

"We aren't convinced that the U.K.'s weak macro fundamentals justify the pound continuing to strengthen once the initial relief rally fades."

Bonds:

Eurozone government bond yields were lower again, extending moves on relief from the U.K. government's fiscal U-turn, while further support for Bunds looks likely on an expected record low for the ZEW business sentiment index, said Commerzbank.

"The 'hunt' for yield extends on the BOE but eurozone government bonds face QT headwinds," Commerzbank said.

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The market reaction on Monday after the U.K. government reversed plans for unfunded tax cuts suggests the recent rise in long-term gilt yields should now be contained, providing investors with more confidence to buy 30-year gilts, RBC said.

The comments come ahead of an auction of GBP2.5 billion in a July 2051 gilt set for later Tuesday.

"Given this resistance and the magnitude of the rally over yesterday's session, we would expect to see some concessions this morning as we head into the supply event," RBC said.

Read Other Insight on Gilts:

Outlook for Gilt Issuance Improves After Government's U-Turn

UK's 2051 Gilt Auction to Test Investor Demand After Fiscal U-Turn

Other News:

Gilt yields started to rise after the BOE disputed a report that it will further delay its quantitative tightening program.

The yield on the 30-year gilt rose 10 basis points to 4.47%. The yield on the 10-year gilt rose 11 basis points to 4.08%.

The Financial Times reported that the BOE is set to further delay its plan to sell government bonds, though the report said it may stick with a plan not to reinvest maturing securities.

The central bank, however, called that report "inaccurate," without saying in what way the report was not accurate.

The BoE had first delayed the gilt sale program when it intervened to stop a brewing pension fund crisis.

Energy:

Oil held modest gains, with continuing expectations that markets will tighten further following OPEC+'s production cut and an impending EU embargo on Russian crude supporting prices.

Reports that China will lockdown the manufacturing hub of Zhengzhou are undermining gains though.

"China is adhering to its zero-Covid policy, leaving little hope for any material demand revival this year. Investors are weighing tightening supplies against these demand headwinds," ANZ said.

Bloomberg News reported the White House is planning to release more barrels prior to the upcoming elections through SPR releases, citing unnamed sources.

SPI Asset Management said the clash between OPEC and the U.S. was heating up.

"Given OPEC's current stance on production, the US has every incentive to progress talks with Iran and Venezuela, especially ahead of the midterm elections."

Metals:

Copper was flat while gold futures edged down, with investors "watching the messaging from China's congress, Russia-Ukraine headlines, and rising interest rates," Peak Trading Research said.

DOW JONES NEWSPLUS


EMEA HEADLINES

U.K. Corporate Bond Selloff is One for the Books

It has been a bad year for global bonds. But U.K. corporate bonds are being hit particularly hard by a toxic mix of political turmoil, high inflation and soaring interest rates.

Highly rated corporate bonds issued in the British pound have posted a negative total return of around 25% this year as measured by the ICE BofA Sterling Corporate Index, by far the largest loss in the index's almost 26-year history. In comparison, a similar index tracking U.S. dollar bonds is down 18% while one for euro-denominated bonds has lost 15% on a total-return basis, which includes price changes and interest payments.


Germany's Economic Expectations Rise Slightly in October

Expectations for economic growth in Germany showed a modest improvement in October, data from the ZEW economic research institute showed Tuesday.

The index of economic expectations rose to minus 59.2 in October from minus 61.9 in September. Economists polled by The Wall Street Journal had projected the index declining to minus 65.0.

Despite the slight rise in expectations, the economic outlook for Germany has deteriorated significantly, the report showed.


Bank of England disputes report it will further delay gilt sales

Bond yields rose on Tuesday started to rise again after the Bank of England disputed a report it will further delay its quantitative tightening program.

The yield on the 30-year gilt BX:TMBMKGB-30Y, an important security to judge the health of the country's embattled pension fund system, rose 10 basis points to 4.47%. The yield on the 10-year gilt BX:TMBMKGB-10Y rose 11 basis points to 4.08%.


Publicis Raises 2022 Organic-Growth Guidance Again

Publicis Groupe SA upgraded its expectations for 2022 organic-revenue growth as it reported third-quarter results, saying that so far, it hasn't seen an impact from clients cutting spending despite signs the ad market could be slowing down.

The Paris-based advertising holding company, which owns agencies including Saatchi & Saatchi, Leo Burnett and Zenith, said it expects to deliver organic growth of 8.5% for the year, up from a previous estimate of 6% to 7%. Organic growth refers to the change in net revenue excluding the impacts of acquisitions, disposals and currency fluctuations.


Rio Tinto Takes Step Toward Huge Rhodes Ridge Iron-Ore Development

Rio Tinto PLC said it has agreed to update a decades-old joint venture with closely held Wright Prospecting Pty Ltd. that could lead to the development of a massive untapped iron-ore deposit in remote northwest Australia.

Rio Tinto-the world's top iron-ore producer alongside Brazil's Vale SA-said the Rhodes Ridge project in Western Australia's East Pilbara mining region has one of the world's largest and highest-quality undeveloped iron-ore deposits. The partners will consider developing a mining operation there before the end of the decade, with an initial annual plant capacity of 40 million metric tons, Rio Tinto said.


George Strait Backed Tequila Brand Sold to Pernod Ricard

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10-18-22 0555ET