European Midday Briefing : Worries Over Rates Continue to Drag on Mood

MARKET WRAPS

Stocks:

European stocks continued to fall on Friday, with sentiment hit by the prospect of prolonged high interest rates to fight inflation.

Investor fears of a potential recession in the U.S. have been reawakened by fresh indications the Federal Reserve expects interest rates to stay high through next year.

"The Fed thinks they can have a smooth landing, but if you raise rates and keep them at a hefty level for a sustained period of time, and oil prices move against you, how long can the consumer last?" Spartan Capital Securities said..

"You have bond yields making new 2006-2007 highs and a strong dollar. All of this is contributing to the fear factor," it said.

Stocks to Watch

Shares in Deutsche Post have underperformed Germany's DAX 40 since the company's first-half results in August, and a rebound in shipping volumes seems key to support a stock recovery, Deutsche Bank said, as the bank cut its target price on the DHL owner to EUR49 from EUR54. Read more .

U.S. Markets:

Stock futures edged higher, although indexes are on pace for weekly losses. Yields on longer-dated Treasury notes held at multiyear highs.

Stocks to Watch

Microsoft's $75 billion acquisition of Activision Blizzard drew closer to being cleared after the U.K.'s antitrust authority said a new restructured deal substantially addresses its concerns over cloud gaming. Microsoft shares rose 0.4%, while Activision jumped 1.8%.

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Forex:

The dollar will likely benefit from weak eurozone and U.K. PMI data, ING said, while the rise in Treasury yields after the Fed signalled rates would remain higher for longer also supports the greenback.

In addition, Thursday's jobless claims data "suggested there are very few signs of a robust U.S. labor market turning," ING said.

Bonds:

Eurozone government bond yields were little changed, with the 10-year Bund yield within the 2.70%-2.80% range that SEB Research targeted for the third and fourth quarters of the year.

"Yields are nearing the peak. Notably declining core inflation in 4Q 2023 and stalling growth should confirm by December that the rate hiking cycle is over, which should exert downside pressure on bond yields in early 2024," SEB said.

Read U.S. 10-Year Treasury Yield Could Rise Further, Charts Show

Read Eurozone Government Bond Issuance in 2024 Expected in Line With 2023

Energy:

Oil prices edged higher, paring a weekly loss, after Russia said it would ban exports of diesel. Despite the modest gains, Brent is set for its first weekly loss following three weeks of consecutive increases.

Fed officials' view that rates would likely stay higher for longer capped the rally, but Russia's temporary ban on diesel and gasoline exports has refocused concerns on market tightness.

Russia ships around 1 million barrels a day of diesel and the ban will likely raise already elevated diesel prices, ING said.

"How severe of an impact the loss of Russian diesel has on the global market will really depend on how long the export ban is in place," ING added.

Metals:

Base metals rebounded somewhat after their post-Fed slump but despite the gains, copper was still on course for a 1.7% loss this week, while aluminum was set for a 1.8% gain.

Gold prices were higher too and remained on course to end the week flat.

DOW JONES NEWSPLUS

EMEA HEADLINES

Eurozone Activity Contracts Again in September, PMIs Suggest

Business activity in the eurozone contracted again in September, albeit at a slower pace, as new orders dropped at the fastest pace since November 2020, data from a purchasing managers' survey showed Friday.

The HCOB Flash Eurozone Composite PMI Output Index-a gauge of activity in the manufacturing and services sectors-rose to a two-month high of 47.1 in September from 46.7 in August.

UK Retail Sales Rose in August in Rebound From Wet Weather

U.K. retail sales rose in August, after food stores bounced back following wet weather in the prior month that subdued sales.

Retail-sales volumes ticked up 0.4% on month, swinging from the 1.1% decrease in July, data from the Office for National Statistics showed Friday.

U.K. Consumer Confidence Highest Since January 2022

Consumer confidence in the U.K. improved in September to the most optimistic level in more than a year and a half, a signal of improving prospects for the country's economy and that pressures on household spending could be easing, according to a survey published Friday.

Confidence among British consumers rose four points to minus 21 this month, the highest reading since January 2022, according to an index compiled by consumer-research firm GfK.

Investec Expects Profits to Rise, Return on Equity to Meet Targets

Investec said it expects adjusted operating pretax profit to rise, driven by strong results in both its U.K. and South African unit, and its return on equity to meet its guidance in the first half of its fiscal year.

The financial-services company said Friday that it expects to report an adjusted pretax operating profit-a metric that strips out any exceptional and other one-off items-of 428.7 million to 449.6 million pounds ($527.1 million-$552.8 million) in the half-year ending Sept. 30 from GBP405.0 million in the prior-year's same period.

Sanofi Expects Currency Hit to Sales, Earnings

Sanofi expects currency movements to hurt its third-quarter sales and business earnings per share, according to preliminary estimates released by the company on Friday.

The French pharmaceutical company said the estimated currency hit on third-quarter business earnings per share-one of the company's preferred earnings metrics-ranges from 8.5% to 9.5%, based on foreign-exchange movements until Sept. 15. Currency fluctuations are expected to reduce quarterly sales by between 7.5% and 8.5%, Sanofi said.

German Auto Makers Are Pouring $406 Billion Into EVs. The Race Is On.

Government officials usually are cheerleaders for their countries' key industries. Not German foreign minister Annalena Baerbock, with respect to the all-but-sacred auto sector.

"The auto industry is faced with the question of whether and how we will be a global leader in the future," she declared at the annual IAA Mobility trade show.

GLOBAL NEWS

Yields Are Near Their Peak. Don't Wait to Buy Bonds.

A "hawkish pause" at the Federal Reserve's September policy meeting has pushed bond yields to 17-year highs, as investors accept a higher-for-longer interest rate stance. Whether or not they have further to rise in the coming months, locking in today's yields on offer is a good move.

The yield on the two-year U.S. Treasury note traded near 5.2% on Thursday, up 1.4 percentage points since May to its highest level since 2006. The 10-year Treasury note yield is at a 16-year high, near 4.5%. Yields have moved dramatically higher since 2020, when the Fed cut interest rates to near zero and the Covid-19 pandemic pushed investors into safer assets like Treasuries, causing prices to rise and dampening yields.

Bank of Japan Holds Off on Rate Increase as Inflation Stays Above Target

TOKYO-The Bank of Japan on Friday kept its interest-rate targets unchanged amid rising prices and growing expectations for an early policy change.

The Japanese central bank decided to maintain its hard cap on the yield of 10-year Japanese government bonds at 1% after raising it from 0.5% at its previous meeting in late July. It also kept short-term interest rates unchanged at minus 0.1%.

China's Economic Worries Spur a Different Kind of Shopping Spree

China's economy is struggling, but one line of business is booming: selling insurance in Hong Kong to travelers from mainland China.

In recent months, mainland tourists have packed the offices of Hong Kong insurance agents and formed long lines at banks. Sales of investment-focused insurance policies have roared back to life after Beijing ended strict pandemic controls and the border with Hong Kong reopened.

McCarthy Sends Republicans Home After Losing 'Shock' Vote in House

WASHINGTON-House Speaker Kevin McCarthy (R., Calif.) threw in the towel on further votes this week, sending lawmakers home after Republican holdouts derailed his latest effort to advance legislation funding the federal government.

Talks continued late Thursday, but the setback further dimmed hopes that Congress could pass measures to avoid a partial government shutdown at the end of the month, and it underscored how McCarthy's hold on the conference has only grown weaker since he won the gavel in January after 15 grueling rounds of voting.

Ukraine Sends First Armored Vehicles Through Breach in Russian Defenses

Ukrainian forces have breached the main Russian defensive line in the southeast of the country with armored vehicles, a significant milestone in the 3 1/2 -month counteroffensive aimed at cutting Russia's occupying army in two.

Ukrainian troops overcame antitank obstacles including ditches and concrete blocks known as dragon's teeth near the village of Verbove in the Zaporizhzhia region, allowing armored vehicles to press through, an officer in Ukraine's air-assault forces in the area said. Open-source intelligence assessments of Russian videos showing artillery strikes on Ukrainian vehicles appeared to confirm the breakthrough.

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

(END) Dow Jones Newswires

09-22-23 0524ET