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EU ECB President Christine Lagarde appears at Committee on Economic and Monetary Affairs; Germany Ifo Business climate index; trading update from Babcock International Group

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Shares could retreat in Europe on Monday as investors digest the U.S. Federal Reserve's hawkish message of higher-for-longer interest rates. In Asia, stock benchmarks mostly weakened; Treasury yields were largely unchanged; the dollar was slightly weaker; while oil gained and gold declined.


European stocks may open lower on Monday as investors fret over the Federal Reserve's signal that it may not be done hiking rates.

U.S. stock indexes edged lower Friday to end an ugly week since the Fed's Wednesday meeting, where chair Jerome Powell left the door open for another interest rate increase this year and said the central bank expects to keep rates higher for longer than it previously forecast to ensure inflation is under control.

"Hawkish Fed comments pushed investors to the sidelines," said Tom Roseen, head of research services at LSEG Lipper.

"Markets weakened this week following an extended period of calm, as the hawkish tone adopted by Fed Chair Powell following the FOMC meeting caused the decline," said Mark Hackett, Nationwide's chief of investment research.

"Bears have wrestled control of the equity markets from bulls."

The prospect of a prolonged period of higher rates has investors trying to assess the impact of elevated borrowing costs on consumers and companies.

"Mixed economic signals continue to befuddle central bankers and market participants alike," said James St. Aubin, chief investment officer at Sierra Mutual Funds.

"This uncertainty is making it difficult for investors to make decisions."


The dollar was slightly weaker but anticipation of more rate increases, following hawkish skips by both the U.S. Fed and the Bank of England may keep it supported.

USD will probably trend higher this week due to U.S. economic outperformance, which has been indicated by U.S. Treasury yields rising faster than elsewhere, CBA currency strategists said.

The U.S. dollar last week completed its first "golden cross" since July 2021, which could mean the greenback is going higher, creating more problems for stocks.

A golden cross occurs when the 50-day moving average closes above the 200-day moving average. It's a popular signal among technical analysts and often - though definitely not always - signals that momentum is building in a given direction.

Some analysts have warned that the dollar's advance, alongside rising Treasury yields, could create more problems for stocks.

"A new cycle high in yields and a golden-cross in the dollar are strong headwinds for the market," said Jeffrey deGraaf, a technical strategist at Renaissance Macro Research.


Treasury yields were barely changed after earlier gains, as traders incorporated the Federal Reserve's higher-for-longer theme in interest rates.

On Friday, senior Fed officials reiterated that the U.S. central bank might not be done raising interest rates, underscoring their higher-for-longer mantra.

"When yields climb with such force, it has repercussions for every other asset class. Since yields are essentially market-determined interest rates, a move higher incentivizes investors to increase their allocation to cash and decrease their exposure to riskier plays like equities," said Marios Hadjikyriacos, senior investment analyst at XM, a Cypress-based multi-asset brokerage.

"With a deluge of supply set to hit the bond market next quarter while the Fed retains a stance of higher interest rates for longer, the upward pressure on yields could persist," Hadjikyriacos said.


Oil prices gained following Russia's decision last week to temporarily ban exports of gasoline and diesel outside a small circle of closely allied states to keep supplies available for processing the annual wheat harvest, in particular.

Russia is one of the world's biggest seaborne exporters of diesel and the ban follows a fall in shipments earlier this month, which helped push up diesel prices in Europe.

"We suspect that the ban will remain in place at least for a month or so, until the harvest is complete," said Edward Gardner, commodities economist at Capital Economics.

Then, Russia is expected to unwind it to take advantage of high crack spreads, which is the overall pricing difference between crude oil and the petroleum products refined from it.

However, Gardner said the ban will still support crude oil prices while it is in place, as higher crack spreads will incentivize non-Russian refineries to increase crude oil throughput.

Russia's announcement is the latest in a series of production cuts and supply restrictions that have helped prop up energy prices since mid-July.

Many analysts expect crude prices in the U.S. and in international markets to move up to, or past, $100 a barrel, a level oil hasn't seen since last year.

"Brent oil has already surpassed the $95 level and could climb towards $100 if the OPEC+ continues to withhold supply," said Fawad Razaqzada, market analyst at City Index and;!!F0Stn7g!BEiqKOgI98CUCW3sf9dIyC7UqkpINzymcTyMzdy8cDDhele-zsAb687ceFfk_I-gKJ1PRP_po26k6CoPuNIlhqUt00oOqIDcuSGA_UkwcuQ$ .

Although crude oil demand outlook may begin to look much weaker in the U.S., the physical-market tightness is so extreme that markets could see $100/bbl in the next month or two, Oanda said.


Gold edged lower amid mixed signals.

On the one hand, Fed Chair Powell delivered a hawkish surprise, reiterating the "higher-for-longer" narrative which has been the worst fear for gold, TD Securities commodity strategists said.

On the other hand, physical markets have been strong, underlining resilience of the precious metal's prices against the recent climb in U.S. Treasury yields, they added.

"As a non-yielding asset, higher interest rates usually prove to be a headwind for gold prices as they increase the opportunity cost of holding the yellow metal," said Mike Ingram, market analyst at Kinesis Money.


Copper fell early Monday, weighed by rising inventories of the base metal.

Copper's hold on the LME has more than doubled over a two-month period, which is a clear signal of weakening demand, ING said.

Also, the discount for near-term delivery versus the three-month contract continues to rise, suggesting more deliveries could be on the way, it added.


Iron ore futures prices were lower despite restocking at steel mills ahead of China's Golden Week holiday.

Tighter iron ore inventories at ports are leading to strong demand from steel mills, ANZ analysts said.

However, mill margins remain unfavorable, thus rising input prices could further weigh on steel mills' profitability, the analysts added.

Nanhua Futures analysts warned that China's policy of capping crude steel production could be gradually implemented, which would weigh on iron ore demand in the medium term.


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09-25-23 0015ET