EMEA Morning Briefing : Stocks May Struggle as Earnings, U.K. Data Awaited

MARKET WRAPS

Watch For:

EU industrial production; Italy labor cost index; UK monthly GDP estimates, industrial production, trade; trading updates from Volkswagen, Inditex, Adidas, Zalando, Eni, E.ON, TCS Holding

Opening Call:

European stock futures were litte changed early Wednesday. In Asia, stock benchmarks were mixed; the dollar and Treasury yields were steady; oil futures rose; while gold was slightly lower.

Equities:

Stock futures were little changed after closing higher Tuesday as markets shrugged off data showing a hotter-than-expected U.S. inflation reading, but cooler than many investors feared.

Traders are now assigning a roughly 60% chance that the central bank begins cutting rates in June, according to futures markets.

"The Fed has already quashed the market's expectation of a March rate cut anyway," said Charlie Ashley, a portfolio manager at Catalyst Funds, referencing next week's policy meeting. "The only way this [reading] was going to be important is if it was scorching hot."

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The U.K.'s inflation problem is likely to persist, even as it's widely expected to fall to the Bank of England's 2% target in 2024, Bank of America said. "The April energy price cap reduction is likely to help propel U.K. inflation to target, but things are not so pretty under the hood."

The U.K. needs higher policy rates than its peers to tackle inflationary pressures which have been aggravated by Brexit, BofA said. "Our take would be that the U.K. has a much tougher fight on its hands, which will require meaningfully higher long term real policy rates, and this isn't priced."

Forex:

GBP fell after data showing an increase in the U.K. unemployment rate in January. The Bank of England is expected to join the Fed in keeping rates unchanged at its March policy meeting, DBS said, noting that interest rate futures peg the BOE to start lowering rates in August. "Until then, GBP/USD should be reluctant to deviate far from 1.28," DBS said.

Bonds:

U.S. government debt sold off Tuesday, pushing yields to one-week highs, after data showed inflation accelerated in February. Also on Tuesday, Treasury's $39 billion auction of 10-year notes drew poor demand and tailed by 1.1 basis points.

"In general, as we work through the data in 2024, the U.S. Treasury market continues to probe for a new range," said Gregory Faranello, head of U.S. rates trading and strategy at AmeriVet Securities.

"Heading into [Tuesday's] CPI release and following Friday's uptick in the unemployment rate, the recent decline in yield left rate markets vulnerable to the hotter inflation report and long-dated supply to clear, " he said.

Energy:

Oil rose in Asia as traders digested an OPEC report overnight and the implications of U.S. inflation data. OPEC kept its 2024 oil demand-growth estimate unchanged.

Supply concerns will likely cap gains in crude markets, Westpac said, with OPEC also saying that Iraq produced more crude than its quota. Westpac added that data showed Russia is also increasing its crude exports this month.

Metals:

Gold prices edged lower as U.S. inflation came in higher than expected. The sticky inflation print has pushed market pricing for a June rate cut by the Fed down to 77% from 93%, ANZ said.

Investors will eye U.S. February retail sales data ahead of next week's FOMC meeting. "Strong retail sales data might force some further repricing of expectations following [Tuesday's] inflation report," ANZ said.

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Copper is little changed but may be supported by expectations of tighter supplies. Investors appear to be increasing their bullish bets across metals, ANZ said, adding that markets are awaiting the meeting of domestic smelters in China to likely introduce production cuts to lift processing fees.

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The pressing question facing iron-ore traders is how low prices for the steel ingredient can go before they find support from mining costs, said Commonwealth Bank of Australia analyst Vivek Dhar. Iron-ore prices have been falling because of concerns about Chinese steel demand, Dhar said.

But he says the seaborne iron-ore market has changed a lot in recent years, after Vale pared supplies following a dam collapse. "The market replaced Vale's iron-ore exports with higher-cost supply that BHP estimates in the $80--$100/ton range," said Dhar. "This underpins our view that iron ore will struggle to stay meaningfully below $100/ton if China's steel demand tracks sideways this year."

TODAY'S TOP HEADLINES

Frothy U.S. Stock Market Just Isn't Crazy Enough to Be a Bubble

When everybody's talking about a bubble in the stock market, should we worry or relax? The answer from past bubbles seems to be a bit of both-with one big caveat about today's market.

The caveat comes first. While it might feel like everyone in the markets is talking about whether there is a bubble, mentions in the media and searches on Google aren't especially elevated.

How China Tried to Fix the Stock Market-and Broke the Quants

China's biggest quant funds beat the market for years by applying complicated statistical models to stock picking. But they didn't model a key factor-the government.

Quantitative funds, which use algorithms to chew masses of data and make trading decisions, have become a powerful force in the U.S., where funds such as AQR Capital Management, Renaissance Technologies and Millennium Management manage huge portfolios and provide an important source of liquidity for small investors. But the industry has at times been controversial, being accused of herd behavior that exacerbates periods of volatility.

Ukrainian Drone Strikes Disrupt Russian Oil Industry

Ukraine struck oil facilities deep inside Russia overnight and into Tuesday, expanding a campaign of drone attacks on refineries and other petroleum infrastructure that aims to disrupt fuel supplies to the front line and damage Moscow's most important export industry.

One of the drone attacks hit a large refinery operated by Lukoil, Russia's second-biggest oil company, in the Nizhny Novgorod region, some 600 miles from the Ukrainian border. The strike caused a fire that spread thick black smoke over the morning sky, according to local authorities and images on social media.

Books Close for BAT's Over $2.0 Billion Stake Sale in Indian Conglomerate

Books have closed for British American Tobacco's share sale in Indian conglomerate ITC that is likely to fetch the U.K.-based company over $2.0 billion.

ITC's shares are being sold in a price range between 384 Indian rupees ($4.64) and INR400.25, according to a term sheet seen by The Wall Street Journal on Wednesday.

U.S. Sending $300 Million in Ammunition, Weapons to Ukraine

WASHINGTON-The Biden administration said it was sending $300 million more in ammunition and other weapons to Kyiv in a stopgap move to boost Ukraine's forces while Congress debates a new aid package.

The Pentagon plans to transfer artillery rounds, rockets for Ukraine's Himars launchers, antiaircraft missile and antitank weapons, using funds in the Army budget left over from weapons contracts for replacing arms sent to Kyiv, officials said.

Israel and Hezbollah Exchange Fire as Tensions Flare on Lebanon Border

Hostilities flared between Israel and the Lebanese Hezbollah militia, threatening to broaden Israel's war to its northern border amid an impasse in negotiations to reach a cease-fire in Gaza.

Hezbollah launched about 100 Katyusha rockets at northern Israel on Tuesday, the heaviest barrage since Israel's war in Gaza against Hamas-an ally of the Lebanese group-began five months ago.

How TikTok Was Blindsided by U.S. Bill That Could Ban It

Two weeks ago, executives from TikTok's U.S. operations flew to their company's international headquarters in Singapore with good news.

They told bosses that after years of battling over its fate in the U.S., the popular video app wasn't in imminent danger of being banned in its most important market, according to people familiar with the meetings. Among the positive signs: President Biden's election campaign had just joined the app, on Super Bowl Sunday.

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Expected Major Events for Wednesday

07:00/UK: Jan Index of Production

07:00/UK: Jan UK trade

07:00/UK: Jan Index of services

07:00/UK: Jan Monthly GDP estimates

07:00/ROM: Jan Industrial production

07:00/ROM: Feb CPI

07:00/GER: Feb WPI

09:00/ITA: 4Q Labour Cost Index

10:00/EU: Jan Industrial Production

11:00/FRA: 4Q OECD Quarterly National Accounts G20 GDP growth

12:30/UK: Feb NIESR Monthly GDP Tracker

All times in GMT. Powered by Onclusive and Dow Jones.

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

(END) Dow Jones Newswires

03-13-24 0117ET