EMEA Morning Briefing : Rate-Cut Optimism Boosts Mood

MARKET WRAPS

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Opening Call:

Stock futures advanced amid Fed cut bets, tracking Wall Street higher. Asian stock benchmarks rose; the dollar fell; Treasury yields steadied; while oil prices fell slightly and gold futures edged higher.

Equities:

European stock futures pushed higher, extending the post-Christmas cheer as optimism about prospects of interest-rate cuts in 2024 prevailed.

Investors have piled into stocks primarily on hopes that with inflation falling back near the Federal Reserve's 2% target, the U.S. central bank will start reducing borrowing costs by the spring of 2024, all while the U.S. economy avoids a recession.

But that's also prompted concerns that market participants have gotten ahead of themselves.

"The stock market is too optimistic about the quantity of rate cuts expected in 2024, and we may be borrowing some of 2024's gains now as the year-end rally continues, because we don't expect to see as many rate cuts as the market is currently predicting," said Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management.

Forex:

The U.S. dollar fell as U.S. bond yields dropped on expectations that the Fed will cut interest rates next year. Gains in equities also weigh on demand for the safe-haven U.S. currency.

"The U.S. dollar remains under decent selling pressure," said Swissquote, noting that buyers rushed into the U.S. Treasury's bond auctions "to close in some good deals before the year ends on expectations that the Federal Reserve will start chopping the rates by spring."

Bonds:

U.S. bond yields steadied after falling Wednesday as investors continued to bet that inflation will ease and the Fed will cut rates, with rates extending their drop in the afternoon after the Treasury Department sold a slug of 5-year Treasury notes.

Markets, meanwhile, are pricing in an 85.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on Jan. 30-31, according to the CME FedWatch tool.

The chances of at least a 25-basis-point rate cut at the Fed's subsequent meeting in March is priced at 84.6%. Indeed, traders reckon that by December 2024, the central bank's main rate will be at least down to a range of 3.75% to 4.0%.

Energy:

Oil futures fell slightly in Asia, as investors continued to monitor developments in the Red Sea amid worries over potential disruptions to crude shipments.

Given the market has likely fully priced in the rate-cut expectation by the Fed, geopolitical uncertainties in the Middle East will be the key driver of oil prices in the short term, Tonghui Futures said. Meanwhile, the market will also pay close attention to the extent of OPEC's production cuts in January.

Metals:

Gold edged higher early Thursday amid improved sentiment. With the U.S. set to enter a rate-cut cycle in 2024, liquidity is expected to improve significantly in global financial markets and benefit the yellow metal, Guotai Junan Securities said.

Gold prices will likely start an upward cycle in mid-2024 when the Fed begins cutting interest rates, Guotai Junan said. However, over the short term as the Israel-Hamas war continues, safe-haven demand for the precious metal will likely gradually fade, it added.

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Copper prices advanced, supported by a weaker dollar, Huatai Futures said. China's domestic inventories aren't at the highest level yet, so demand for copper may rise.

With the Fed expected to end its tightening cycle, the improved macro environment should be positive for copper, Huatai said.

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Iron ore prices rose, supported by signs of stable demand, Huatai Futures said. Demand for the steelmaking material is likely to rise as Chinese plants are expanding iron ore inventories during the winter period. Huatai thinks prices could remain at a high level in the near term.

TODAY'S TOP HEADLINES

The Dominant Dollar Faces a Backlash in the Oil Market

Some major emerging economies are dabbling in trading commodities without using the dollar, as they seek to reduce their reliance on the U.S. currency.

Faced with U.S. sanctions and other restrictions, Russia and Iran in particular have stepped up oil sales in alternative currencies, and have found buyers in China, India and elsewhere that are happy to buy these exports, often at lower prices.

Soft Landing Talk Prompts 1990s Flashbacks

Talk of a soft landing for the U.S. economy has investors dreaming of a 1990s-style boom soon afterward. A lot would have to go right for that to happen, but it isn't as outlandish as it sounds.

Examples of the economy escaping a tightening cycle from the Federal Reserve without entering a recession are few. Some cite the Fed's rate cuts in 2019, though it is impossible to know how that would have ended without the pandemic. The most frequently mentioned example is a series of rate hikes in 1994. They wreaked havoc on markets that year, but were soon followed by the dawn of a golden period for both Wall Street and Main Street.

Israel Intensifies Offensive in Gaza Refugee Camps

TEL AVIV-Israeli forces intensified their ground offensive in refugee camps in the central Gaza Strip, as fighting continued to drive Palestinian civilians into shrinking and overcrowded areas in search of safety.

Meanwhile, Egyptian officials worked with Qatar to advance a multiphased proposal to end the war-a plan that neither Hamas nor Israel is likely to accept in its current form.

Apple Can Restart Watch Sales as U.S. Court Pauses Ban

Apple won approval Wednesday to restart most sales in its $18 billion smartwatch business after a U.S. appeals court paused a federal agency's import ban on some models of the device.

The Apple Watch Series 9 and Ultra 2 models, for which sales were halted in the past week, were once again available in stores on Wednesday and will return online Thursday, according to the company. They will continue to be sold in the coming weeks while the court weighs Apple's request to stay the ban while its appeal is considered.

New York Times Sues Microsoft and OpenAI, Alleging Copyright Infringement

The New York Times sued Microsoft and OpenAI for alleged copyright infringement, touching off a legal fight over generative-AI technologies with far-reaching implications for the future of the news publishing business.

In a complaint filed Wednesday, the Times said the technology companies exploited its content without permission to create their artificial-intelligence products, including OpenAI's humanlike chatbot ChatGPT and Microsoft's Copilot. The tools were trained on millions of pieces of Times content, the suit said, and draw on that material to serve up answers to users' prompts.

Amazon's Prime Video to start showing ads on Jan. 29

Subscribers of Amazon's Prime Video have one more month before they start seeing commercials - or have to pay more to avoid them.

In an email to subscribers this week, Amazon AMZN said "limited advertisements" will air with movies and TV shows on Prime Video starting Jan. 29.

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Expected Major Events for Thursday

07:00/SWE: Nov Foreign trade

08:00/SPN: Nov Retail Sales

09:00/AUT: Dec Austria Manufacturing PMI

10:00/CYP: Oct Industrial Production Index

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

(END) Dow Jones Newswires

12-28-23 0016ET