MARKET WRAPS

Stocks:

Most European stock markets edged lower on Monday, after a stronger-than-expected U.S. jobs report cast doubt on how quickly the Federal Reserve will ease its pace of interest-rate hikes.

The jobs data keeps the Fed on track to raise interest rates in two weeks by a half percentage point, which would bring the benchmark federal-funds rate to a range between 4.25% and 4.5% from its current range. It also underscores the risk that officials will lift the rate above 5% in the first half of next year.

The downbeat mood in Europe was despite strong gains in Hong Kong and China after local Chinese authorities took more steps to ease strict Covid-19 policies that have crimped the country's growth.

Stocks to Watch

Saint-Gobain's long-term growth potential should entice investors as green building renovations accelerate worldwide, Jefferies said. Ambitions from the European Union and the U.S. should boost confidence in long-term growth from global decarbonization.

"With a portfolio of products heavily focused on carbon reduction in existing buildings and new residential build, we believe continued momentum in government initiatives and regulation can drive Saint-Gobain revenues to out-perform its local construction markets through the longer term," Jefferies said.

It raised its rating on the French company to buy from hold and its target price to EUR65 from EUR41.40.

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Swisscom looks like a steady option in the European telecommunications sector, Deutsche Bank said, adding, however, that recent outperformance versus peers warranted a downgrade on the stock.

Swisscom's reasonable competition environment, forensic attention to costs and stable dividend put the Swiss company at the steadier end of the telecom spectrum, Deutsche Bank said.

"Quality is worth paying for, but we now note, post recent outperformance versus peers, that the stock's risk versus reward balance warrants a downgrade to sell [from hold]," Deutsche Bank said. It also cut its target price to CHF465 from CHF510.

Economic Insight

The U.K. economy is set to fall into a recession, which is likely to cause a 2% peak-to-trough fall in GDP, a bigger slump than what's expected in other advanced economies, Pantheon Macroeconomics said.

Household finances will be hit hard by the rapid withdrawal of energy bills support, while higher interest rates will also squeeze incomes of those who have to refinance their mortgage. Better news might come on the inflation front, as price growth has likely peaked and is expected to fall fast in 2023, Pantheon said.

It expects inflation to average 6.5% in 2023, less than the 6.9% consensus estimate from economists taken from FactSet.

U.S. Markets:

Stock futures fell ahead of data on service-sector activity and factory output.

Meantime, the yield on 10-year government bonds rose to 3.538%, from 3.502% Friday. The yield has fallen for four straight weeks on hopes slowing inflation will encourage the Fed to slow interest-rate increases.

The increase in benchmark borrowing costs was helping contain demand for stocks, with some analysts also noting that techinical factors may hobble a rally that has seen the S&P 500 rise 13.8% from its 2022 low hit in mid October.

BTIG noted that though stocks were benefiting from lower Treasury yields in recent months, the S&P 500 remained within its downtrend, and the CBOE VIX index, a measure of expected market volatility, was now at the levels sometimes associated with trader complacency.

U.S. economic updates set for release on Monday include the final November S&P U.S. services PMI, the ISM services index for November and the October factory orders.

There will be no Fed speakers until after its policy-setting meeting on Dec. 14.

Forex:

The dollar's gains after Friday's stronger-than-expected jobs data proved brief and it soon turned lower, suggesting it won't return to this year's peak and will most likely weaken in 2023, Swissquote said.

However, the falls won't be smooth as Fed interest rates still need to rise further, Swissquote said.

The broadly weak dollar helped sterling rise to a near six-month high of $1.2346, but the gains soon fade and ING said a rise beyond $1.25 looks unlikely.

"We struggle to see cable [GBP/USD] extend its rally to 1.25 and beyond, " ING said. "A contraction below 1.20 seems more appropriate given global and U.K. macro fundamentals."

Ahead of next week's Bank of England decision--which comes alongside various other rate decisions, including in the U.S. and eurozone--the pound is likely to be driven largely by the dollar and by risk sentiment, ING said.

Bonds:

German 10-year Bund yields could trade in narrow ranges until the European Central Bank's December meeting, Morgan Stanley said.

It believes "the worst-case scenario is a 1.80/2.00% trading range" until the meeting, with a potential overshooting risk limited to 1.75%.

However, it acknowledged that the yield could return to its fair value or trade even a bit cheap going into the heavy eurozone government bond supply in January.

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French government bond yields edged lower, broadly in line with the eurozone peers, after Friday's rating reviews.

S&P affirmed France's 'AA' rating but revised the outlook to "negative" from "stable", while Moody's affirmed its 'Aa2' rating, keeping the "stable" outlook unchanged.

"The negative outlook reflects our view of rising risks to France's public finances and the resulting reduction in fiscal space," S&P said.

This comes amid France's already large general government debt, implementation risk associated with its structural reform agenda, a wider economic slowdown, and the European Central Bank's monetary policy tightening.

Energy:

Oil pared early gains at the start of a crucial week for energy markets, as the impact of a ban and price cap on Russian oil remains unclear. Prices had risen more than 2% in early Asian trading.

Oil traders have many factors to consider Monday, with the price cap and EU ban on Russian oil coming into force and OPEC over the weekend deciding to leave its production levels unchanged. Some expectations had built that the cartel was considering increasing output so its decision to hold fire could be driving the modest gains.

Oil market participants are wondering what the impact of a Western-led price on Russian oil due to come into force Monday will be. According to JPMorgan, the answer is "likely nothing."

The EU's $60 a barrel cap is higher than the price of Russian oil at key ports on the Black and Baltic Seas. Russia's Urals crude has recently traded between $65 and $70, though the price at some ports is below $55 a barrel.

The EU and G-7 said they will renew the price cap regularly. If they continue to set the level "close to Russia's realized price, then status quo will prevail with minimal market disruptions," JPMorgan said.

Natural Gas

European natural gas prices continued a steady climb higher as colder temperatures across the region increased demand. Benchmark TTF gas futures were up 5.3% recently, after ending last week with their third consecutive weekly increase.

Colder weather still is expected in Northern Europe this week, which will offer "the first real test of [Europe's] ability to withstand the energy crisis and replace Russian gas flows," ANZ said.

While U.S. flows of LNG have compensated for lost Russian supplies, the European winter is set to coincide with reopening in China, which will likely mean more competition for LNG cargos, ANZ said.

Metals:

Base metals and gold edged higher as dollar weakness and more positivity around a China reopening boosted sentiment in global markets.

"The driving force today is the higher expectations for economic recovery in China," Marex said. More than 10 cities had waived proof of Covid test results for entrances into public places, it said.

"With China's reopening seemingly a matter of time, the focus switched to economic development," Marex said, adding this was boosting metals demand alongside further strength from a lower dollar.

DOW JONES NEWSPLUS

EMEA HEADLINES

Credit Suisse's Investment Bank Spinoff Attracts Saudi Crown Prince

Saudi Arabia's crown prince and a U.S. private-equity firm run by Barclays PLC's former chief executive are among investors preparing to invest $1 billion or more into Credit Suisse's new investment bank, people familiar with the matter said.

Crown Prince Mohammed bin Salman is considering an investment of around $500 million to back the new unit, CS First Boston, and its CEO-designate, Michael Klein, some of the people said. Additional financial backing could come from U.S. investors including veteran banker Bob Diamond's Atlas Merchant Capital, people familiar with that potential investment said. Credit Suisse previously said it had $500 million committed from an additional investor it hasn't named.

Vodafone CEO to Step Down

Vodafone Group PLC said Monday that Nick Read has agreed to step down as chief executive and that current Chief Financial Officer Margherita Della Valle has been appointed as interim chief executive.

The U.K.-based telecommunications company said Mr. Read will step down on Dec. 31 and that he will be available as an adviser to the board until March 31.

FDA Takes Tougher Line on Fast-Tracked Drugs

The Food and Drug Administration is taking a harder line on its program that fast-tracks drug approvals based on preliminary evidence, spurring GSK PLC, Roche Holdings AG and other drugmakers to remake plans for their drugs or pull them from the market.

Under the accelerated-approval program, the FDA clears the use of prescription medicines faster than it normally would. The agency relies on preliminary data to make the decision, but asks companies to conduct follow-up studies to confirm that the drug works.

Europeans Cut Back on Spending, Pointing to Recession Ahead

Europeans cut back sharply on their spending on goods during October, a sign that high prices at the start of a period of increasing energy usage are pushing the region's economies toward recession.

Consumer prices have surged since Russia's invasion of Ukraine, and the Kremlin's decision to weaponize the country's vast stores of energy to undermine European support for Kyiv.

Oil Price Rises After Russia Cap Kicks In

The West imposed sanctions on Russian crude, pitching the energy conflict with Moscow into an unpredictable new phase that could inject further volatility into global oil markets.

The European Union and U.K. barred inbound shipments of Russian crude Monday-a watershed for a continent striving to end its dependence on Russia's fossil fuels after Moscow invaded Ukraine and weaponized supplies of natural gas. In tandem, the EU, the U.S. and allies placed curbs on shipping, insuring and funding Russian crude anywhere in the world.

OPEC+ Keeps Oil Curbs Despite Russia Price Cap

OPEC+ said Sunday it would lock in current production levels, a pause that suggests the world's leading oil producers are uncertain about the direction of crude prices with a price cap on Russia's petroleum exports set to take effect.

The decision on Sunday allows the Organization of the Petroleum Exporting Countries and a group of producers led by Russia-collectively known as OPEC+-to take more time to assess the market impact of an EU and Group of Seven price cap, which is intended to crimp Russia's revenue for the Ukraine war. It locks in a 2 million-barrels-a-day production cut decided in October.

Ukraine Says Oil-Price Cap Won't Dent Russia's Ability to Fund War

KYIV, Ukraine-Ukraine denounced a price cap on Russian oil agreed to by the U.S. and its allies as a weak measure that would fail to deprive Russia's military machine of funds, as Moscow said it could stop supplying consumers in response.

The Group of Seven agreed Friday to cap the price of Russian oil at $60 a barrel, moving forward with an unprecedented sanction against one of the world's largest producers following its invasion of Ukraine.

Russia Will Rely on 'Shadow' Tanker Fleet to Keep Oil Flowing

Shipping companies have snapped up dozens of secondhand oil tankers this year, paying record prices for ice-class ships that can navigate frozen seas around Russia's Baltic ports in winter.

A driving force behind the purchases, say people familiar with the deals: To get Russian oil to market after the harshest sanctions to date strike Russia's energy industry next week.

Explosions Hit Russian Air Bases as More Missiles Strike Ukrainian Infrastructure

Explosions at a pair of air bases deep inside Russia killed at least three people and wounded six others on Monday, Russian authorities said, while Ukrainian officials hinted at a capability to strike deeper within Russian territory.

A fuel tanker exploded at an airfield in Ryazan, southwest of Moscow, killing at least three people, according to RIA Novosti, a Russian state-run news agency. The report didn't say what caused the explosion.

U.N. Nuclear Agency Under Pressure to Share Knowledge of Alleged Russian Abuse of Ukraine Plant Workers

Why You Can't Find Wegovy, the Weight-Loss Drug

Novo Nordisk A/S flubbed the launch of its buzzy new weight-loss drug Wegovy, missing out on hundreds of millions of dollars in sales and squandering a head start before a rival could begin selling a competing product.

Wegovy is among a new class of drugs that health regulators have approved to cut the weight of people who are obese, a goal long sought by doctors and patients. Their weight-dropping potential became a viral sensation on social media. Elon Musk tweeted about Wegovy in October. And a related drug for diabetes, Ozempic, is a hot topic in Hollywood among celebrities seeking to stay thin, according to doctors.

Iran Disbands Morality Police, Considers Changing Hijab Laws, Official Says

Iran's attorney general said the country had disbanded its so-called morality police and is considering altering the requirement that women cover their heads in public, a move that analysts said was aimed at peeling away support for antigovernment protests.

Mohammad-Jafar Montazeri outlined the steps Saturday, saying the law requiring veils, known as hijabs, was under review by Iran's Parliament and judiciary, and that the morality police had been abolished, according to government-run news agencies.

GLOBAL NEWS

Chinese Stocks Jump After More Covid Easing

Stocks in Hong Kong and mainland China jumped on Monday, after local Chinese authorities took more steps to ease strict Covid-19 policies that have crimped the country's growth.

The Hang Seng Index was 4.5% higher on Monday afternoon in Hong Kong, with key stocks including e-commerce giant Alibaba and smartphone maker Xiaomi rising more than double that. The CSI 300 Index, a gauge of the largest listed companies in mainland China, rose nearly 2% to its highest level since mid-September.

Fed Could Pencil in Higher Interest Rates Next Year While Slowing Hikes in December

Federal Reserve officials have signaled plans to raise their benchmark interest rate by 0.5 percentage point at their meeting next week, but elevated wage pressures could lead them to continue lifting it to higher levels than investors currently expect.

They have raised rates this year at the fastest pace since the early 1980s, including by 0.75 point at each of their past four meetings to combat inflation. Fed Chair Jerome Powell indicated last week that the central bank was prepared to downshift the size of rate increases at its coming meeting on Dec. 13-14.

Bond Rally Drags 10-Year Treasury Yield Back Down to 3.5%

Hopes that inflation is easing have driven a weekslong rally in government bonds, pulling the 10-year U.S. Treasury yield back to 3.5% for the first time since September.

Treasurys started rallying with stocks after the Labor Department released better-than-expected consumer-price index data on Nov. 10. That move was supercharged last week when Federal Reserve Chairman Jerome Powell sent the clearest signal yet that the central bank plans to raise short-term interest rates by half a percentage point at its Dec. 13-14 meeting, a step down from the 0.75 percentage point increases of the past four meetings.

China Caixin Services PMI Fell to Six-Month Low

A private gauge of China's services sector slipped further into contraction in November, the lowest reading since May, reflecting continued downward pressures brought by the government's efforts to stamp out Covid-19 outbreaks.

The Caixin China services purchasing managers index dropped to 46.7 in November, down from 48.4 in October, Caixin Media Co. and S&P Global said Monday. A reading below 50 suggests a contraction in activity.

China Loosens Covid Restrictions as Public Anger Simmers

HONG KONG-Local authorities across China are paring back some of their strictest Covid-19 control measures, just days after public anger spilled over into rare protests against a zero-tolerance approach that has kept the country largely isolated for three years.

In recent days, officials in major cities-including Beijing and other areas where protests broke out a week ago-said they were lifting some curbs on residents' movements, such as by ending mandatory Covid testing for people who want to use public transport or enter parks and other public spaces.

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(END) Dow Jones Newswires

December 05, 2022 06:14 ET (11:14 GMT)

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