European shares were sharply lower again on Thursday as the positive impact from the previous day's gilt-market intervention by the Bank of England quickly faded.

Concerns mount about the risk of sharp interest-rate rises, particularly in the U.K., following last week's government announcement of sweeping tax cuts to be funded by borrowing.

Stocks to Watch:

Givaudan should prove resilient during a recession, having stable growth and the ability to expand margins in 2023, Citi said. The company's raw-material and energy hedging should mean it has experienced the peak of this year's inflationary pressure as it enters the fourth quarter.

Its portfolio is highly defensive and its organic sales growth has historically seen the lowest volatility in Citi's coverage of the sector.

"With macro challenges looming, we now see Givaudan as the stock to own across consumer chemicals," Citi said, upgrading its rating on the stock to buy from neutral.

Bank of England:

The BOE's purchases of long-end gilts buys time for the U.K. government to make some reversal of recent policy announcements, AXA Investment Managers said.

The upcoming Conservative Party Conference provides the next test as to whether the government will react , AXA said. "Otherwise, UK asset markets are likely to come under further pressure ."

The necessity of the BOE's intervention to address the disruption of orderly markets caused by the Chancellor's statement on Friday is quite exceptional .

"The BOE's operations buy time for the government to 're-evaluate' policy ."


Barclays said the BOE's move offers a short-term fix, but not a panacea.

"In the short term, these actions are working extremely well. But if the goal is to restore lasting stability to sterling-denominated financial markets, we worry that the move will fall short."

The problem is that bond and currency markets have reacted poorly since the mini-budget, at least in part due to fears that the move added new fiscal stimulus to an economy that already had 10% inflation and a very low jobless rate, Barclays said.

"It's difficult to see how this perception can be corrected by new monetary policy stimulus."

Read: Market Prices Hefty BOE Interest-Rate Rise for November

U.S. Markets:

Wall Street was in rally mode on Wednesday after the BOE's attempt to calm U.K. bonds, but that sentiment has dissipated, with Dow futures recently down more than 300 points.

Indeed, there were other signs the positive impact of the BOE's action was already starting to fade. The benchmark 10-year Treasury yield was up 12.7 basis points to 3.863% and the dollar resumed its advance.

"The USD still exhibits a strong, negative correlation to global equities because, in a world where monetary and fiscal policy are now at odds with each other, the value of collateral is being tested," Citi said.

"The whole reason central banks are hiking rates is to tighten financial conditions, which implicitly means that the Fed is targeting a lower equity market."

Investor anxiety could be seen in the CBOE Vix index. The Vix, whose long-term average is around 20, was hovering near 31, having stood above 30 for much of this week.


Although markets have stabilized moderately since the BOE intervened in the gilt market, the dollar will remain investors' currency of choice and strong demand is likely on any dips, ING said.

"The dollar will continue to be favored--especially if it is soon to be paying 4% on deposits."

Meanwhile, a narrowing U.S. trade deficit means the dollar "does not look as vulnerable as it could," ING said.

ING also said the Bank of England's intervention to stabilize gilt markets will have only a limited positive impact on sterling, which looks vulnerable to a drop back toward Monday's record low of $1.0349.

"We doubt cable [GBP/USD] holds gains to 1.08/1.09 and the bias has got to be for a 1.0350/1.0500 retest. There is only so much the BOE can do to support cable, since we think FX intervention and emergency rate hikes are not on the table."


Flash estimate Spanish and German inflation data for September are expected to shift bond investors' attention away from the recent turmoil in sterling markets, Mizuho said.

As markets are still expecting inflation to remain above 9% for the next four months, "this should continue to be a driver for higher EUR yields and determined action from the European Central Bank," Mizuho said.

It expects the ECB to raise interest rates again by 75 basis points at the October meeting; markets are currently pricing in around 67bps, according to Refinitiv data.


Oil extended its losses, with prices recently down almost 2%, as demand concerns linked to slowing global growth continued to weigh on sentiment.

With OPEC+ set to meet next week, many analysts now expect a sizable output cut from the group that should support prices. SEB expects a cut of between 500,000 and 1 million barrels daily.

"Bearish demand concerns likely to dominate in the near term," it said. But in the longer term, "supply side issues will be worse than demand side issues unless there is a severe global recession."


Base metals were lower as tightening monetary policy across the world continues to pose a headwind to prices, although Marex said hopes of infrastructure spending in China offered some support.

Chinese media reports that Beijing would allocate 500 billion yuan to infrastructure projects is encouraging metals demand on the Chinese mainland, Marex added.

Other News:

Lithium prices have tripled in a year, and the chemical element, which is used in batteries for electric vehicles, faces a long-term supply shortage.

The increase "is largely due to increasing demand for electric vehicles and the inelastic nature of supplies," Global X said. Bringing new production capacity online can take three to five years or more, "for studies, permitting, capital raising, and capital expenditure before any lithium is produced."

Read more here.




Eurozone Economic Sentiment Continues Its Steep Decline

Economic sentiment in the eurozone deteriorated again in September, weighed by high inflation and a darkening outlook for the economy.

The European Commission said Thursday that its economic sentiment indicator--an aggregate measure of business and consumer confidence--declined to 93.7 in September from 97.3 in August, the lowest reading since November 2020.


Porsche Shares Trade Almost 2% Above IPO Price in Debut

Porsche AG's shares opened almost 2% higher on their first day of trading Thursday, supported by investors who missed out in one of Europe's biggest initial public offerings to get a piece of the luxury car brand.

The trading debut contrasts with an otherwise downbeat global market for initial public offerings. The total value of IPOs is down 70% globally to $135 billion so far in 2022 from the comparable period last year, according to data from Dealogic. Activity has suffered from a combination of equity volatility that makes valuing companies more challenging and the poor performance of recently listed companies


Next Cuts FY 2023 Profit, Sales Guidance Amid Waning Consumer Confidence

Next PLC on Thursday reported a better-than-expected pretax profit increase for the first half of fiscal 2023, amid stronger retail sales, and cut its full-year profit guidance amid rising living costs.

The fashion retailer reduced its sales guidance for the rest of the current fiscal year to minus 2% from 3% compared to the previous year following a worse-than-expected fall in August sales, partially caused by increased cost-of-living pressures, which indicates a general weakening of underlying demand along with the effect of rising bills.


H&M 3Q Profit Drops After Russia Exit Costs

Sweden's Hennes & Mauritz AB said Thursday that net profit for its third quarter fell significantly after it booked a one-time cost related to the winding down of its Russian operations, and that it will start a cost and efficiency program.

The company posted a net profit of 531 million Swedish kronor ($47.4 million) for the fiscal quarter ended Aug. 31, compared with SEK4.69 billion a year earlier. Analysts polled by FactSet had expected a net profit of SEK2.17 billion.


U.K. Market Woes Threaten Economic and Political Crisis

The U.K. continued to try to stave off a financial and economic crisis on Wednesday as the country's central bank carried out emergency buying of government bonds to stabilize a spiraling debt market, adding pressure on the government of new Prime Minister Liz Truss.

The central bank's surprise move to spend 1 billion pounds buying U.K. government debt spurred a rally in the bond market, and helped the embattled pound gain slightly against the U.S. dollar, though it was still down against the euro. But the intervention-to stave off an imminent pension crisis-underscored the risks that continuing market turbulence poses to the U.K. financial system and economy.


Ukraine's Zelensky Vows to Protect Citizens in Areas Russia Plans to Annex

KYIV, Ukraine-President Volodymyr Zelensky vowed to protect Ukrainians living under the threat of prolonged Russian rule as Moscow prepares to annex parts of four regions in the east and south of the country after a series of staged referendums.

Ukrainian forces are trying to push further into areas currently occupied by Russian forces, undermining the Kremlin's goal of placing swaths of the country under its permanent control. But after a lightning offensive that liberated some 3,500 square miles of territory in recent weeks, there are signs that the Ukrainian military is encountering stronger resistance from Russian units in some areas after they regrouped further east.


Russian Leaders Welcome Referendum Result as Ukraine Conflict Deepens

MOSCOW-Russian leaders have been quick to welcome the outcome of the referendums that pave the way for occupied regions of Ukraine to be incorporated in the Russian Federation, escalating the conflict with Kyiv and Western governments, which have dismissed the votes as a sham.

Vyacheslav Volodin, speaker of the State Duma, wrote on Telegram Wednesday that the outcome would "save millions of people from genocide, " after results released Tuesday evening claimed to show that Russian-controlled Luhansk and areas of Donetsk, Kherson and Zaporizhzhia overwhelmingly supported becoming part of Russia.


UK Car Manufacturing Rose in August, But Still Below 2019 Levels

U.K. car manufacturing rose in August for the fourth consecutive month, but is still well below prepandemic levels, according to data released Thursday by an industry body.

The Society of Motor Manufacturers and Traders said that a total of 49,901 cars drove off the production lines in August compared with 37,246 in August 2021 and 92,158 in August 2019.


Iran Attacks Northern Iraq With Missiles and Drones, Killing at Least 13

Iran attacked northern Iraq on Wednesday with more than 40 ballistic missiles and armed drones, one of which was shot down by a U.S. warplane as it headed toward the city of Erbil where American troops are based, according to U.S. and Iraqi officials.

The strikes were by far the largest and most deadly in recent days by Iran's Islamic Revolutionary Guard Corps, which has carried out repeated bombardments of Kurdish areas in northern Iraq since last week, after publicly blaming Iranian Kurdish separatist groups based there for fomenting unrest that has swept across Iran.


Iran Protesters Seek End of an Islamic Republic Pillar-the Morality Police

The protests that have erupted across Iran in the past two weeks are rooted in anger at the country's morality police, an unpopular vestige of the 1979 revolution that represents a weak point for the government, according to protesters and human-rights advocates.

The death of Mahsa Amini, 22, on Sept. 16, while in the custody of the morality police has touched a nerve among many Iranian families, who have had their own humiliating experiences with officers tasked with enforcing the country's strict Islamic codes for clothing and behavior. Among those protesting are conservative women and men, joining throngs of young secular people who say the enforcement of rules around hijab, or headscarves, for women is often capricious.



Developing Countries Face Stiff Economic Headwinds, World Bank Chief Says

WASHINGTON-The head of the World Bank warned that developing nations face an extremely challenging near-term outlook, as the sharp slowdown in global growth raises the risks of a prolonged recession.

Speaking Wednesday at Stanford University, David Malpass said the challenges for the developing world are shaped by higher food, fertilizer and energy prices caused by the war in Ukraine, as well as rising interest rates, currency depreciation and capital outflows, which could result in a shortage of funds needed to support people's lives and economic activities.


Lithium Demand From EVs Is Strong. Shortages Will Keep Prices High.

Lithium prices have tripled in a year, and the chemical element, which is used in batteries for electric vehicles, faces a long-term supply shortage.

The increase "is largely due to increasing demand for electric vehicles and the inelastic nature of supplies," says Alec Lucas, research analyst at Global X. Bringing new production capacity online can take three to five years or more, "for studies, permitting, capital raising, and capital expenditure before any lithium is produced."


What the Bank of England's Emergency Move Means-And Doesn't-for the Fed

The Bank of England's emergency move to buy U.K. government bonds begs the question: Is the resumption of quantitative easing in the U.K. idiosyncratic, or does it foreshadow a U.S. Federal Reserve that is close to backing down from its inflation fight?

On Wednesday the BoE said it would purchase the country's long-dated government bonds "on whatever scale is necessary" to stabilize its bond market after the U.K. government announced large tax cuts last week despite double-digit inflation. Strategists say the central bank's move implies that at least one large entity, such as a pension fund or a financial institution, was on the verge of failure amid a disorderly Gilt market.


Biden Administration Grants Waiver Allowing Diesel Shipment Into Puerto Rico

The Biden administration on Wednesday approved a temporary waiver to Jones Act shipping restrictions to allow a tanker to deliver diesel fuel to Puerto Rico needed to run generators following the devastation caused by Hurricane Fiona.

The waiver was granted after criticism from Puerto Rico's governor and other officials while the BP ship sat off the island's coast, unable to unload 300,000 barrels of diesel fuel because of the law that limits domestic U.S. maritime shipments to U.S.-flagged vessels. The BP vessel, which picked up its fuel cargo in Texas, is flagged to the Marshall Islands.


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(END) Dow Jones Newswires

September 29, 2022 05:49 ET (09:49 GMT)

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