MARKET WRAPS
Stocks:
European stocks edged higher in a cautious opening session, as
investors turned their attention to the Federal Reserve's latest
interest-rate decision.
The decision is overwhelmingly expected to see policy stay on
hold. But investors will seek clues on when the central bank might
shift its stance after recent inflation readings have tempered
hopes for near-term interest-rate cuts.
"The recent bond market reaction could be a cause for concern
for some Fed members if the slide in yields prompts financial
conditions to loosen just enough to prompt an inflation rebound,"
CMC Markets UK said.
"That doesn't mean we will see another rate hike, no change is
expected, but it could prompt the FOMC to look at their dot plots
for next year and be wary of altering them in any way that could be
considered dovish."
Stocks to Watch
UBS upgraded BASF to buy from sell, citing earnings growth on an
improving upstream chemicals cycle, among other things.
"Our analysis suggests 4Q23/1Q24 marks a trough in BASF's global
upstream chemicals utilization rates, with a consistent tightening
of markets over the medium term," UBS said.
The chemical company's shares have historically outperformed
peers on the European exchange by 26% in a recovery environment,
UBS added.
It also has a dividend yield above its competitors and multiple
ways to improve free cash flow, including reducing capital
expenditures and improving working capital.
Economic Insight
The European Central Bank is determined to avoid any flare-up in
core inflation, Vanguard said, forecasting no interest-rate cut
until at least the middle of 2024.
"We expect gradual cuts to begin as the output gap--actual
economic activity compared with potential economic activity--begins
to widen and the labor market softens."
Vanguard forecasts the ECB to cut the deposit rate to 3.25% by
the end of 2024 from the current 4%.
It added that for consumers and businesses, higher interest
rates force prudence in borrowing decisions, increase the cost of
capital, and encourage saving, while for governments, rates will
necessitate a reexamination of fiscal views in the near term.
U.S. Markets:
Contracts tied to the major indexes gained modestly, while
ten-year Treasury yields held steady at close to 4.2%.
The CBOE VIX Index, an option-based volatility gauge that tends
to fall when investors are more bullish, closed on Tuesday's
session at its lowest in more than four years.
U.S. producer prices data for November, which indicate
inflationary pressures down the pipeline, will be published before
the opening bell.
Forex:
Sterling weakened after data showed U.K. GDP fell by 0.3% in
October, more than the contraction expected in a WSJ poll, which
could cause growing speculation about possible interest-rate cuts
next year, Quilter Investors said.
The BOE is expected to leave interest rates on hold on Thursday
but close attention will be paid to any comments on economic
weakness.
"Calls for rate cuts are likely to grow stronger should this
sort of economic data persist. Interest rates are biting now and
further contraction cannot be ruled out."
The Fed is expected to leave interest rates on hold in a
decision later on Wednesday, and how the dollar moves afterward
will depend on whether policymakers counter recent growing
expectations for rate cuts next year, UniCredit Research said.
UniCredit doesn't expect the central bank to "push back firmly
against recent market expectations of aggressive rate cuts," which
means EUR/USD could stabilize above 1.08.
However, if the Fed suggests rate-cut expectations are overdone,
the DXY dollar index should rally further above 104 and EUR/USD
would retreat, albeit likely staying above 1.07, UniCredit
added.
Bonds:
Gilt yields declined after the below-forecast U.K. GDP data
suggested a weak economic outlook and risked raising expectations
of an early BOE rate cut in 2024.
"This GDP report probably won't change [Thursday's BOE]
decision, but may increase the likelihood of a rate cut earlier in
2024," Moneyfarm said.
RBC Capital Markets said the U.K.'s sale of GBP2 billion in the
3.75% October 2053 gilt on Wednesday is expected to go well, helped
by the fact that it's likely to be the final re-opening of this
bond.
"We like being long the bond on relative metrics into the end of
its tapping cycle," RBC said.
It favors long positions in 30-year gilts against European
counterparts and against shorter-dated U.K. peers via a
5-10-30-year butterfly trade, where investors bet on the shape of
the curve.
Energy:
Oil futures were close to 1% lower on concerns over demand and
oversupply as market watchers awaited the Fed meeting and OPEC's
monthly report.
New concerns over excess supply and a slowing demand have
outweighed the continuing Middle East conflict, StoneX said.
On Wednesday, the EIA will issue its weekly U.S. petroleum
supply report. On average for the week ended Dec. 8, analysts
expect the report to show a supply decline of 2.7 million barrels
for crude.
Metals:
Base metals moved lower, weighed by a stronger dollar, but gold
held steady ahead of the latest Fed decision.
Worries over copper supply have emerged, largely from Latin
America where major producers are halting production. The Panama
Supreme Court found earlier this month that First Quantum's
contract to operate a copper mine was unconstitutional, which
Sucden Financial said would mean 500,000 tons of copper being lost
from the market.
Sucden added that for now prices are being led by the dollar
rather than fundamentals.
Dealmaking is likely to remain a prominent feature of the global
metals and mining industry in 2024, as valuations are generally
very low, Jefferies said.
"The optimal time for the major miners to pursue sizable
acquisitions is now. If they wait for the macro environment to
improve, the window for highly accretive M&A may have already
closed."
Jefferies said mining stocks continue to be deeply undervalued
by investors given the time it takes to build new operations and
the scarcity of high-quality mines globally.
EMEA HEADLINES
U.K. Economy Shrinks, But BOE Unlikely to Be Pushed Into Rapid
Rate Cuts
The U.K. economy shrank a little more than expected in October,
though likely not enough to convince the Bank of England to start
cutting interest rates from their current elevated levels in the
short term.
Gross domestic product fell by 0.3% compared with a month
earlier, according to preliminary figures set out Wednesday by the
Office for National Statistics. Economists polled by The Wall
Street Journal had expected GDP to contract by 0.1%.
Inditex Lifts Profitability Outlook After Strong Earnings
Growth
The owner of Zara clothing stores lifted its outlook for
profitability after earnings increased in the first nine months,
though sales growth has slowed in the most recent quarter.
Inditex said on Wednesday that net profit in the nine months
ended Oct. 31 jumped 32.5% to 4.10 billion euros ($4.43 billion)
from EUR3.1 billion in the same period last year.
Entain CEO Jette Nygaard-Andersen Steps Down
Entain said Wednesday that Chief Executive Officer Jette
Nygaard-Andersen will step down from the group with immediate
effect and be replaced by nonexecutive Director Stella David on an
interim basis.
The FTSE 100 betting-and-gambling group said David will remain
in the role until a full-time replacement has been found.
BAE Systems to Keep Managing U.S. Ammunition Plant in $8.8
Billion Deal
BAE Systems won a new 10-year contract worth $8.8 billion to
manage the U.S. Army's main ammunition plant in Tennessee as
efforts continue to surge production of artillery shells, missiles
and other weapons, the Pentagon said on Tuesday.
The UK defense company's U.S. arm has overseen the Holston Army
Ammunition Plant in Kingsport since 1999. It beat out competing
bids from General Dynamics and Day & Zimmerman, according to
people familiar with the Army's decision. Both operate other Army
ammo facilities.
Houthi Rebel Attacks Rattle Global Shipping
Yemen's Houthi forces have attacked several commercial ships
crossing through the Bab el-Mandeb strait in recent days, creating
a new front in the battle between Israel and Hamas and complicating
efforts by the U.S. and its allies to secure the critical shipping
lane.
Houthi rebels claimed responsibility on Tuesday for a strike on
the Norwegian tanker Strinda a day earlier off Yemen's coast, as
the Iranian ally escalates attacks to disrupt the flow of cargoes
in response to fighting in Gaza. The elevated risk of moving
cargoes through the region has resulted in higher costs for
shippers and also prompted some countries to rethink security
measures to allow safe passage.
GLOBAL NEWS
Where Are Interest Rates Headed? What to Expect From the Fed
Meeting
Federal Reserve officials are set to hold interest rates steady
this week at a 22-year high and will likely project cutting them
next year.
Still, they won't declare an end to rate hikes this week, even
though they are growing more convinced that they have done enough
to bring inflation down.
China Turns the Tables on Wall Street
China is upending how the international financial system handles
debt crises in the developing world. Wall Street isn't happy.
Large bond fund managers cried foul last month when China
blocked their deal to salvage investments in defaulted Zambian
debt. The smackdown came just weeks after Chinese officials
brokered a private debt restructuring with Sri Lanka,
outmaneuvering Western governments that were trying to do the
same.
Cash Is About to Be Dethroned. Bonds Are the Place to Be.
About the author: Ashish Shah is chief investment officer of
public investing at Goldman Sachs Asset Management.
Ukraine's Biggest Wireless Service Knocked Offline in Attack
Ukraine's biggest wireless network operator said attackers
knocked its service offline Tuesday, disrupting critical
infrastructure through an assault that coincided with the Ukrainian
president's latest visit to Washington.
The incident, which affected millions of Kyivstar customers in
Ukraine, is among the most disruptive cyberattacks to succeed
against the country's civilian infrastructure since the start of
Russia's invasion of the country in 2022. Officials in the Kyiv
region said that the air alert system that warns residents about
missiles was temporarily disabled due to the hack.
Write to paul.larkins@dowjones.com
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(END) Dow Jones Newswires
December 13, 2023 05:29 ET (10:29 GMT)
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