European shares struggled for momentum on Thursday in a largely cautious session, with traders eyeing a subdued open on Wall Street.

A profit warning from Shell and more disappointing economic data out of Germany added to the caution.

Stocks to Watch:

European car makers are expected to report third-quarter revenue and earnings that surprise positively due to strong pricing and volumes, Bernstein said.

However, the results for the July-September period could turn out to be the peak for auto makers, which are now facing stalling pricing in Europe and China among other challenges.

"Into results, we prefer US$ and China exposure, but worry that investors will look through 2022 earnings and continue to worry about 2023--as do we," Bernstein said.

Next year, car makers in Europe will face significant earnings headwinds, Bernstein added.


Sales of luxury goods are likely to have held up well in the third quarter and current uncertainties look priced into the sector's share performance, Citi said, which has buy ratings on LVMH, Kering, Richemont, Moncler and Pandora.

Growth in Europe and in Asia, excluding China, should support luxury's third quarter, and investors are likely to focus on normalization in the U.S., the sustainability of European performance, and the shape of recovery in China, Citi said. With the sector having derated significantly this year, these variables look factored in, it added.

Economic Insight:

The assumption that European inflation would be transitory--most forecasters' central case at the start of the year--is looking increasingly like a mistake, HSBC said.

Eurozone and U.K. inflation rates are in the double digits and there is more pass-through from wholesale energy prices to come, despite governments intervening more forcefully, according to HSBC's economists.

Weaker exchange rates, rising input prices and real wage resistance--workers resisting cuts to real-term pay by demanding pay raises--could all add to core inflationary pressure, too, HSBC said. It added that more monetary tightening and a real-terms income squeeze means Europe's major economies will enter recession.

"A challenging period lies ahead where slow growth rates may coexist with higher inflation rates."

U.S. Markets:

Futures pointed to a mildly mixed start ahead of an update on the number of Americans applying for unemployment benefits, as traders eschewed fresh chunky bets after several volatile sessions.

Government bond yields rose. The yield on the benchmark 10-year Treasury note rose to 3.785%, from 3.757%. The two-year yield, which is more sensitive to interest-rate expectations, rose to 4.160%.

Later Thursday, investors will parse the latest initial jobless claims data, which serve as a proxy for layoffs. Economists surveyed by The Wall Street Journal expect claims to rise to 203,000, from 193,000 the previous week.

A number of Fed officials are due to speak and are likely to affirm the need for more rate hikes.


The dollar has recovered some ground after recent falls and is likely to continue to do so ahead of the weekend, potentially around Friday's U.S. jobs report in particular, ING said.

"As we had expected, the dollar downtrend has started to prove unsustainable," ING said, adding that markets probably aren't yet ready to bet heavily on the Federal Reserve slowing the pace of interest-rate rises.

The jobs data has the potential to lift the DXY to around 112-113, ING said.


Sterling should resume a weakening trend following its recent rebound after U.K. Prime Minister Liz Truss dampened hopes for further changes to the government's fiscal policy, MUFG Bank said.

Truss on Wednesday confirmed a U-turn on plans to scrap the highest rate of income tax but said the government would press ahead with other planned tax cuts. Without further fiscal tightening, the U.K. faces even higher government bond yields which undermines the already weak economic growth outlook, MUFG said.

"Now the dust is beginning to settle after the pound's recent volatile price action, we expect the bearish trend to resume."


Gilt yields rose after Fitch cut its outlook on the U.K. to negative from stable, following on from S&P's recent decision to reduce the country's outlook to negative.

Fitch said the reduction in the outlook reflected the "large and unfunded fiscal package announced as part of the new government's growth plan," which could "lead to a significant increase in fiscal deficits over the medium term."

Fitch affirmed the U.K. credit rating at AA-.


The widening potential for the 10-year Italian BTP-German Bund yield spread is diminishing beyond 240 basis points, but some risks are still there, Mizuho said.

Italian election winner Giorgia Meloni's failure to bring in European Central Bank Executive Board member Fabio Panetta as the next finance minister doesn't bode well, Mizuho said.

"The risk is that this development spirals into a more ominous narrative for the incoming government, in terms of failing to attract a market-friendly character to take charge of Italy's finances."


Government bond yields face opposing pressures from hawkish central banks and weak economic growth, Amundi said, maintaining an active and tactical approach.

Amundi is slightly cautious on duration--a measure of the sensitivity of bonds to changes in interest rates--mainly through Treasurys and core Europe, but it is positive on China and neutral on the U.K. amid the recent sharp movements, it said.

Amundi keeps a slightly constructive stance on Italian government bonds versus German Bunds, supported by the availability of the European Central Bank's Transmission Protection Instrument. It also believes Italy's next government "should not deviate too much from the fiscal and reform path."

While Amundi is following developments in Italy, it finds that eurozone peripheral spreads have stabilized, even as it is monitoring fragmentation and political risks.


Oil prices held modest gains post-OPEC, with SPI Asset Management saying the market is already tight and is expected to tighten further when an EU embargo on Russian oil comes into force later this year.

Other News: Shell warned that a steep fall in refining margins will have a negative impact of between $1 billion and $1.4 billion on its third-quarter adjusted earnings, while it also expects lower results from its Integrated Gas business.

Read more here.


Metals prices rose across the board as traders once again pivot to risk assets on tepid signs of a macroeconomic recovery.

"The macro environment is on the bullish side of the ledger for the first time in four weeks," Peak Trading Research said.




Shell Braces for Profit Hit From Volatile Natural-Gas Prices, Rising Costs

Shell PLC said it expects its third-quarter earnings to be hit by "significantly lower" profit from trading gas because of market volatility as well as higher costs for delivering fuel amid a global scramble for energy supplies.

The London-based company said Thursday that the pricing and cost swings from shortfalls of liquefied natural gas will likely cut into profit from its huge gas business, typically its biggest cash generator. But Shell said its overall marketing profits from trading oil and other products were higher in the third quarter compared with the previous quarter. The comments came in a preview of Shell's full third-quarter earnings, scheduled for later this month.


Credit Suisse's Woes Don't Make for a Lehman Moment -- Analysis

European banks aren't at risk of facing a Lehman-style crash.

That's according to multiple analysts reacting to the stream of negative stories and market turmoil hitting Swiss banking giant Credit Suisse Group AG.


German Factory Orders Fell Sharply in August

New orders in Germany's manufacturing sector fell sharply in August, more than forecast, reflecting weakening demand for goods in a context of rising input costs and high energy prices.

Factory orders decreased 2.4% on month, data from the German statistics office Destatis showed Thursday. The decrease is much larger than forecast by economists polled by The Wall Street Journal, who expected orders to fall by 0.5%.


Top European Union Official Backs Calls for Gas Price Cap

BRUSSELS-European governments should consider temporary measures to curb prices in the continent's natural-gas market, European Commission President Ursula von der Leyen said, marking her clearest comments in support of a possible bloc-wide limit on gas prices.

Ms. von der Leyen's remarks, in a letter to European Union leaders on Wednesday, are part of an apparent shift by the commission, which until last week had seemed to sideline the option of a gas-price cap within the bloc. More than a dozen EU member states have called for a broad ceiling on gas prices, but such a move is opposed by Germany, the bloc's largest economy, and several others.


Saudi Sovereign-Wealth Fund Joins 100-Year Bond Club

Saudi Arabia braved turbulent markets to join the small club of issuers that have borrowed for 100 years from investors, with its sovereign-wealth fund selling the ultralong debt as part of a $3 billion bond-market debut.

The three-part sale of green bonds tapped global investors for funds that will help support projects at the heart of Crown Prince Mohammed bin Salman's national economic transformation.


Diageo Backs Medium-Term Guidance Amid Challenging Operating Backdrop

Diageo PLC said Thursday that it has had a good start to fiscal 2023 and that it remains well-positioned to deliver its medium-term guidance despite expecting the operating environment to remain challenging.

The liquor maker--which owns Johnnie Walker whisky and Tanqueray gin--said it is in a good position to achieve its guidance of organic net sales growth in the range of 5% to 7% and organic operating profit growth in the range of 6% to 9% for fiscal 2023 to fiscal 2025.


Imperial Brands Launches Buyback of Up to GBP1 Bln; FY 2022 Performance in Line With Views

Imperial Brands PLC said Thursday that it is launching a share-buyback program of up to one billion pounds ($1.13 billion), and that its performance for the year ended Sept. 30 was in line with expectations.

The FTSE 100 tobacco group--which houses Davidoff, Gauloises and JPS among its brands--said that including dividends and buybacks, total capital returns in fiscal 2023 are expected to be above GBP2.3 billion, and that this represented around 13% of its current market capitalization.


Merck KGaA Backs Mid-Term Targets; Plans Acquisitions as of 2023

Merck KGaA on Thursday backed its medium-term targets at group level and for its business units, and said that it plans further in-licensing deals and acquisitions as of next year.

The German pharmaceuticals-and-chemicals company said it remains on track to reach its growth target of 25 billion euros ($24.71 billion) in sales by 2025. Sales growth is expected at an average of 6% a year, which equates to an increase of more than EUR1 billion annually, the company said.


Europe Has the Strength to Sail Through a Recession

Europe has had a punishing year. The fallout from the war in Ukraine has caused food and fuel costs to spike, forcing central bankers to move aggressively to curb inflation. Yet, tighter monetary policy is colliding with looser fiscal policy, as governments seek to mitigate the impact of rising costs on household budgets.

The result is a macroeconomic mess, which has pressured stock markets from London and Paris to Berlin and Rome. The FTSE 100, in Britain, is down 4% year to date and down 6% since mid-August; the Stoxx Europe 600, a pan-European index, is off 18%, versus the 21% loss in the S&P 500.


U.K. Home-Builder Stocks May Be a Buying Opportunity as the Pound Tanks

They say an Englishman's home is his castle. It's also a disproportionate amount of his net worth, which should make buying shares of companies that build new homes a relatively safe bet.

U.K. house prices have quintupled since 1992. That's significantly more than in the U.S., where prices have quadrupled over the past 30 years. The strong growth shows the power of demand for homes in Britain, especially when so much of the country's housing stock consists of small, damp Victorian dwellings.


After Rocky Start, U.K. Leader Truss Tries to Unite Party

BIRMINGHAM, England-U.K. Prime Minister Liz Truss, after a turbulent first month in power, tried to recover the confidence of both the public and her own party on Wednesday by defending her controversial plans for tax cuts as the best path to stir a slumbering British economy.

Speaking to her restive Conservative Party at the close of its annual conference, Ms. Truss called on party members to unite to attack "antigrowth" political opponents and back her agenda of lower taxes and deregulation.


Russian Missiles Hit Civilian Targets in Southeastern Ukraine

KYIV, Ukraine-Russian missiles struck the city center of the southeastern Ukrainian city of Zaporizhzhia, killing at least two people early on Thursday while Ukraine's forces reclaimed more territory from Moscow, according to senior Ukrainian officials.

At least seven missiles struck the city in an attack that hit a series of apartment buildings, according to Kirill Timoshenko, a Ukrainian presidential adviser. At least six people were also wounded in the strike, he said. Zaporizhzhia and the surrounding area have been a focal point of Russian attacks in recent months after Russia seized control of the nearby nuclear power plant with the same name.


U.S. Believes Ukraine Was Behind Assassination of Putin Ally's Daughter

WASHINGTON-U.S. intelligence agencies have concluded that Ukraine was responsible for the August assassination outside Moscow of the daughter of a prominent far-right wing Russian ideologue, a U.S. official said.

The U.S. wasn't aware beforehand of the operation that killed Daria Dugina, the official said, and Washington has formally complained about it to Ukraine's government.


Iran Protests Erupt Anew After Teenage Demonstrator's Death

Iranian women and girls held fresh antigovernment protests on Wednesday, activists said, as demonstrations stretched into a third week, given new impetus as word spread on social media that a 16-year-old student had died after taking part in a women's rights rally.

The student's aunt, Atash Shahkarami, told BBC Persian that Nika Shahkarami called a friend to say she was being chased by security forces on Sept. 20. Her family found her body at a Tehran morgue 10 days later, Ms. Shahkarami said. The BBC said Ms. Shahkarami was arrested after being interviewed.



Talking Markets: China Likely Needs More Than October Meetings to Exit Zero-Covid

Some China watchers are hoping that political meetings this month will signal an end to strict anti-Covid-19 policies that have cast a gloomy spell on the world's second-largest economy. They are likely to be disappointed and left waiting well into next year, analysts say.

Chinese businesses have slowed investments and consumers have cut spending amid citywide lockdowns, mass testing and years of border closures stemming from Beijing's pandemic controls. These factors played a role in slower-than-expected GDP growth in the second quarter, as well as in several equity market selloffs. Both the CSI 300 and the Shanghai Composite Index have fallen to multimonth lows, while the MSCI China Index has hit a six-year low.


Bank of Japan Maintains View on Most of Japan's Regional Economies

The Bank of Japan on Thursday maintained its view that most of Japan's local economies were growing moderately, citing improvements in supply shortages

The bank's assessment for eight of the nine local economies was unchanged, and it raised its assessment for one region in the western part of the nation's main island.


Fed's Bostic wants to pause after December rate hike

The Federal Reserve should get its benchmark rate to between 4% and 4.5% by December and then pause, Atlanta Fed President Raphael Bostic said Wednesday.

"Ideally, I would like to reach a point where policy is moderately restrictive - between 4% and 4.5% by the end of this year - and then hold at that level and see how the economy and prices react," Bostic said in a speech at Northwestern University.


Fed's Daly says more rate hikes needed, dismisses 'pivot' talk

The Federal Reserve needs to keep raising its benchmark interest rate in order to cool inflation that hit a 40-year high earlier this year and has shown little signs of cooling, Mary Daly, president of the Federal Reserve Bank of San Francisco said Wednesday.

"I do see more rate increases as necessary," Daly said, in an interview on Bloomberg Television.


North Korea Test-Fires Two Short-Range Ballistic Missiles Off Its East Coast

SEOUL-North Korea test-fired two short-range ballistic missiles off its east coast on Thursday, shortly after the U.S. said at the United Nations that Pyongyang is feeling emboldened.

The Thursday test marked the Kim Jong Un regime's sixth weapons launch in 12 days, adding to what is already a historic year of missile tests.


U.S. Looks to Ease Venezuela Sanctions, Enabling Chevron to Pump Oil

The Biden administration is preparing to scale down sanctions on Venezuela's authoritarian regime to allow Chevron Corp. to resume pumping oil there, paving the way for a potential reopening of U.S. and European markets to oil exports from Venezuela, according to people familiar with the proposal.

In exchange for the significant sanctions relief, the government of Venezuelan President Nicolás Maduro would resume long-suspended talks with the country's opposition to discuss conditions needed to hold free and fair presidential elections in 2024, the people said. The U.S., Venezuela's government and some Venezuelan opposition figures have also worked out a deal that would free up hundreds of millions of dollars in Venezuelan state funds frozen in American banks to pay for imports of food, medicine and equipment for the country's battered electricity grid and municipal water systems.


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


(END) Dow Jones Newswires

October 06, 2022 05:51 ET (09:51 GMT)

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