European Midday Briefing : Stocks Struggle as Market Pressures Mount
(marketscreener) MARKET WRAPS Stocks: European shares struggled for direction on Monday, wavering between minor gains and losses, as... MUFG Bank said Monday's steep slide in the pound and sharp rise in gilt yields following Friday's expensive tax cuts, and measures to cap energy prices, signaled that investors are losing confidence in U.K. domestic economic policy. In terms of GBP/USD, Swissquote said parity is now "seen as almost certain," after sterling continued its slide against the dollar as investors reacted very negatively to Friday's announcement of sweeping U.K. tax cuts and a cap on energy price rises. Investors worry about a Europe-led recession amid increased energy prices, tighter liquidity and China's pandemic-related restrictions, Citi said. Russia's War in Ukraine to Cost Global Economy $2.8 Trillion, OECD Says Russia's invasion of Ukraine will cost the global economy $2.8 trillion in lost output by the end of next year-and even more if a severe winter leads to energy rationing in Europe-
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European shares struggled for direction on Monday, wavering between minor gains and losses, as investors digested a widely-anticipated right-wing coalition victory in Italy's general election, a fresh selloff of U.K. assets and some disappointing German economic data.
MUFG Bank said Monday's steep slide in the pound and sharp rise in gilt yields following Friday's expensive tax cuts, and measures to cap energy prices, signaled that investors are losing confidence in U.K. domestic economic policy.
With the U.K.'s finance minister saying over the weekend that more tax cuts are on the way, the Bank of England will need to act quickly to restore confidence, MUFG said.
"Without timely policy action this week, cable could quickly fall below parity."
The European Central Bank has a window to raise interest rates until the end of this year or early next year, Danske Bank said, reiterating its long-held view.
However, it has adjusted its expectations, forecasting the deposit rate--currently at 0.75%--to peak at 2.5%, with a 75-basis-point rate rise in October, 50bps in December and 50bps in February.
"The biggest risk to the call of ECB stopping its hiking cycle in February is the fiscal measures."
Futures for the S&P 500, Dow industrials and Nasdaq-100 flitted between small gains and losses, suggesting investors aren't ready to buy back into a market that fell sharply on Friday.
"In addition to the ongoing flight of the dollar, overarching concerns around the possibility of a global recession are weighing on equity markets generally. The risk of a hard landing for economies following a period of over-tightening are becoming elevated," said Interactive Investor.
In addition, option markets are pointing to heightened pessimism that may prove attractive to contrarian traders.
The CBOE Vix index, informally known as Wall Street's fear gauge, has moved up to a three month high around 32, and large money managers over the past four weeks have spent $34.3 billion on put options for stocks and ETFs, the most since such data started in 2009.
The euro fell to a 20-year low against the dollar as the greenback strengthened across the board and as investors digested Sunday's Italian general election.
The "biggest concern for investors" is whether the new far-right Italian government will deviate from reforms under Mario Draghi that helped Italy get the EU on its side, Swissquote Bank said.
EUR/USD could remain under pressure as Italian government bond yields will rise further, widening the gap with other eurozone yields, Swissquote said.
In terms of GBP/USD, Swissquote said parity is now "seen as almost certain," after sterling continued its slide against the dollar as investors reacted very negatively to Friday's announcement of sweeping U.K. tax cuts and a cap on energy price rises.
"What the market is hearing is: who will finance this spending? The only hope here is to see at least a sugar rush in the British economy to help investors digest information, but the next couple of years will probably be harsh for the U.K.," Swissquote said.
Read: BOE Unlikely to Deliver Emergency Rate Rise as Pound Plunges, Says ING
"We expect market participants to focus on policy, especially in the context of European integration and fiscal policy," Goldman Sachs said, adding that the focus on Italy will be especially strong from mid-October onward.
Capital Economic said the likely coalition victory doesn't pose an immediate risk to bond markets but warned that the fact the country will be governed by a group of historically euroskeptic parties under an untested leadership raises the risk of a loss of confidence in Italy's public finances.
"Concerns about Italy's public finances could flare up at any point given the size of the country's public debt burden."
This is specially true against the current context of monetary tightening, an imminent recession and pressure for the government to cushion the hit to households and firms from the energy crisis, Capital said.
The massive selloff in gilts on Friday should have limited repercussion on the eurozone rates markets, though the risk-off moves warrant caution, Commerzbank said.
In particular, another record print in eurozone HICP is due and should underpin market expectations of European Central Bank interest-rate rises.
The unwarranted stabilization of 10-year German Bund yields has ended, with Morgan Stanley's year-end target of 2% reached on Friday, which now expects more moves upward.
"With the marked upward revision on the [Federal Reserve's] dot plots at the September FOMC [meeting], and recurrent hawkish ECB comments, we do not see any reason to question our bearish duration view, with the 2.25% level being a credible target next month," Morgan Stanley said.
The strategists added that the yield is now on the cheap side by 13 basis points versus September fair value, but it is around fair value for October.
Oil prices fell to the lowest levels since January following a week of central bank interest-rate hikes that refreshed worries about the strength of the world economy.
The stronger dollar was also weighing on oil. The ICE Dollar index is at a fresh 20-year high, weakening demand for dollar-denominated oil among holders of other currencies.
Gold and base metals moved lower in London trade as investors still looked toward risk-off assets with the macro sentiment remaining weak.
Any future aluminum-price surges on fresh production cuts are likely to be brief, as demand fears outweigh tightening supply, Citi said.
"The aluminum market has become reluctant to price in power-related curbs, having switched its focus to concerns of demand destruction amid supply-chain destocking."
Investors worry about a Europe-led recession amid increased energy prices, tighter liquidity and China's pandemic-related restrictions, Citi said.
But in the coming months, "any sizable power-related curbs in Yunnan, China, or Europe may see transitory spikes in prices," while there is also the risk the London Metal Exchange may delist or halt inflows of Russian metal, Citi added.
Russia's War in Ukraine to Cost Global Economy $2.8 Trillion, OECD Says
Russia's invasion of Ukraine will cost the global economy $2.8 trillion in lost output by the end of next year-and even more if a severe winter leads to energy rationing in Europe-the Organization for Economic Cooperation and Development said Monday.
The estimate by the Paris-based club of advanced economies lays bare the magnitude of the economic fallout from Moscow's invasion of its neighbor seven months ago, the worst military conflict on the continent since World War II, which is Russia's attempt to redraw the map of Europe by force.
Italian Right Is On Course to Win Elections
ROME-Italians elected a right-wing coalition to lead the country, according to projected results, choosing an untested leader who will confront Europe's gathering economic downturn and energy crisis resulting from Russia's invasion of Ukraine.
Giorgia Meloni is favored to become Italy's new prime minister after her Brothers of Italy party won the biggest share of the vote in Sunday's parliamentary elections, according to projections based on counting nearly half of the votes for Italy's Senate. She would require approval from junior partners in her coalition to assume the role.
British Pound Sinks to Record Low Against the Dollar
The British pound tumbled to a record low of $1.0349 against the U.S. dollar early Monday as the U.K. government's planned tax cuts continued to spook traders.
The pound also fell against all major global currencies, slipping below EUR1.08 against the euro - its lowest level since September 2020. The currency has recovered some ground, last trading at $1.0721 and EUR1.1064.
Business confidence in Germany worsened considerably in September as companies turned more pessimistic due to the energy crisis.
The Ifo business-climate index fell to 84.3 points in September from a revised figure of 88.6 points in August, data from the Ifo Institute showed Monday. This is its lowest value since May 2020. Economists polled by The Wall Street Journal had expected the index to come in at 87.1.
Credit Suisse Says Strategic Review is on Track
Credit Suisse Group AG on Monday said its comprehensive strategic review is on track, including potential divestitures and asset sales.
The Swiss bank said it will provide further updates when it reports its third-quarter results on Oct. 27.
Sainsbury's Talks with LXI REIT Over Sale of 18 Stores Collapse
J Sainsbury PLC said Monday that it is no longer in discussions with LXI REIT PLC over the sale and leaseback of a portfolio of 18 supermarket stores, due to LXI's market volatility concerns.
The British grocer said the investment trust isn't proceeding with a share issue that would have partly funded the transaction due to stock market volatility concerns, and the two parties are no longer in discussions.
Unilever CEO Alan Jope to Retire at End of 2023
Unilever PLC said Monday that Chief Executive Officer Alan Jope has decided to retire from the company at the end of 2023 after five years in the role.
The Anglo-Dutch retailer--which owns consumer brands such as Ben & Jerry's ice cream, Dove soap and Cif and Domestos cleaning products--said it will start a formal search for a successor, and that it will consider both internal and external candidates.
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