European Midday Briefing : Inflation Fears, China Doubts Drag on Stocks

MARKET WRAPS

Stocks:

European stocks were deep in the red on Tuesday, as fears mounted that persistent inflation would ensure interest rates remained higher for longer, with China's surprise rate cut unable to lift the cautious mood.

U.S. Markets:

Stock futures slipped after a Nasdaq-led rally in the previous session, and bonds remained under pressure, with the 10-year Treasury yield above 4.2%.

The key level to watch: last October's peak of 4.231%, which was the highest close since 2008.

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Forex:

Strong U.S. retail sales data could lift the dollar, dragging EUR/USD down further, Danske Bank Research said.

EUR/USD, which fell below 1.09 on Monday to hit its lowest in more than five weeks, has generally been on a downward trajectory the past month, Danske added.

"The recent two rather benign U.S. CPI prints have not been a trigger for a persistent cyclical dollar decline."

Meanwhile, growth prospects in the eurozone and China look to be deteriorating and this pattern is expected to continue weighing on EUR/USD.

Read Dollar Strength Hit Global Household Wealth in 2022, UBS-CS Report Says

Sterling erased gains after briefly hitting a two-week high against the euro following data showing U.K. average earnings excluding bonuses rose 7.8% in the three months to June, their highest since at least 2001.

This points to another U.K. interest-rate rise in September, though the unemployment rate rose more than expected to 4.2%, raising concerns about the impact of higher rates on the economy.

Investors are also cautious ahead of Wednesday's data, which are expected to show U.K. inflation slowing.

Any gains in sterling "could be contained" ahead of this data, MUFG said.

Read UK Record Wage Growth Leaves BOE With Another Tough Decision

Bonds:

Bond market weakness stands out in the absence of apparent bearish drivers and Tuesday's two-way data impetus hardly offers lasting relief, Commerzbank Research said.

"Markets are second-guessing swift Fed-cuts, with U.S. Treasuries selling off across tenors and the curve bear-flattening," Commerzbank said.

With the Assumption holiday in large parts of Europe, it expects liquidity to be thin, enabling small data surprises to trigger decent volatility. Germany's ZEW business sentiment index is expected to remain weak, and although it usually isn't a major market mover, long-end Bunds might still benefit at the margin.

Read August Weekly Eurozone Bond Issuance Seen Peaking This Week

Gilt yields rose as market expectations of a September interest-rate rise from the BOE grow after the latest data showing record wage growth.

"There are growing signs that the U.K. jobs market is softening, but for now the BOE will remain focused on stubbornly high wage growth," ING said.

Energy:

Oil prices were steady, with the PBOC rate cut only moderately boosting investor sentiment around the nation's economy.

A batch of Chinese economic data for July pointed to continued weakness. The nation's industrial production came in weaker than expected while retail sales slipped.

The "surprise rate cut will hardly reverse appetite for Chinese investments as meaningful fiscal stimulus becomes necessary," Swissquote Bank said.

Metals:

Base metals were higher but gold inched down after China's interest rate cuts, with investors still worried about the broader economy, according to Peak Trading Research, noting a strong dollar and weak Chinese demand.

"Investors are worried about rising interest rates and China's deepening property market downturn," Peak said.

The rate cuts have weakened the yuan, while Janet Yellen's comments on how Chinese weakness could drag on the U.S. economy too has furthered investor worries, Peak added.

Read Platinum Likely to Face Headwinds on Strong Dollar, Growth Worries

DOW JONES NEWSPLUS

EMEA HEADLINES

Russia Imposes Emergency Interest-Rate Rise to Halt Ruble Selloff

Russia's central bank raised its key interest rate at an emergency meeting to stem a sharp selloff in the ruble, a slide that has brought into focus the mounting financial costs of Moscow's war in Ukraine.

The bank on Tuesday raised the rate to 12% from 8.5%, a day after the currency temporarily fell past 100 to the U.S. dollar for the first time since the weeks after Russia invaded Ukraine. The ruble recovered to around 96 a dollar early Tuesday but remains down more than 20% this year, placing it among the world's worst-performing currencies.

UBS to Pay $1.44 Billion to Settle Financial Crisis-Era Mortgage Case

UBS will pay $1.44 billion to settle U.S. Justice Department allegations that it defrauded investors who bought bonds backed by mortgages before the financial crisis, marking the end to a decadelong string of prosecutions against Wall Street's biggest players.

The case is the last among more than a dozen DOJ prosecutions against banks and other financial institutions over securities backed by subprime loans, the agency said. Including the UBS case, the DOJ said it reached more than $36 billion in all via settlements with banks including Bank of America, Citigroup and HSBC. Credit Suisse, now owned by UBS, paid $5.3 billion in 2016.

Marks & Spencer Sees Full-Year Profit Rising After Early FY 2024 Shows Good Progress

Marks & Spencer Group said that the first 19 weeks of fiscal 2024 have seen continued market share growth in both its Clothing & Home and Food businesses, and it expects full-year profit growth.

The British retailer said Tuesday that like-for-like Food sales for the period ended Aug. 12 grew more than 11%, as it makes further investment in quality and value and sharpens prices on a number of product lines.

Legal & General Operating Profit, Solvency Ratio Beats Views

Legal & General Group beat expectations as it reported operating profit and a solvency ratio ahead of views for the first half of 2023 and backed its mid-term targets.

The FTSE 100-listed insurer on Tuesday posted an operating profit of 941 million pounds ($1.19 billion) for the six months ended June 30, beating the GBP834 million expected by a company-compiled consensus but below the previous year's restated figure under the IFRS 17 accounting standard of GBP958 million.

Pandora Raises Growth Guidance After Reporting Solid Start to 3Q

Pandora on Tuesday raised its full-year growth guidance after reporting a solid start to the third quarter.

The Danish jeweler said like-for-like growth in the third quarter so far is at mid-single digit levels with encouraging underlying trends, driven by a broad-based pick up in traffic during the holiday season, though it expects traffic to ease off after the holiday season.

GLOBAL NEWS

China Slashes Rates, Suspends Youth Jobless Data as Economy Signals Sharper Downturn

SINGAPORE-Chinese officials said they would stop reporting the country's youth unemployment rate after months of spiraling increases, depriving investors, economists and businesses of another key data point on the declining health of the world's second-largest economy.

The surprise move extends China's efforts to restrict access to a variety of data on its economy and corporate landscape to outside scrutiny.

China's Central Bank Cuts Two Key Policy Rates

China's central bank on Tuesday cut a set of policy rates, signaling a that the country's benchmark lending rates will be trimmed later this month.

The People's Bank of China injected 401 billion yuan ($55.24 billion) of liquidity via the one-year medium-term lending facility at an interest rate of 2.50%, down from the previous 2.65%. It also provided CNY204 billion of funds through seven-day reverse repurchase agreements at an interest rate of 1.90%, down from 1.80% previously.

Japan's Economy Grows at 6% Pace in Second Quarter

TOKYO-Japan's economy expanded at a much faster pace than expected in the April-June quarter thanks to robust exports, outpacing growth in the U.S. and China.

Japan's real gross domestic product increased 1.5% in the three months to June from the previous quarter, compared with 0.9% growth in the January-March period.

Wall Street Is Ready to Scoop Up Commercial Real Estate on the Cheap

Wall Street firms are raising new funds to acquire office buildings, apartments and other troubled commercial real estate, looking to scoop up properties at a fraction of the price investors paid a few years ago.

Cohen & Steers, Goldman Sachs, EQT Exeter and BGO, formerly known as BentallGreenOak, are among the prominent names raising billions of dollars for funds to target distressed assets and other real estate with slumping values, according to regulatory filings.

Georgia Grand Jury in Trump Case Returns Sealed Indictment

ATLANTA-A grand jury here returned at least one sealed indictment after a local prosecutor finished presenting evidence from her investigation into alleged election interference by former President Donald Trump and his allies.

It wasn't immediately clear which defendants were named or charges brought.

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

(END) Dow Jones Newswires

08-15-23 0536ET