European Midday Briefing : Powell Caution Adds to Market Gloom

MARKET WRAPS

Stocks:

European shares extended their recent losses on Friday as fears continued to mount of an escalation in the Israel-Hamas war and after cautious comments from Jerome Powell sank stocks on Wall Street.

Powell said the Fed may need to do more to rein in inflation but also said policy makers would proceed with caution - language that analysts saw as a signal rates would remain on hold, as already expected, on Nov. 1, and likely in December as well.

"Jerome Powell continues to walk a middle line between hawk and dove. The Fed still isn't sure whether it's done enough," TradeStation said.

U.S. Markets:

Stock futures drifted lower, suggesting markets could come under fresh pressure after a pullback in the previous session. The 10-year Treasury yield slipped, after nearing 5% on Thursday.

American Express is due to round out a busy week of corporate earnings.

Stocks to Watch

Solar stocks sold off after equipment maker SolarEdge Technologies said installation rates slowed recently in Europe. Enphase Energy, SunRun, First Solar and SunPower all fell premarket.

Tesla continued to fall premarket. The stock tanked more than 9% on Thursday, making it the worst Nasdaq performer, after disappointing earnings.

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Forex:

Sterling hit a five-month low against the euro after U.K. data showed retail sales dropped 0.9% during September, much more than expected, suggesting the economy is feeling the pinch from higher interest rates.

The data "showed an alarming slide in consumer spending, putting the prospect of a U.K. recession back on the table for policymakers," Monex Europe said, adding that a November rate hike by the Bank of England looks increasingly unlikely.

Bonds:

Long-dated eurozone government bond yields seem to have "very limited" room to fall in 2024 as the European Central Bank is expected to be able to cut rates slowly, SEB Research said.

"If our expectations of the ECB reducing policy rates to only 2.50% by end-2025 materializes, the downside in long German yields from their currently low levels seems relatively minor."

SEB also said Treasury yields are unlikely to turn decisively lower until markets are prepared to add to future rate cut expectations, "which is unlikely to happen quickly."

Lately, sticky inflation and stronger-than-expected data have recently wiped out nearly 40 basis points of 2024 rate cut expectations and pushed Treasury yields to 16-year highs, SEB said. It added it sees prospects for Treasurys to outperform peers in 2024.

Societe Generale Research said bond yields are set to revisit new cycle highs, with 10-year Treasury and Bund yields close to 5% and 3%, respectively.

"This is remarkable, especially in the current geopolitical situation," SocGen said, adding that fundamentals are strong, but longer-term forces are likely at play.

With quantitative tightening in full force, the large bond supply to be absorbed is adding to a rapid rebuilding of term premium, SocGen said.

Supply, rather than demand, seems a bigger danger for Treasurys, while the demand side may be more complicated in Europe.

Citi Research said the ECB is likely to start discussing quantitative tightening of reinvestments under the PEPP next week but ECB talk seems cautious, perhaps partly due to the recent widening of eurozone government bond yield spreads.

"The compromise might be an early start but a longer taper. Still, the start of this discussion might be enough to take 10-year BTP-Bund past 210bps," Citi said.

Generali Insurance Asset Management said high-yield credit spreads are expected to widen further as volatility in U.S. and European government bonds remains elevated.

"Watch out credit spreads; they do not easily digest prolonged phases of rates volatility and could now decompress, especially in the lower buckets of the rating spectrum."

Volatility in sovereign bond yields is expected to continue in the coming weeks due to the Middle East conflict and uncertainty around economic growth, Generali said.

Energy:

Oil prices were higher as concerns grow that the Israel-Hamas conflict could escalate further.

Commonwealth Bank of Australia said the risk of a ground invasion by Israel could open up multiple fronts in the war, and possibly bring Iran into the conflict, which would likely send oil above $100 a barrel.

"Iran's involvement in any conflict with Israel is a key risk for oil markets, especially given the nation's control of the Strait of Hormuz," with 15-20% of global supply transiting through the strait.

Metals:

Gold prices hit their highest since July 31, rising on heightened geopolitical risk, BMI said.

However, base metals have moved in contrast to most other commodities, with weak demand and a strong dollar pegging prices back, BMI said.

"Industrial metals remain the worst performing commodity sub-asset class in terms of year-to-date performance."

DOW JONES NEWSPLUS

EMEA HEADLINES

BMW Has Quietly Moved Into EVs. The Upside for the Stock Could Be 41%.

BMW boasts that it makes the "ultimate driving machine." The company may also have the ultimate electric-vehicle stock not named Tesla.

BMW (ticker: BMW.Germany) isn't known for EVs. It's a luxury auto maker that makes sleek, stylish-and pricey-sedans such as the 8 Series Gran Coupe, the M3 sports car, and the X5 Sports Activity Vehicle. But the German company has also become a stealth EV play. It delivered 93,931 all-battery electric vehicles, or BEVs, during the third quarter of 2023, more than General Motors (GM), Ford Motor (F), and Rivian Automotive (RIVN) combined.

EU New Car Sales Rose in September Driven by Hybrids, EVs

New passenger-car registrations rose in September, driven by higher sales of fully electric and hybrid-electric vehicles, the European Automobile Manufacturers' Association said Friday.

Registrations, which reflect sales, increased 9.2% to 861,062 units last month compared with a year earlier, according to the industry group, known as ACEA. This marks the EU car market's fourteenth consecutive month of growth, the association said, after part shortages hurt auto sales last year.

UK Retail Sales Struggle as Living Costs Bite

U.K. retail sales declined more steeply than expected in September amid an increasingly gloomy landscape for consumer spending.

Volumes fell 0.9% in September, data from the Office for National Statistics showed Friday, faster than the 0.4% expected by economists in a poll carried out by The Wall Street Journal.

U.K. Consumer Confidence Sinks in October as Cost-of-Living Pressures Bite

Consumer confidence in the U.K. dipped in October as the high cost of living meant respondents shied away from big purchases ahead of the key Christmas season, according to a survey published Friday.

Confidence among British consumers dropped nine points on month to minus 30 this month, according to an index compiled by consumer-research firm GfK.

GLOBAL NEWS

Bond Yields Are Surging. That Could Help to Keep the Fed on Hold.

Another interest-rate hike looks to be off the table at the Federal Reserve's November policy meeting-and maybe at the December meeting, too. A leading reason: sharply higher bond yields.

Fed Chairman Jerome Powell laid the groundwork Thursday, in a speech to the Economic Club of New York, for the central bank to hold interest rates steady at its Oct. 31-Nov. 1 meeting. In prepared remarks, Powell highlighted that the economy is already moving toward price stability, and that lags in monetary policy and rising geopolitical uncertainty are forcing the Fed to "proceed carefully."

China Holds Benchmark Lending Rates Steady

China held its benchmark lending rates steady Friday, as expected after the central bank kept its policy rates unchanged earlier this month.

The one-year loan prime rate was maintained at 3.45% and the five-year rate at 4.2%, the People's Bank of China said on its website.

Jerome Powell Signals Fed Will Extend Interest-Rate Pause

Federal Reserve Chair Jerome Powell suggested the run-up in long-term Treasury yields could allow the central bank to suspend a historic run of interest-rate increases so long as recent progress on inflation continues.

Powell's remarks at a Thursday lunchtime address in New York closely tracked those of colleagues who indicated in recent days that they would hold short-term interest rates steady at their next meeting on Oct. 31-Nov. 1.

U.S. Forces in Syria, Iraq, Red Sea Come Under Militant Attack

U.S. forces in the Middle East came under attack several times this week, a potential sign of heightened aggression toward the U.S. following Hamas's terrorist attack on southern Israel earlier this month.

Such attacks are typically carried out by Iranian-aligned militia groups, but U.S. military officials didn't confirm the perpetrators of this week's attacks.

Biden Links Wars in Israel and Ukraine, Vows to Speed Aid to Allies

President Biden declared the world at an "inflection point in history" in an Oval Office address Thursday, linking Israel's battle against Hamas to Ukraine's fight against Russia and stressing the need for the U.S. to continue funding both wars.

"American leadership is what holds the world together. American alliances are what keep us, America, safe. American values are what make us a partner that other nations want to work with," Biden said. "To put all that at risk and walk away from Ukraine and turn our backs on Israel. It's just not worth it."

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

(END) Dow Jones Newswires

10-20-23 0523ET