EMEA Morning Briefing : Investors Brace for Higher Rates for Longer

MARKET WRAPS

Watch For:

Flash PMI data from EU eurozone, Germany, France, UK; UK retail sales, Bank of England market participants survey results; no major corporate updates expected

Opening Call:

Shares could continue their retreat in Europe on Friday as investors digest the U.S. Federal Reserve's hawkish message of higher-for-longer interest rates. In Asia, stock benchmarks mostly weakened; Treasury yields were largely unchanged; the dollar was steady; while oil and gold advanced.

Equities:

European stocks are set to extend losses on Friday amid worries the U.S. Fed will keep interest rates higher for longer to tame inflation.

On Wednesday, the Fed kept interest rates unchanged, but left the door open to at least one more rate hike this year, with rate cuts becoming less likely.

The Fed's revised "dot plot" forecast fortified a view that the potential path of interest rates could remain higher for longer, with the central bank's policy rate pegged to remain above 5% for some time.

Higher interest rates could be problematic for high-flying growth stocks in the weeks and months ahead, said Wealth Alliance.

"The market is waking up and saying, 'Oh, wait a minute, the Fed isn't going to cut rates.' So those growth stocks, they're vulnerable," it said.

Forex:

The dollar was consolidating amid anticipation of more rate increases, following hawkish skips by both the U.S. Fed and the Bank of England.

U.S. data show layoffs are still not compatible with a cooling economy.

Bannockburn said "the Fed's forecasts are full-throated endorsement of the soft landing, which also means the Fed expects rates to remain higher for longer."

---

Sterling is on track to its worst month since the Truss-era crisis, said Vantage, referring to the turbulence a year ago prompted by the U.K. mini-budget of former Prime Minister Liz Truss.

"It seems tough to go against the two-month bear trend whose sole support from rate hike expectations is fading very fast," it said in a note after the BOE opted to keep the bank rate unchanged at 5.25%.

Neuberger Berman believes sterling is overvalued, and expects U.K. interest rates to have peaked, following the BOE's decision to hold rates.

"We believe that this may have been the final hike in the cycle as the U.K. economy is slowing and inflationary pressures are subsiding slowly, " Neuberger Berman said. "We believe the British pound has not yet fully discounted the rate differential and the worsening U.K. growth picture."

Bonds:

Treasury yields were barely changed after earlier gains, as investors continued to absorb the Fed's message of higher-for-longer interest rates.

"It's the higher-for-longer finally coming to be understood as the reality of the future for interest rates," said Teucrium.

Despite the FOMC keeping its next meeting alive, odds of another skip in November reach 73.7% in the CME's FedWatch tool, up from 68% yesterday.

Markets continue to price rate cuts by mid-2024, also at odds with the Fed's own outlook.

Wednesday's policy decision by the Fed "was a very hawkish hold," said John Hancock Investment Management.

"If you connect the dots, the Fed is not going to be hand-holding this market, and will basically be pushing back on market expectations for rate cuts. I think markets are going to have to face their fears of a Fed that is not going to be supportive," it said.

Energy:

Oil prices retraced earlier losses amid diverging global cues.

Oil prices were being weighed by the U.S. Fed's hawkish tone that has stoked fears about holding rates higher for longer. Interest rate increases can stall economic growth and curb oil demand.

Oil traders are also focused on Russia's abrupt full ban on gasoline and diesel exports on Thursday, ahead of the winter heating season.

"Russia is trying to stabilize the domestic situation, which means only ex-Soviet states will have access to their exports," Oanda said.

Metals:

Gold edged higher after the Fed and the BOE held rates steady this week.

However, stronger labor markets and persistent inflation raise the prospect of rates remaining higher for the foreseeable future, ANZ said.

The peak in U.S. Treasury yields is almost here, but until recession risks become the base case for the U.S., the precious metal might struggle to stabilize, Oanda said.

---

Copper edged higher in a likely technical rebound after front-month Comex copper for September delivery settled overnight at its lowest value since Aug. 16.

However, commodity trading advisors still have lots of offers to deploy, said TD Securities, noting that the base metal finally broke below the uptrend which has supported prices since 2020.

Also, a break below the $7,900/ton on an LME monthly futures basis could trigger the first of several large-scale selling programs, it added.

---

Iron ore prices edged lower as market participants continued to assess negative cues from the FOMC meeting and potential China demand.

In the near term, iron ore prices could be supported by possible demand for steel during China's upcoming peak construction season, Huatai Futures said.

Market participants will likely keep an eye on steel industry policies and the recovery of steel scrap supply, it added.

TODAY'S TOP HEADLINES

Bank of Japan Holds Off on Rate Increase as Inflation Stays Above Target

TOKYO-The Bank of Japan on Friday kept its interest-rate targets unchanged amid rising prices and growing expectations for an early policy change.

The Japanese central bank decided to maintain its hard cap on the yield of 10-year Japanese government bonds at 1% after raising it from 0.5% at its previous meeting in late July. It also kept short-term interest rates unchanged at minus 0.1%.

China's Economic Worries Spur a Different Kind of Shopping Spree

China's economy is struggling, but one line of business is booming: selling insurance in Hong Kong to travelers from mainland China.

In recent months, mainland tourists have packed the offices of Hong Kong insurance agents and formed long lines at banks. Sales of investment-focused insurance policies have roared back to life after Beijing ended strict pandemic controls and the border with Hong Kong reopened.

U.K. Consumer Confidence Highest Since January 2022

Consumer confidence in the U.K. improved in September to the most optimistic level in more than a year and a half, a signal of improving prospects for the country's economy and that pressures on household spending could be easing, according to a survey published Friday.

Confidence among British consumers rose four points to minus 21 this month, the highest reading since January 2022, according to an index compiled by consumer-research firm GfK.

TikTok Fights More Potential Bans, This Time in Africa

JOHANNESBURG-Soon after the government of Senegal blocked access to TikTok last month, executives of the world's most downloaded app faced more problems brewing across Africa.

Somalia had also called for a ban on the app. Kenya's parliament was considering outlawing it, too.

Survivors in Flood-Ravaged Libya Wonder if They Will Ever Have a Home Again

AL BAYDA, Libya-Nearly two weeks after a deadly flood destroyed her house in Al Bayda, a town near Libya's Mediterranean coast, Noura Khalifa Adam and her family are still sheltering at a local school and have no idea where they will go next.

The school year is about to start, so officials have told them they won't be able to stay-but they also haven't offered an alternative.

Johnnie Walker Owner Hires Former Clif Bar CEO to Jump-Start U.S. Growth

Diageo PLC has unexpectedly replaced its head of North America as the company's chief executive tries to jump-start growth in the U.S., the Johnnie Walker maker's largest market.

The world's largest global liquor maker has appointed the former head of Clif Bar, Sally Grimes, to the newly created role of North America CEO. Clif was bought by Mondelez last year in a deal worth at least $2.9 billion, and Grimes stepped down from the snack maker in February.

The Elusive Figure Running Wagner's Embattled Empire of Gold and Diamonds

T-shirts have appeared on the streets of the Central African Republic's capital recently picturing a bearded man with flowing hair and an almost saintly look.

The image, reminiscent of a revolutionary Che Guevara, is of 34-year-old Dmitry Sytii, the current frontman of the Wagner paramilitary group in Africa.

Write to [e-mail]

Expected Major Events for Friday

04:30/NED: 2Q GDP - 2nd estimate

06:00/UK: Aug UK monthly retail sales figures

06:00/DEN: Aug Central Government Finance & Debt

06:00/DEN: Sep Business tendency survey

07:00/SWI: 2Q Balance of Payments

07:00/SPN: 2Q Final GDP

07:15/FRA: Sep France Flash PMI

07:30/GER: Sep Germany Flash PMI

08:00/ICE: Aug Harmonized CPI

08:00/EU: Sep Eurozone Flash PMI

08:30/UK: Sep Flash UK PMI

10:00/UK: Sep CBI Industrial Trends Survey

10:00/IRL: Aug WPI

12:00/POL: Aug Broad money M3

15:59/UKR: Aug PPI

16:59/SPN: 2Q Quarterly Balance of Payments

All times in GMT. Powered by Onclusive and Dow Jones.

Write to us at [e-mail]

We offer an enhanced version of this briefing that is optimized for viewing on mobile devices and sent directly to your email inbox. If you would like to sign up, please go to https://newsplus.wsj.com/subscriptions.

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

(END) Dow Jones Newswires

09-22-23 0015ET