EMEA Morning Briefing : Stocks Poised for Weak Start on Higher U.S. Bond Yields

MARKET WRAPS

Watch For:

EU money supply in euro area, ECB governing council non-monetary policy meeting; Germany GfK consumer climate survey; France consumer confidence survey; trading updates from Old Mutual, H&M, Dechra Pharmaceuticals

Opening Call:

Shares may be off to a shaky start in Europe on Wednesday after long-term U.S. Treasury yields reached fresh highs. In Asia, stock benchmarks were mixed; Treasury yields retreated following earlier gains; the dollar was steady; oil firmed up amid supply tightness and gold was barely changed.

Equities:

European stocks are poised for a weak open on Wednesday, as long-term Treasury yields rose to their highest levels in a dozen years or more.

The prospect of interest rates staying higher well into next year again could also weigh on equity valuations.

"Elevated yields will serve as a headwind to equities through the end of the month and perhaps the end of the year," said NorthEnd Private Wealth.

Many Fed officials in recent days have reiterated they believe the central bank will need to increase rates again and keep them at elevated levels for some time to quell inflation.

Higher Treasury yields relative to their international peers have lifted the U.S. dollar, with the dollar index DXY moving above 106, to its highest in about 10 months. A surging dollar can also act as a headwind for U.S. equities, partly by making multinationals less competitive.

Some investors said the threat of a U.S. government shutdown also might be starting to weigh on the market.

Forex:

The dollar was consolidating in Asia after earlier gains amid more hawkish Fedspeak even as fresh data pointed to economic slowdown.

Neel Kashkari, president of the Minneapolis Fed, published an essay saying that services inflation "has also been quite sticky and remains elevated" and monetary policy "might not be" tight enough.

Worries over an imminent U.S. government shutdown are gaining traction, said RBC Capital Markets.

It is worth noting that higher U.S. bond yields, higher crude-oil prices as well as a stronger USD are a "toxic" macro combination, it added.

Bonds:

Treasury yields fell, following previous gains amid the higher-for-longer theme on interest rates in the wake of the U.S. Federal Reserve's decision last week.

"The recent rise in yields is partly because investors are pricing in that policy rates will remain higher for longer, particularly after the Fed's dot plot last week. But it's also been driven by the growing realization that supply is set to remain elevated given mounting budget deficits, along with a small uptick in longer-term inflation expectations," said Deutsche Bank.

Spreads between shorter-term and longer-term yields are becoming less negative, according to Tradeweb.

Sticky inflation could keep monetary policy hawkish, Minneapolis Fed's Kashkari said in an essay.

Traders are looking ahead to the Fed's favored inflation gauge, the core personal consumption expenditure price index for August, which will be published on Friday.

Investors are also focused on the prospects of a U.S. government shutdown.

Energy:

Oil futures were higher in Asia, as investors shook off worries about the global economic outlook to resume a rally that has been fueled by tightening crude supplies.

Oil prices have rallied strongly on the back of supply restrictions, and the economy falling to live up to expectations will be one of the primary counter-risks for the price, Oanda said.

Uncertainty around the demand outlook has risen after the Fed last week indicated rates may continue to move higher and will remain elevated for longer than investors previously anticipated.

Metals:

Gold prices were flat as U.S. Treasury yields surged to multiyear highs amid a recent bond selloff.

Investors are adjusting to expectations that the Fed is unlikely to ease policy next year, ANZ said.

Meanwhile, renewed strength in the U.S. dollar is another headwind, reducing the appeal of the precious metal, ANZ added.

Investors are awaiting the U.S. PCE index, the Fed's preferred inflation gauge, due later this week, to gauge the Fed's next moves.

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Copper edged higher in a likely technical rebound after front-month Comex copper for September delivery posted a fourth straight session of decline overnight.

Meanwhile, downside risks to Commerzbank Research's copper-price forecast of $8,800 a ton for the year-end have risen, the bank said, adding that the supply outlook for the base metal has improved noticeably.

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Iron ore prices rose as steel mills replenish stocks of the steel-making material ahead of the Chinese Golden Week holiday, Nanhua Futures said.

In the longer term, investors are concerned that the Chinese government's support measures won't be enough to revive the property sector, especially amid Evergrande's debt problems, ANZ said.

TODAY'S TOP HEADLINES

Fed's Kashkari Warns of Possible Need for More Rate Hikes

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, gives the U.S. economy a 60% chance of a soft landing with one more interest-rate hike, according to an essay released Tuesday.

But the policy maker warned that a quarter-percentage-point increase in interest rates might not be enough to bring inflation down to the Fed's 2% target.

China's Industrial Profit Rose in August

China's industrial profit jumped in August, while the decline in profit for the first eight months eased, thanks to broad-based improvement in profitability, official data showed Wednesday.

Monthly industrial profit rose 17.2% from a year earlier in August, rebounding from the 6.7% drop recorded in July, the National Bureau of Statistics said.

Rising Loan Costs Are Hurting Riskier Companies

Petco took out a $1.7 billion loan two years ago at an interest rate around 3.5%. Now it pays almost 9%.

Interest costs for the pet-products retailer surged to nearly a quarter of free cash flow in this year's second quarter. Early in 2021, when Petco borrowed the money, those costs were less than 5% of cash flow.

Senators Unveil Bipartisan Funding Deal to Avert Government Shutdown

WASHINGTON-The Senate moved ahead Tuesday with its own approach to averting a partial government shutdown, advancing legislation that would extend funding through Nov. 17 while also providing about $6 billion apiece for Ukraine and for disaster relief.

The Senate proposal-the only bipartisan approach currently being pursued by congressional leaders-sets up a showdown with House Speaker Kevin McCarthy. The California Republican wants to extend government funding but on the condition that Congress also enact strict border-security measures and exclude any new support for Kyiv to keep his conference united.

3M Being Investigated in Belgium Over Forever Chemicals Emissions

3M is looking at a government investigation in Belgium over water emissions from a company plant that allegedly contained a higher-than-allowed level of so-called forever chemicals.

The Minnesota-based materials company said in a regulatory filing that it has idled all manufacturing related to PFAS, known as forever chemicals, at the 3M Belgium facility in Zwijndrecht, near Antwerp, though other operations have continued there.

U.K. Says Wirecard's Marsalek Worked With Five Suspected Russian Spies

LONDON-Jan Marsalek, a former fintech executive wanted in Germany for a 1.9 billion euro fraud, conspired with five people arrested in the U.K. on suspicion of spying for Russia, according to British prosecutors.

The five Bulgarian nationals appeared in a London court Tuesday charged with collecting information "intended to be directly or indirectly useful to an enemy" between 2020 and 2023, according to U.K. prosecutors.

TikTok Employees Say Executive Moves to U.S. Show China Parent's Influence

TikTok has spent the past three years trying to convince U.S. lawmakers it can operate independently in this country from its China-based parent company, ByteDance. After recent personnel moves, some employees aren't so sure.

Since the start of the year, a string of high-level executives have transferred from ByteDance to TikTok, taking on some of the top jobs in the popular video-sharing app's moneymaking operations. Some moved to the U.S. from ByteDance's Beijing headquarters.

OpenAI Seeks New Valuation of Up to $90 Billion in Sale of Existing Shares

OpenAI is talking to investors about a share sale that would value the artificial-intelligence startup behind ChatGPT at between $80 billion to $90 billion, roughly triple its level earlier this year.

The startup, which is 49% owned by Microsoft, has told investors that it expects to reach $1 billion in revenue this year and generate many billions more in 2024, people familiar with the discussion said.

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Expected Major Events for Wednesday

06:00/NOR: Jul Labour force survey SA, incl unemployment

06:00/SWE: Aug Foreign trade

06:00/GER: Oct GfK consumer climate survey

06:45/FRA: Sep Consumer confidence survey

07:00/SVK: Aug PPI

07:00/SWE: Sep Monthly Business Tendency Survey

07:00/SWE: Sep Consumer Tendency Survey

08:00/ICE: Aug Labour Force Survey

08:00/EU: Aug Monetary developments in the euro area (M3)

08:00/AUT: Sep Austria Manufacturing PMI

08:30/UK: Aug Capital issuance statistics

10:00/IRL: Aug Retail Sales Index

12:30/CZE: Czech interest rate decision

17:59/UK: REC JobsOutlook survey

23:01/UK: Sep CBI Growth Indicator and Service Sector Survey

23:01/UK: Aug Zoopla House Price Index

23:01/UK: Aug UK monthly automotive manufacturing figures

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09-27-23 0016ET