MARKET WRAPS
Stocks:
European shares were sharply lower again on Thursday as the
positive impact from the previous day's gilt-market intervention by
the Bank of England quickly faded.
Concerns mount about the risk of sharp interest-rate rises,
particularly in the U.K., following last week's government
announcement of sweeping tax cuts to be funded by borrowing.
Stocks to Watch:
Givaudan should prove resilient during a recession, having
stable growth and the ability to expand margins in 2023, Citi said.
The company's raw-material and energy hedging should mean it has
experienced the peak of this year's inflationary pressure as it
enters the fourth quarter.
Its portfolio is highly defensive and its organic sales growth
has historically seen the lowest volatility in Citi's coverage of
the sector.
"With macro challenges looming, we now see Givaudan as the stock
to own across consumer chemicals," Citi said, upgrading its rating
on the stock to buy from neutral.
Bank of England:
The BOE's purchases of long-end gilts buys time for the U.K.
government to make some reversal of recent policy announcements,
AXA Investment Managers said.
The upcoming Conservative Party Conference provides the next
test as to whether the government will react , AXA said.
"Otherwise, UK asset markets are likely to come under further
pressure ."
The necessity of the BOE's intervention to address the
disruption of orderly markets caused by the Chancellor's statement
on Friday is quite exceptional .
"The BOE's operations buy time for the government to
're-evaluate' policy ."
---
Barclays said the BOE's move offers a short-term fix, but not a
panacea.
"In the short term, these actions are working extremely well.
But if the goal is to restore lasting stability to
sterling-denominated financial markets, we worry that the move will
fall short."
The problem is that bond and currency markets have reacted
poorly since the mini-budget, at least in part due to fears that
the move added new fiscal stimulus to an economy that already had
10% inflation and a very low jobless rate, Barclays said.
"It's difficult to see how this perception can be corrected by
new monetary policy stimulus."
Read: Market Prices Hefty BOE Interest-Rate Rise for
November
U.S. Markets:
Wall Street was in rally mode on Wednesday after the BOE's
attempt to calm U.K. bonds, but that sentiment has dissipated, with
Dow futures recently down more than 300 points.
Indeed, there were other signs the positive impact of the BOE's
action was already starting to fade. The benchmark 10-year Treasury
yield was up 12.7 basis points to 3.863% and the dollar resumed its
advance.
"The USD still exhibits a strong, negative correlation to global
equities because, in a world where monetary and fiscal policy are
now at odds with each other, the value of collateral is being
tested," Citi said.
"The whole reason central banks are hiking rates is to tighten
financial conditions, which implicitly means that the Fed is
targeting a lower equity market."
Investor anxiety could be seen in the CBOE Vix index. The Vix,
whose long-term average is around 20, was hovering near 31, having
stood above 30 for much of this week.
Forex:
Although markets have stabilized moderately since the BOE
intervened in the gilt market, the dollar will remain investors'
currency of choice and strong demand is likely on any dips, ING
said.
"The dollar will continue to be favored--especially if it is
soon to be paying 4% on deposits."
Meanwhile, a narrowing U.S. trade deficit means the dollar "does
not look as vulnerable as it could," ING said.
ING also said the Bank of England's intervention to stabilize
gilt markets will have only a limited positive impact on sterling,
which looks vulnerable to a drop back toward Monday's record low of
$1.0349.
"We doubt cable [GBP/USD] holds gains to 1.08/1.09 and the bias
has got to be for a 1.0350/1.0500 retest. There is only so much the
BOE can do to support cable, since we think FX intervention and
emergency rate hikes are not on the table."
Bonds:
Flash estimate Spanish and German inflation data for September
are expected to shift bond investors' attention away from the
recent turmoil in sterling markets, Mizuho said.
As markets are still expecting inflation to remain above 9% for
the next four months, "this should continue to be a driver for
higher EUR yields and determined action from the European Central
Bank," Mizuho said.
It expects the ECB to raise interest rates again by 75 basis
points at the October meeting; markets are currently pricing in
around 67bps, according to Refinitiv data.
Energy:
Oil extended its losses, with prices recently down almost 2%, as
demand concerns linked to slowing global growth continued to weigh
on sentiment.
With OPEC+ set to meet next week, many analysts now expect a
sizable output cut from the group that should support prices. SEB
expects a cut of between 500,000 and 1 million barrels daily.
"Bearish demand concerns likely to dominate in the near term,"
it said. But in the longer term, "supply side issues will be worse
than demand side issues unless there is a severe global
recession."
Metals:
Base metals were lower as tightening monetary policy across the
world continues to pose a headwind to prices, although Marex said
hopes of infrastructure spending in China offered some support.
Chinese media reports that Beijing would allocate 500 billion
yuan to infrastructure projects is encouraging metals demand on the
Chinese mainland, Marex added.
Other News:
Lithium prices have tripled in a year, and the chemical element,
which is used in batteries for electric vehicles, faces a long-term
supply shortage.
The increase "is largely due to increasing demand for electric
vehicles and the inelastic nature of supplies," Global X said.
Bringing new production capacity online can take three to five
years or more, "for studies, permitting, capital raising, and
capital expenditure before any lithium is produced."
Read more here.
DOW JONES NEWSPLUS
EMEA HEADLINES
Eurozone Economic Sentiment Continues Its Steep Decline
Economic sentiment in the eurozone deteriorated again in
September, weighed by high inflation and a darkening outlook for
the economy.
The European Commission said Thursday that its economic
sentiment indicator--an aggregate measure of business and consumer
confidence--declined to 93.7 in September from 97.3 in August, the
lowest reading since November 2020.
Porsche Shares Trade Almost 2% Above IPO Price in Debut
Porsche AG's shares opened almost 2% higher on their first day
of trading Thursday, supported by investors who missed out in one
of Europe's biggest initial public offerings to get a piece of the
luxury car brand.
The trading debut contrasts with an otherwise downbeat global
market for initial public offerings. The total value of IPOs is
down 70% globally to $135 billion so far in 2022 from the
comparable period last year, according to data from Dealogic.
Activity has suffered from a combination of equity volatility that
makes valuing companies more challenging and the poor performance
of recently listed companies
Next Cuts FY 2023 Profit, Sales Guidance Amid Waning Consumer
Confidence
Next PLC on Thursday reported a better-than-expected pretax
profit increase for the first half of fiscal 2023, amid stronger
retail sales, and cut its full-year profit guidance amid rising
living costs.
The fashion retailer reduced its sales guidance for the rest of
the current fiscal year to minus 2% from 3% compared to the
previous year following a worse-than-expected fall in August sales,
partially caused by increased cost-of-living pressures, which
indicates a general weakening of underlying demand along with the
effect of rising bills.
H&M 3Q Profit Drops After Russia Exit Costs
Sweden's Hennes & Mauritz AB said Thursday that net profit
for its third quarter fell significantly after it booked a one-time
cost related to the winding down of its Russian operations, and
that it will start a cost and efficiency program.
The company posted a net profit of 531 million Swedish kronor
($47.4 million) for the fiscal quarter ended Aug. 31, compared with
SEK4.69 billion a year earlier. Analysts polled by FactSet had
expected a net profit of SEK2.17 billion.
U.K. Market Woes Threaten Economic and Political Crisis
The U.K. continued to try to stave off a financial and economic
crisis on Wednesday as the country's central bank carried out
emergency buying of government bonds to stabilize a spiraling debt
market, adding pressure on the government of new Prime Minister Liz
Truss.
The central bank's surprise move to spend 1 billion pounds
buying U.K. government debt spurred a rally in the bond market, and
helped the embattled pound gain slightly against the U.S. dollar,
though it was still down against the euro. But the intervention-to
stave off an imminent pension crisis-underscored the risks that
continuing market turbulence poses to the U.K. financial system and
economy.
Ukraine's Zelensky Vows to Protect Citizens in Areas Russia
Plans to Annex
KYIV, Ukraine-President Volodymyr Zelensky vowed to protect
Ukrainians living under the threat of prolonged Russian rule as
Moscow prepares to annex parts of four regions in the east and
south of the country after a series of staged referendums.
Ukrainian forces are trying to push further into areas currently
occupied by Russian forces, undermining the Kremlin's goal of
placing swaths of the country under its permanent control. But
after a lightning offensive that liberated some 3,500 square miles
of territory in recent weeks, there are signs that the Ukrainian
military is encountering stronger resistance from Russian units in
some areas after they regrouped further east.
Russian Leaders Welcome Referendum Result as Ukraine Conflict
Deepens
MOSCOW-Russian leaders have been quick to welcome the outcome of
the referendums that pave the way for occupied regions of Ukraine
to be incorporated in the Russian Federation, escalating the
conflict with Kyiv and Western governments, which have dismissed
the votes as a sham.
Vyacheslav Volodin, speaker of the State Duma, wrote on Telegram
Wednesday that the outcome would "save millions of people from
genocide, " after results released Tuesday evening claimed to show
that Russian-controlled Luhansk and areas of Donetsk, Kherson and
Zaporizhzhia overwhelmingly supported becoming part of Russia.
UK Car Manufacturing Rose in August, But Still Below 2019
Levels
U.K. car manufacturing rose in August for the fourth consecutive
month, but is still well below prepandemic levels, according to
data released Thursday by an industry body.
The Society of Motor Manufacturers and Traders said that a total
of 49,901 cars drove off the production lines in August compared
with 37,246 in August 2021 and 92,158 in August 2019.
Iran Attacks Northern Iraq With Missiles and Drones, Killing at
Least 13
Iran attacked northern Iraq on Wednesday with more than 40
ballistic missiles and armed drones, one of which was shot down by
a U.S. warplane as it headed toward the city of Erbil where
American troops are based, according to U.S. and Iraqi
officials.
The strikes were by far the largest and most deadly in recent
days by Iran's Islamic Revolutionary Guard Corps, which has carried
out repeated bombardments of Kurdish areas in northern Iraq since
last week, after publicly blaming Iranian Kurdish separatist groups
based there for fomenting unrest that has swept across Iran.
Iran Protesters Seek End of an Islamic Republic Pillar-the
Morality Police
The protests that have erupted across Iran in the past two weeks
are rooted in anger at the country's morality police, an unpopular
vestige of the 1979 revolution that represents a weak point for the
government, according to protesters and human-rights advocates.
The death of Mahsa Amini, 22, on Sept. 16, while in the custody
of the morality police has touched a nerve among many Iranian
families, who have had their own humiliating experiences with
officers tasked with enforcing the country's strict Islamic codes
for clothing and behavior. Among those protesting are conservative
women and men, joining throngs of young secular people who say the
enforcement of rules around hijab, or headscarves, for women is
often capricious.
GLOBAL NEWS
Developing Countries Face Stiff Economic Headwinds, World Bank
Chief Says
WASHINGTON-The head of the World Bank warned that developing
nations face an extremely challenging near-term outlook, as the
sharp slowdown in global growth raises the risks of a prolonged
recession.
Speaking Wednesday at Stanford University, David Malpass said
the challenges for the developing world are shaped by higher food,
fertilizer and energy prices caused by the war in Ukraine, as well
as rising interest rates, currency depreciation and capital
outflows, which could result in a shortage of funds needed to
support people's lives and economic activities.
Lithium Demand From EVs Is Strong. Shortages Will Keep Prices
High.
Lithium prices have tripled in a year, and the chemical element,
which is used in batteries for electric vehicles, faces a long-term
supply shortage.
The increase "is largely due to increasing demand for electric
vehicles and the inelastic nature of supplies," says Alec Lucas,
research analyst at Global X. Bringing new production capacity
online can take three to five years or more, "for studies,
permitting, capital raising, and capital expenditure before any
lithium is produced."
What the Bank of England's Emergency Move Means-And Doesn't-for
the Fed
The Bank of England's emergency move to buy U.K. government
bonds begs the question: Is the resumption of quantitative easing
in the U.K. idiosyncratic, or does it foreshadow a U.S. Federal
Reserve that is close to backing down from its inflation fight?
On Wednesday the BoE said it would purchase the country's
long-dated government bonds "on whatever scale is necessary" to
stabilize its bond market after the U.K. government announced large
tax cuts last week despite double-digit inflation. Strategists say
the central bank's move implies that at least one large entity,
such as a pension fund or a financial institution, was on the verge
of failure amid a disorderly Gilt market.
Biden Administration Grants Waiver Allowing Diesel Shipment Into
Puerto Rico
The Biden administration on Wednesday approved a temporary
waiver to Jones Act shipping restrictions to allow a tanker to
deliver diesel fuel to Puerto Rico needed to run generators
following the devastation caused by Hurricane Fiona.
The waiver was granted after criticism from Puerto Rico's
governor and other officials while the BP ship sat off the island's
coast, unable to unload 300,000 barrels of diesel fuel because of
the law that limits domestic U.S. maritime shipments to
U.S.-flagged vessels. The BP vessel, which picked up its fuel cargo
in Texas, is flagged to the Marshall Islands.
Write to paul.larkins@dowjones.com
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(END) Dow Jones Newswires
September 29, 2022 05:49 ET (09:49 GMT)
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