UKX FTSE 100 Index

MARKET WRAPS

Stocks:

European stock markets staged a moderate recovery on Friday after steep losses this week in response to the U.K.'s plan for sweeping tax cuts to be funded by borrowing.

Quarter-end flows were dominating trade but the overall outlook remains grim with concerns about U.K. fiscal policy coupled with economic and geopolitical woes.

In the U.K., house-builders gained as battered investors welcomed data showing house-price rises continued in September. Still, annual price increases slowed to 9.5% during the month, from 10% in August, the Nationwide house-price index showed.

"Before taking into account today's moves, [the third quarter] will have been a pretty dreadful quarter for many investors in the U.K. stock market," said Steve Clayton, fund manager at HL Select.

Stocks to Watch:

Credit Suisse needs CHF6 billion in capital to effectively restructure operations, support growth and protect itself from the unknown, KBW Research said, adding that the fact the Swiss bank's market cap fell below CHF10 billion this week was a worrying sign.

KBW said a negative feedback loop might now be engulfing the company as happened to Deutsche Bank in 2016.

Replenishing Credit Suisse's capital base, including a CHF4 billion capital raise, undergoing large-scale cost reductions and a material shrinkage of the investment bank is the only way to steady investor perceptions and put the bank back to profitability, KBW said. It has an underperform rating on the stock and a CHF4.50 target price.

Economic Insight:

The French government's budget for 2023 is based on over-optimistic macroeconomic projections, Barclays said.

The government projects an unchanged deficit of 5% of GDP and debt of 111.2% of GDP in 2023. Barclays said the deficit will eventually fall to 4.7% of GDP in 2022 but deteriorate next year to 5.7% of GDP as the French economy enters a recession and GDP declines by 0.7% in 2023.

Public debt is projected to remain virtually unchanged over the next five years, but it could increase further if economic growth continues to disappoint, Barclays added.

"The medium-term projections presented by the government lack ambition to restore public finance sustainability."

U.S. Markets:

Stock futures ticked higher and government bond yields edged down ahead of an update on consumer spending and the Federal Reserve's preferred inflation gauge.

Stocks to Watch:

Nike shares dropped 9% premarket after it said price-cutting efforts to flush off-season clothing from warehouses in North America would dent gross margins for the rest of its fiscal year and warned of a big potential hit from the stronger dollar.

The stock fell as much as 10% after hours on Thursday.

Forex:

The dollar fell to a one-week low against a basket of currencies, largely due to quarter-end flows as investors adjusted positions after a turbulent week. But reasons for dollar strength remain, ING said.

"While the macro risks remain skewed for a stronger dollar, over the short term the dollar does look to be getting caught up with quarter-end re-balancing flows and the de-leveraging of tightly held positions - including long dollars," ING said.

Prospects of further Fed interest rate rises and safe-haven demand due to economic and geopolitical risks should ensure any losses are temporary, ING added. It reckons the DXY Dollar Index could hit 120 by year-end.

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Sterling has erased much of its losses against the dollar since Friday's mini budget, reaching a one-week high of $1.209, but the U.K. government needs to clarify its plans sufficiently to avoid renewed declines, MUFG said.

This week's intervention by the Bank of England and news that Prime Minister Liz Truss and Chancellor Kwasi Kwarteng will meet today with the head of the Office for Budget Responsibility has calmed trading in sterling.

A YouGov opinion poll showing collapsing support for the ruling Conservative Party could encourage parliament opposition to the budget, MUFG said. Still, the U.K.'s hefty external financing burden underlines the urgent need for clarity, it added.

Bonds:

U.K. gilts kicked off Friday with gains after a turbulent week but investors are likely to remain cautious towards increased debt issuance, fiscal concerns and anticipated further interest-rate increases by the Bank of England.

The 10-year gilt yield was down more than 7 basis points to 4.032%, tracking European peers, according to Tradeweb.

"Today of course marks the last day of a memorable quarter," Mizuho said.

Italian BTPs, long-end gilts and investment-grade credit spreads have been among the most hit on a quarter-by-quarter total return basis, Mizuho said.

Read: Gilts Are Expected to Remain Under Pressure

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Eurozone government bonds look to regain some of their recent lost ground but volatility is set to remain, as central banks continue their fight against inflation with interest-rate rises, analysts said.

"The volatility remains in the market given the uncertainty about the terminal rate, QT [quantitative tightening], fiscal stimulus packages as well as the poor market liquidity," Danske Bank said.

Barclays said higher outright government bond yields and wider peripheral yield spreads are "the path of least resistance," citing likely persistence of elevated volatility and an unfavorable medium-term supply-demand backdrop.

It said volatility in eurozone rates markets has risen sharply in the context of spillover from extreme volatility in U.K. rates. Developments in the U.K. will likely continue to influence near-term price action in euro fixed-income markets, Barclays added, pointing to scope for continued volatility.

Other Comment:

Italy lines up for a ratings review by Moody's later Friday but a downgrade of its 'Baa3' rating with negative outlook is unlikely just yet, Barclays said.

Moody's lowered Italy's outlook to negative in August, and a downgrade would mean Italy loses its investment grade rating with the agency.

"Such an outcome is not our base case: rating agencies typically maintain a negative outlook for 1-2 years before initiating a downgrade, while Moody's will likely want to see how the new government's policy approach evolves before taking action."

That said, a downgrade cannot be ruled out, according Barclays, in the context of the current uncertain environment.

Energy:

Oil prices were on course to end the week higher for the first time in five weeks as investors looked ahead to an expected OPEC+ production cut next week.

OPEC+ meets next Wednesday and is increasingly expected to cut production levels for a second time to help arrest a slide in oil prices on concerns about weak demand.

"There is increasing noise that OPEC+ will be looking to agree on an oil production cut at their meeting next week, given the broader pressure that we have seen on oil prices," ING said.

Other News:

European energy ministers are expected to approve the main tenets of a EUR140 billion plan to counter Moscow's efforts to deprive the continent of natural gas and hobble its economy, diplomats said.

The meeting of senior officials in Brussels comes just days after leaks were detected along the Nord Stream pipeline in the Baltic Sea-damage that NATO said was the result of sabotage.

Read more here.

Metals:

Base metals moved higher again after the LME said it was considering launching a consultation on whether it should continue accepting Russian metal on its trading system.

The exchange said a discussion paper to be shared with market participants was an option "under active consideration," but stressed that no decision had been made.

The consultation would seek to take on the views of traders and other users of the exchange and would consider the possible options to be taken regarding metals of Russian origin.

Read more here.

DOW JONES NEWSPLUS

EMEA HEADLINES

Eurozone Inflation Posts New Record High of 10.0% in September

Eurozone inflation hit a new record in September and is expected to rise further in the coming months amid higher energy prices, increasing the likelihood of a lengthier and deeper economic contraction at year-end.

The consumer price index--a measure of what consumers pay for goods and services--increased 10.0% in September compared with the same month a year earlier after climbing 9.1% in August, according to preliminary data from Eurostat, the European Union's statistics agency.

EU Is Expected to Approve Sweeping Energy-Market Intervention

BRUSSELS-European energy ministers are expected to approve the main tenets of a EUR140 billion plan to counter Moscow's efforts to deprive the continent of natural gas and hobble its economy, diplomats said.

The meeting of senior officials in Brussels comes just days after leaks were detected along the Nord Stream pipeline in the Baltic Sea-damage that NATO said was the result of sabotage.

UK Economy Grew Slightly in Second Quarter

The U.K. economy grew marginally from April to June, but is expected to contract in the coming quarters as the cost-of-living crisis and higher interest rates weigh on consumers and businesses.

U.K. gross domestic product expanded by 0.2% in the second quarter compared with the first three months of the year, instead of the 0.1% contraction previously estimated for the period, data from the Office for National Statistics showed Friday.

German Labor Market Remained Stable in September Despite Weakening Outlook

Jobless claims in Germany rose in September, but less than expected, showing the resilience of the labor market amid the energy crisis and weakening consumption.

Jobless claims increased by 14,000 in September compared with the previous month, down from the revised 26,000 rise registered in August, according to data from the Federal Employment Agency released Friday. Economists polled by The Wall Street Journal had forecast that the number of people out of work would climb by 20,000.

BOE Says UK Government Tax Cuts Will Prompt 'Significant' Change to Key Interest Rate

The Bank of England is likely to make a "significant" change to its key interest rate in response to tax cuts recently outlined by the U.K. government when policymakers next meet in early November, its chief economist will say later Thursday.

"It is hard to avoid the conclusion that the fiscal easing announced last week will prompt a significant and necessary monetary policy response in November," Huw Pill will say, according to the text of a speech to be delivered later in Northern Ireland.

Pension Strategy Left Funds Vulnerable to Rate Increases

A pension-fund strategy that aims to reduce volatility without lowering returns created the first crack in the financial system after one of the fastest jumps in interest rates in decades.

The Bank of England stopped the selloff exacerbated by heavy selling from U.K. pension funds forced to raise cash.

U.K. Prime Minister Defends Tax Cuts as Market Turmoil Continues

LONDON-Prime Minister Liz Truss looked to reassure the British public and rattled investors that her plan to cut taxes wouldn't lead to prolonged financial instability, arguing in a series of interviews on Thursday that the country had been buffeted by global shocks rather than her government's reforms and that her policies would result in faster growth.

"We had to take decisive action," Ms. Truss told the British Broadcasting Corp. in her first public comments since the tax plan was presented last Friday. The new prime minister said she wouldn't backtrack on plans to carry out big tax cuts and spending increases, a package funded by borrowing which raised alarm among investors.

LME Considering Consultation on Banning Russian Metal

The London Metal Exchange said late Thursday that it was considering launching a consultation on whether to allow Russian metal to be traded and stored in its system.

The exchange said a discussion paper to be shared with market participants was an option "under active consideration," but stressed that no decision had been made.

Thousands Protest in France Against Inflation, Macron's Pension Plan

PARIS-Thousands of people took to the streets in France on Thursday to demand higher wages to cope with inflation and to protest President Emmanuel Macron's plan to raise the country's retirement age.

Striking teachers, students and railway workers joined peaceful protests in dozens of cities across the country, snarling traffic and forcing many schools to shut down. The Eiffel Tower remained closed. The street demonstrations are a sign of the potential turmoil European leaders face as the war in Ukraine continues with no end in sight. Moscow has choked supplies of Russian gas to the continent, hammering businesses and stoking fuel prices.

Barclays to Pay $200 Million SEC Fine Over Debt-Sale Snafu

Barclays PLC agreed to pay a $200 million fine to settle Securities and Exchange Commission charges stemming from a flubbed debt sale earlier this year.

The British bank had registered with the SEC to sell up to $20.8 billion in securities but sold some $38.5 billion worth instead. The flub involved the sale of structured notes, or debt instruments linked to an underlying reference such as the S&P 500 index, and exchange-traded notes.

Iran Protests Feature Smaller Gatherings, Rooftop Chanting as Crackdown Intensifies

Iranian protesters are moving away from big gatherings and street clashes with authorities in Tehran in favor of pop-up demonstrations and individual displays of resistance against the government, according to residents of the capital.

The decline in large-scale demonstrations against the Islamic establishment is driven in part by the harsh crackdown, the threat of arrests and efforts by police to seal off central areas of the city from protesters, the people said.

Escalation of Ukraine War Effort Raises Risks to Russia's Putin at Home and Abroad

MOSCOW-Russia is planning triumphant ceremonies and public rallies as President Vladimir Putin prepares to formally annex a broad, additional swath of neighboring Ukraine in the coming days.

The celebrations are set to echo the pomp and circumstance that accompanied Russia's seizure of Ukraine's Crimean Peninsula eight years ago, an event that Mr. Putin marked in the imperial grandeur of the Kremlin's gilded St. George's Hall.

GLOBAL NEWS

China's Service Sector Slows in Latest Economic Warning Sign

HONG KONG-Chinese economic activity remained feeble in September, with the services sector slipping into contraction, offering fresh evidence of the damage that Beijing's Covid-prevention measures and a deepening real estate slide are inflicting on the country's economy.

Activity in the service sector, which includes the retail, catering and transport industries, were hammered as authorities across China tightened Covid-19 restrictions ahead of a key political gathering in October.

China's Central Bank Gives Cities Room to Lower Mortgage Rates

China's central bank is giving local governments leeway to lower mortgage rates for first-time home buyers, in a bid to shore up the nation's slumping real-estate market.

The People's Bank of China said late Thursday that cities that have recorded month-on-month and year-over-year drops in home prices between June and August can relax the floor on mortgage rates for first-time buyers.

India's Central Bank Calls Aggressive Monetary Policy a Shock to Global Economy

India's central bank raised its key interest rate by half a percentage point, as efforts to rein in inflation and protect an economic recovery have been complicated by its currency's decline against the U.S. dollar.

On Friday, the Reserve Bank of India raised its overnight lending rate to 5.90% from 5.40%, the fourth increase since it began raising rates following an unscheduled meeting in May, prompted by global inflationary pressures exacerbated by Russia's invasion of Ukraine.

Talking Markets: Taiwan Dollar More Prone to Risks Than Most Other Asian Currencies

The Taiwan dollar, which fell to five-and-a-half-year lows against the U.S. dollar in the third quarter, is likely staring at more potential volatility and weakness till the end of this year.

Vulnerability to geopolitical risks and potential equity outflows are likely to weigh on the currency in the fourth quarter, analysts say.

Fed must try to avoid a 'harsh recession,' Daly says

The Federal Reserve does not need to induce a deep recession in order to bring down high inflation, San Francisco Fed President Mary Daly said Thursday.

"Inducing a deep recession does not seem warranted by conditions, nor is it necessary to achieve our goals," Daly said in a speech at Boise State University.

Senate Approves Stopgap Bill to Fund Government, Provide More Ukraine Aid

WASHINGTON-The Senate approved legislation to keep the federal government operating until mid-December as well as fund new aid for Ukraine.

The legislation, which passed 72-25, would prevent a partial government shutdown after the current fiscal year expires Friday night.

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

(END) Dow Jones Newswires

September 30, 2022 05:59 ET (09:59 GMT)

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