European Midday Briefing : Inflation Fears Hold Back Stocks

MARKET WRAPS

Stocks:

Shares in Europe struggled for momentum, with investors cautious before the euro zone's final inflation report for November, and as they look ahead to the U.S. personal consumption expenditure data later this week.

"As of today, upside risks to inflation persist and build up, and this will inevitably dawn on investors sooner rather than later," Swissquote Bank said.

"A stronger case is being built for a sizeable downside correction in both stock and bond markets into next year."

Stocks to Watch

While John Wood Group is steadily progressing on its turnaround plan, investors will likely still need to see solid evidence of continued growth and free cash-flow generation into 2024 for shares to re-rate, Berenberg said, lifting its price target to 200 pence from 180 pence.

Revenue and Ebitda growth of at least mid-to-high single digit target and material free cash flow generation would help, Berenberg said.

"In addition, a restart of the dividend from 2025 would provide a confident message to investors that long-term, sustained FCF generation is expected."

U.S. Markets:

Forex:

The yen fell after the Bank of Japan kept its ultra-loose policy unchanged and offered no hints of a possible switch in direction, but losses were limited, suggesting investors still expect the central bank to tighten next year, UniCredit Research said.

"This relatively moderate reaction... suggests that investors are still confident that a change in the BOJ monetary policy might occur next year although the Japanese central bank refrained from indicating any timeframe yet."

The dollar's gains against the yen were also insufficient to lift the DXY dollar index, with the U.S. currency remaining "sluggish."

Bonds:

Eurozone and U.K. government bond yields fell on improved market sentiment following the BOJ decision.

"Markets read the [BOJ] outcome as neutral to moderately dovish," UniCredit Research said.

Danske Bank Research said the fall in bond yields is overdone, but both U.S. and European data have brought interest-rate cuts closer, forecasting 10-year Bund yields at 2.35% on a 12-month horizon.

"Our view is that market developments have recently overtaken reality."

The roughly 150 basis points of interest-rate cuts priced in by markets for the European Central Bank in 2024 "would require a considerably grimmer economic environment than currently appears to be on the cards," Danske said, expecting three interest rate cuts of 25 basis points each next year, starting in June.

Energy:

Oil prices were mixed on concerns over global trade disruptions after major shipping and oil-and-gas companies paused transit in the Red Sea due to escalating attacks from Yemen's Houthi rebels.

The U.S. and other nations have set up a naval force to protect vessels in the area, while an increasing number of companies is rerouting ships via southern Africa's Cape of Good Hope.

"Investors and consumers haven't forgotten the impact snarled up supply chains had on prices following the pandemic," AJ Bell said.

"News that shipping firms will cease using the Red Sea route after a number of attacks on shipments will be unsettling."

Metals:

Copper prices edged higher despite broad concerns over weak demand in top metals consumer China, and as investors continued to keep a close eye on the path of interest rates.

According to analysts, markets continue to price in a 25 basis-point interest rate cut by the Fed as early as March.

"The communication and timing of these cuts will be an important driver for risk assets, the dollar, and our commodity markets next year," Peak Trading Research said.

Saxo Bank has kept a bullish outlook for gold into 2024 "in the firm belief that rates have peaked, and that Fed funds and real yields will start to trend lower."

Central banks' demand for gold is also potentially heading for another record year, with more than 1000 tons being removed from the market for a second year running, Saxo Bank said, adding that this is one of the main reasons the yellow metal has managed to rally despite surging real yields.

EMEA HEADLINES

Cevian Takes $1.3 Bln Stake in UBS, Citing Potential to Increase Value

Activist investor Cevian Capital paid 1.2 billion euros ($1.31 billion) for a stake in UBS Group, saying it sees significant value potential in the Swiss financial giant after its takeover of rival Credit Suisse.

The Swedish investment firm said Tuesday that its stake in UBS amounts to 1.3%. UBS declined to comment when contacted by Dow Jones Newswires.

Why UBS Wants to Be the No. 6 Investment Bank in the U.S. (Yes, No. 6)

More than a decade after throwing in the towel on its hopes of being a major player in the lucrative U.S. investment-banking market, UBS is making another push, but this time the Swiss financial giant's ambitions are a bit more measured.

The takeover of local rival Credit Suisse and turmoil at other global peers has opened a door of opportunity to build back up a business that has been lagging behind rivals, UBS executives say. They have been on a hiring spree for senior deal makers, expanded research coverage and are ramping up pitches to potential clients.

GLOBAL NEWS

These Bull Markets Could Keep Charging Ahead

The typical year-end investing advice is to trim holdings of your winners and buy more shares of the losers. But the party may not be over for some of this year's bull markets.

In a note to clients on Monday, Louis-Vincent Gave, founding partner of Gavekal Research, predicted further gains for Latin American stocks and bonds, Japanese stocks, uranium, and gold. But he said he thinks the Magnificient Seven stocks, which include Apple, Amazon, Alphabet, Meta Platforms, Nvidia, Microsoft, and Tesla, could lose steam. He considers India, the market's darling in 2023, pricey.

Fed Official Says Rate Cuts Could Be Needed Next Year to Prevent Overtightening

A Federal Reserve official said it is appropriate for the central bank to begin looking ahead to lowering interest rates in 2024 because of how inflation has improved this year.

San Francisco Fed President Mary Daly said her outlook for interest rates and inflation was "very close" to the median of projections from 19 Fed officials last week. Most of them penciled in at least three rate cuts next year amid a faster decline in inflation than they anticipated.

Russia Tried to Weaken Democrats Ahead of 2022 Midterm Vote, U.S. Spy Agencies Say

WASHINGTON-The Russian government and its proxies attempted to denigrate the Democratic Party and undermine voter confidence ahead of the 2022 midterm elections, an operation that most likely sought to weaken U.S. support for Ukraine, U.S. intelligence agencies said.

China also tacitly approved efforts to try to influence a handful of unidentified midterm races, though it refrained from favoring one party, as Beijing exhibited a greater willingness to target the U.S. with election influence activities than it has previously, according to a newly released intelligence community assessment. Iran also was blamed for trying to undermine confidence in U.S. democracy, while other foreign governments, including Cuba, were said to have experimented with small-scale U.S. influence pushes.

Kim Jong Un's Most Powerful Weapon Is Ready if U.S. Makes a 'Wrong Decision'

SEOUL-In November 2017, North Korea hit a milestone: launching a homegrown intercontinental ballistic missile that could reach the U.S. mainland.

More than six years later, honing the technology has become a perennial quest, with launch after launch.

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

(END) Dow Jones Newswires

12-19-23 0510ET