European Midday Briefing : Stocks Struggle, Lack U.S. Direction

MARKET WRAPS

Stocks:

European stocks edged lower on Monday, erasing early gains, and with U.S. markets closed, trading volumes are likely to be lighter than usual.

Investors continue to weigh the outlook for monetary policy following some mixed signals on the U.S. economy.

Interactive Investor said U.S. bank earnings so far have been mixed, though weaker U.S. producer prices data eased inflation concerns following the recent stronger-than-expected U.S. CPI data.

Stocks to Watch

ABN Amro is unlikely to strike cross-border deals soon, ING said after Bloomberg reported that Deutsche Bank's CEO is exploring deals with the Dutch lender and Commerzbank to boost its valuation.

"Such press articles are not new, and we believe that it is unlikely so early after the Silicon Valley Bank banking crisis to see any large M&A, " ING said.

Cross-border deals offer little value without a banking union, it added, noting that the Basel 4 reforms potentially coming in 2025 will help fuel such talks.

The Dutch State--which owns around 48% of ABN Amro--is unlikely to prioritize profit over banking stability, ING said, noting the weak position of any government resulting from November's elections might be another reason to not rush into deals.

The first two weeks of the year were marked by escalating tensions in the Middle East and the Indo-Pacific, events that coupled with the war in Ukraine should continue to support European defense sector spending, Citi said.

"Overall, we struggle to see a geopolitical climate in near-term which lends itself to lower European defense spending."

Citi noted that several countries have elections in Europe this year as does the U.S., which could have significant ramifications on the urgency and degree to which European powers increase arms spending.

Market Insight

Many investors remain overweight cash but Neuberger Berman doesn't share this view as markets have begun to price for a substantial decline in short-term interest rates.

Neuberger Berman's asset allocation committee "therefore thinks it is time to deploy liquidity, locking in bond yields before they, too, are dragged down, and seeking out value in equities and other markets."

As a result, Neuberger Berman has "heavily" downgraded its view on cash. "When cash begins to drag on returns but economic fundamentals remain uncertain, conservative valuations become an investor's friend."

Economic Insight

Jefferies's major call for 2024 is a bullish view on front-end rates and steeper curves, but it doesn't share market views of early interest-rate cuts.

"We are not in the March rate-cut camp for the Federal Reserve or an April cut from the European Central Bank," it said.

Jefferies continues to expect the first rate cuts from both the Fed and the ECB in June, with the view driven by the fact that there is no urgency for the central banks to be overly aggressive in rate cuts.

Forex:

The dollar is likely to stay in a tight range this week, keeping the DXY index in the 102-103 region, ING said, but it could benefit due to Middle East tensions and concerns about China-Taiwan relations after Taiwan's elections.

Recent better-than-expected U.S. data haven't triggered a dollar rebound and the consensus view that the currency will decline later this year "seems to be making investors keen to sell dollar rallies," ING said.

Investors probably need clearer signals from the Federal Reserve that data don't justify the market pricing in so many interest-rate cuts.

Bonds:

The eurozone government bond syndications pipeline should start thinning out after last week's whopping volume of EUR41 billion, Commerzbank Research said.

That said, the syndications that are usual at the beginning of the year aren't over yet.

"Among the candidates for further syndications are Finland and France," Commerzbank said.

However, France only came to market in late January/early February in the last two years, indicating the French Treasury Agency might wait until after this first supply wave has been absorbed.

Gilt yields edged higher as investors awaited Tuesday's U.K. labor market report and Wednesday's inflation data.

"So far this year, investors have been very constructive on U.K. rates. This week, gilts will have to digest fresh labor market and inflation data, which will put that appetite to the test," Mizuho said.

Stronger-than-expected data would increase prospects of interest rates staying higher for longer and dampen demand for gilts.

Energy:

Oil prices edged lower after rising earlier in the session with investors keeping a close eye on the Middle East following U.S.-led attacks against Houthi targets in Yemen.

On Sunday, the U.S. military shot down an anti-ship cruise missile fired from Houthi militant areas of Yemen toward a U.S. destroyer in the Southern Red Sea.

"We are still not seeing a reduction in oil supply as a result of developments in the region. But clearly the more escalation we see in the region, the market will likely have to start pricing in the larger risk of supply disruptions," ING said.

Metals:

Base metals were mixed after China's central bank left its key policy rates unchanged against expectations of monetary easing, while gold moved higher.

"The macro environment is sending mixed signals ahead of the MLK [U.S.] market holiday and a quiet week for economic data," Peak Trading Research said.

"Investors are betting on a dovish Fed, which supports stock markets, bonds, and cryptos but isn't translating to better demand for commodities."

Gold may undergo a breakout , based on technical charts, after it staged a V-shaped reversal in last week's latter half at the lower boundary of its medium-term ascending channel in place since early October, together with a bullish momentum condition signaled by the daily relative strength index's momentum indicator.

Uranium prices are surging faster than anticipated, Morgan Stanley said.

The bank, which recently named the nuclear fuel as its top mined-commodities pick, pointed out that uranium's $92.50/pound spot price is now just 2.6% shy of MS's $95/pound 2Q forecast.

Estimated margins for hot rolled coil steel in China are at their lowest since 2015, Morgan Stanley said, yet that doesn't necessarily suggest recent softness in iron-ore prices will continue.

EMEA HEADLINES

German Economy Contracted in 2023, Hit by Inflation and Weak Foreign Demand

Germany's economy contracted in 2023, hindered by high inflation that squeezed consumer spending, with the country's creaking industrial model also suffering from weak global demand.

Price adjusted gross domestic product declined 0.3% compared with the previous year, according to preliminary data published Monday by Germany's statistics office Destatis.

Thomson Reuters Buys Majority Stake in Pagero

Thomson Reuters said it has bought a majority stake in the Pagero Group, taking it closer toward full control of the latter.

Apart from the key shareholders, including Summa Equity, Pagero's chief executive Bengt Nilsson, several members of the management team and employees, have sold their stock to the company, Thomson Reuters said Monday.

GLOBAL NEWS

China Central Bank Keeps Key Policy Rates Unchanged

China's central bank on Monday kept its key policy rates unchanged in an unexpected hold.

The country's major commercial banks had lowered their deposit rates, a move seen as leaving room for more rate cuts.

It Won't Be a Recession-It Will Just Feel Like One

The good news is the probability of a recession is down sharply, according to The Wall Street Journal's latest survey of economists. The bad news is that, for a lot of people, it is still going to feel like a recession.

Business and academic economists surveyed by the Journal lowered the probability of a recession within the next year, to 39% from 48% in the October survey.

Congressional Leaders Strike Deal to Fund Government Into Early March

WASHINGTON-Congressional leaders have reached an agreement on a new stopgap spending bill that would extend government funding into March, as House Speaker Mike Johnson (R., La.) sticks to his plan to defy the most brass-knuckled budget hawks in his party in a bid to avoid a government shutdown.

The government has been running on short-term spending laws, known as continuing resolutions, or CRs, since the start of the fiscal year on Oct. 1, as lawmakers continued to negotiate full-year funding.

Taiwan Election Piles Pressure on Delicate U.S.-China Ties

Taiwan's election of the presidential candidate China most distrusts puts at risk a fragile detente between Washington and Beijing, threatening another flare-up between the world's biggest economic and military powers.

Voters on Saturday gave the Democratic Progressive Party four more years in power, this time by choosing as president-elect the current vice president, Lai Ching-te, whom China condemns as an inveterate agitator for Taiwan's independence-an outcome that Beijing has vowed to prevent, by force if necessary.

After 100 Days, Israel-Hamas War Threatens to Spill Beyond Gaza, Disrupt Global Trade

After 100 days, Israel's war with Hamas is turning into a protracted conflict with no clear end, threatening to spread across the Middle East, disrupt global trade and bog down the U.S.

One of the biggest geopolitical events this century, the war has swung from a Hamas attack on Oct. 7 that Israel says killed 1,200 people to the Israeli military's ferocious retaliation against the militant group in Gaza.

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

(END) Dow Jones Newswires

01-15-24 0534ET