European Midday Briefing : Investors Continue to Digest Hawkish Fed Comments

MARKET WRAPS

Stocks:

European stocks were lower on Wednesday as investors continued to adapt to a less dovish outlook for interest-rate cuts by the Federal Reserve.

"The Fed members are on the battlefield, fighting the doves," Swissquote Bank said.

" Loretta Mester said there is no rush to cut rates and Neel Kashkari said that the Fed hasn't reached its inflation goal yet. The game is now being played for a May cut, with around two thirds probability attached to it."

Additionally, the European Central Bank's Isabel Schnabel warned against cutting interest rates too early, signaling again the difficulty of the "last mile" of bringing inflation down to target.

Shares on the Move

Barratt Developments said it would buy smaller peer Redrow in an all-share deal worth GBP2.5 billion. The acquisition value looks attractive and Barratt has previously noted a shortfall of land in the south east, an area Redrow specializes in, RBC Capital Markets said. Barratt fell 7% and Redrow rose 13%.

U.S. Markets:

Stock futures were trading little changed as Fed officials in recent days have said the central bank would be cautious in lowering interest rates.

Stocks to Watch

Ford Motor reported fourth-quarter adjusted earnings and sales that beat analysts' estimates and said it expects to generate an operating profit in 2024 of between $10 billion and $12 billion. The stock rose 5.7%.

Snap was falling 31% after the company posted fourth-quarter revenue of $1.36 billion, below Wall Street estimates of $1.38 billion, and said it expects an adjusted Ebitda loss for the first quarter of between $55 million and $95 million, much wider than consensus forecast for a loss of $21 million.

Forex:

The dollar edged lower, retracing some of its recent sharp gains, though it remained well supported following Friday's very strong U.S. jobs data, ING said, adding that a quiet week with low volatility could be a good opportunity to park money in the currency.

"Paying 5.3% on overnight deposits, the dollar... remains an attractive place to park money until some clearer trends develop."

The DXY dollar index should stay in a range between 104.00 and 104.75, ING added.

Bonds:

Natixis Research lowered its forecasts for eurozone government bond yield spreads , particularly for Italy, seeing a number of factors in favor of narrower spreads versus previous forecasts.

They now forecast the 10-year BTP-Bund spread at 170 basis points in March, down from their previous projection of 190bps.

Meanwhile, the 10-year German Bund yield is expected to end 2024 at 2.00%, Natixis said, confirming its previous forecast.

Having fallen below 2.00% at the end of 2023, the 10-year Bund yield returned to 2.15% at the end of January, in a steepening movement, it said.

Slowing inflation and a resilient economy is a good backdrop for bonds and more so for equities, Societe Generale said.

The most recent reading of U.S. PCE inflation is falling toward 2%, opening the door for Fed interest-rate cuts to come, it said. "The U.S. economy is moving away from overheating and is moving towards resilience."

Energy:

Oil futures were higher after the EIA said it doesn't expect domestic production to reach a new record until early 2025, easing concerns over market oversupply.

Meanwhile, heightened tensions in the Middle East are having only a marginal impact on prices in absence of major disruptions to oil supply, according to analysts.

"Market participants appear to be assuming that we will not see a significant escalation in the Middle East, at least an escalation which puts oil supply at risk," ING said.

UBS said the oil market is expected to be slightly undersupplied with OPEC and its allies likely to extend output cuts to mid year and a potentially overestimated U.S. crude production.

It sees Brent crude in a range of $80-$90 a barrel in the coming months from around $79 a barrel currently.

Metals:

Base metals and gold were marginally weaker but fairly stable, as the market processes a flurry of recent economic and monetary policy news.

Although the dollar and yields have corrected slightly after a Fed-driven rally in recent days, they are still relatively high, indicating the market has adjusted its expectations for U.S. monetary policy, according to analysts.

Base metals have found new levels of support after navigating a recent market downturn, thanks to the calming of macroeconomic pressures, while precious metals have recouped some of their recent losses, Sucden Financial said.

EMEA HEADLINES

Germany's Industrial Production Falls For Seventh-Straight Month - Update

Germany's industrial production declined more than expected in December, posting a seventh-straight month of falling output and reflecting further weakness in the key manufacturing sector of Europe's largest economy.

Output slumped 1.6% compared with the previous month, seasonally and on a calendar-adjusted basis, from an upwardly revised 0.2% decline in November, according to data published Wednesday by German statistics office Destatis.

Siemens Energy Swings to Net Profit After Orders Surge

Siemens Energy said it swung to a profit in the first quarter of fiscal 2024, when orders jumped amid favorable energy market trends.

The German energy company said Wednesday that its net income came to 1.55 billion euros ($1.67 billion) for the quarter ended Dec. 31 compared with a EUR473 million loss a year prior.

TotalEnergies Ramps Up Shareholder Returns, Joining Other Energy Majors

TotalEnergies said it would lift its 2023 dividend and increase payouts this year, joining other energy companies such as Shell, BP and Equinor in splashing out on shareholder returns.

The French oil and gas company said it would distribute a cumulative 2023 dividend of 3.01 euros ($3.24) a share, a 7.1% increase from a year earlier. The company proposed a final interim dividend for 2023 of EUR0.79 a share.

Orsted Sets Out Cost-Saving Plan After U.S. Wind Projects Cancellation

Orsted, the struggling European wind-energy giant, said it will cut costs, pause dividend payments over several years, sell assets and refocus business priorities as it tries to right itself from a costly move into the U.S. offshore wind market.

Orsted, which transformed itself in recent years from what was Denmark's small state oil company into a global giant in wind energy development, has recently hit major headwinds as it pushed aggressively to expand into new markets, particularly in a push in the U.S.

GLOBAL NEWS

King Cash Is Being Dethroned. What to Buy Now.

The mantra "cash is king" reigned supreme last year. Now it's time to dethrone the king and start putting cash to work.

Lured by 5% yields, investors have flooded into money-market funds and other cash proxies, plowing more than $7 trillion into the holdings. But the outlook for cash is dimming. The Federal Reserve is widely expected to cut its benchmark federal-funds rate this year; the timing and magnitude are a coin toss, but even small rate cuts would erode yields on cash.

Fed's Harker says a 'soft landing' is in sight as inflation wanes

The president of the Philadelphia Federal Reserve said inflation is slowing toward low, pre-pandemic levels and that the central bank appears primed to achieve a "soft landing" for the U.S. economy.

The Fed's "balanced" approach "has put us on the path to a soft landing, " Patrick Harker said in prepared remarks at a forum at Rowan University in New Jersey.

Biden Gets Real Win, Haley Takes Symbolic Loss in Unusual Nevada Primaries

LAS VEGAS-President Biden easily won Nevada's Democratic primary while Nikki Haley suffered an embarrassing-though symbolic-defeat to "none of these candidates" on the Republican side.

The Associated Press called the Democratic race Tuesday night, with Biden easily dispatching self-help author Marianne Williamson. Another Democratic challenger, Minnesota Rep. Dean Phillips, wasn't on the Nevada ballot. Soon after, AP said Haley had lost the GOP contest to a ballot choice that was seen as a sign of support for Donald Trump.

Senators Rush to Salvage Ukraine Aid After Border Deal Fails

WASHINGTON-Senators threw in the towel Tuesday on a $118 billion national-security and border package after sharp opposition from Republicans scuttled the deal, forcing frustrated lawmakers to urgently seek for a backup plan to deliver aid to Ukraine as it loses ground in its campaign to repel Russia.

The surrender to political reality left Democrats seething over what they called a bait and switch by Republicans after four months of talks, while GOP lawmakers said the deal's border provisions weren't strong enough. Both sides, however, signaled they could try to move to a narrower bill focused on foreign assistance and weapons once they get past Wednesday, when the doomed package will get a vote in the Senate.

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

(END) Dow Jones Newswires

02-07-24 0547ET