European Midday Briefing : Middle East Turmoil Contiues to Hamper Markets

MARKET WRAPS

Stocks:

European stocks struggled for momentum on Monday as investors continued to focus on the intensifying conflict in the Middle East, higher oil prices and the impact on inflation.

"As a result of this continuing uncertainty and the war of words being played out in plain sight it's hard to see much in the way of upside for stock markets unless there is a dialling back in the tension which is currently convulsing the region," CMC Markets UK said.

Stocks to Watch

The GLP-1 story will be dominated by Novo Nordisk and Eli Lilly through the next two decades, reflecting their entrenched commercial position, superior product profiles, compelling outcomes data, strongest pipelines, and volume requirements providing significant barriers to entry, Citi said.

Sales of GLP-1 drugs--developed to treat weight-loss and diabetes--are set to exceed $36 billion in 2023, despite continuing periodic supply constraints.

"We forecast...Novo's GLP-1 franchise growing from $24 billion in 2023 to $77 billion in 2039."

Novo's revised forecasts point to 2023-28 sales growth of 16% and EPS growth of 22%, and Citi's EPS estimates are 50% ahead of consensus, it added. It raised its price target to DKK815 from DKK745, maintaining a buy rating on the stock.

Economic Insight

Although inflation remains too high, there are growing signs the current tightening cycle has already peaked--or will do soon, Lazard Asset Management said.

"The market is already expecting rate cuts in the middle of next year, indicating a recessionary market environment," it said, but added that central banks haven't won the fight against inflation yet.

"The good U.S. economic data, the robust labor market and the recent rise in oil prices would complicate the situation for central banks," Lazard said. On the positive side, economic data on both sides of the Atlantic don't currently point to a hard landing.

U.S. Markets:

Stock futures and Treasury yields edged higher, with a quiet earnings calendar ahead of a wave of companies reporting on Tuesday. Charles Schwab is the one to watch in early Wall Street trading.

Economic updates set for release include the Empire State manufacturing survey for October, while Philadelphia Fed President Patrick Harker is due to speak twice during the day.

Other Stocks to Watch

Lululemon Athletica will join the S&P 500 on Wednesday. It replaces Activision Blizzard, after the gaming company's takeover by Microsoft. Lululemon stock rose 4.6% premarket.

Pfizer, Moderna, BioNTech and Novavax stocks and ADRs fell in premarket trading. Late Friday, Pfizer cut its revenue outlook for the year by $9 billion due to fading demand for Covid-19 treatments.

Forex:

The dollar edged lower as investors are hesitant to bet on more sustained gains of the currency, UniCredit Research said.

"The rise in inflation expectations included in the University of Michigan's survey for October lifted the USD across the board, but investors were still reluctant to ride a more sustained rise of the U.S. unit," it said.

Markets remain skeptical about a final rate hike by the Federal Reserve by December, with less than 50% likelihood of such a move priced. Holding 1.05 and regaining 1.06 is important for EUR/USD to avoid a drop back to the year-to-date low of 1.0449, UniCredit Research said.

RBC BlueBay Asset Management said the dollar might be losing momentum for now amid a somewhat less hawkish stance from the Fed.

"In many respects, it was surprising that the dollar failed to be lifted much by a flight to quality on geopolitical worries," it said.

With the dollar failing to gain from recent strong payrolls data, "it may be tempting to think that the trend towards a stronger dollar has run its course for the time being," RBC added.

Read Sterling Likely to Struggle Against Dollar on Increased Uncertainty

Bonds:

Commerzbank Research said the underlying run into safe-haven German Bunds is unlikely to reverse with "Israel's ground offensive in Gaza imminent amid risks that Hezbollah or even Iran/U.S. may enter the war," but further curve flattening should be limited.

Various European Central Bank speakers across the doves-hawks spectrum line up on Monday and Tuesday but "are unlikely to strike any new tones on the policy stance and will probably stick to their respective biases."

AXA Investment Managers Core said 2023 was supposed to be the year of the bond after the biggest increase in yields since 2020 but, instead, the market has given the doubters more reasons to question the value of fixed income.

AXA added that "next year will be the year of the bond." Bond yields are at multiyear highs; returns have been "awful" and the risk-return balance for putting money in today's bond market is the best it has been for a generation.

"Of course, higher cash rates for now will remain a challenge but once central banks go down the more dovish route, returns will pick up."

Read Approaching End of Interest-Rate Rises Bodes Well for Fixed Income

Read Italy Faces Risks on Rating Outlook on Friday

Read Greece Could Get Another Investment-Grade Rating on Friday

Energy:

Crude oil prices pulled back slightly following last week's late surge, with tensions in Israel and Gaza providing worry to markets.

Concerns the wider region would become embroiled in the conflict are a major worry for analysts.

"Market attention has now turned to the likely Israeli ground invasion of the Gaza Strip," Commonwealth Bank of Australia said, adding that if Israel "dismantled" Hamas quickly and withdrew as soon as possible it should limit Brent prices to around the $90 a barrel mark.

Metals:

Base metals gained while gold fell around 1% as markets remained focused on the events in the Middle East.

"A fall in Treasury yields will have provided some support to the gold market, while the ongoing uncertainty in the Middle East will likely have boosted demand for safe-haven assets," ING said.

It added that ETF demand remained down with holdings 397,000 ounces lower last week to 86.7 million ounces.

DOW JONES NEWSPLUS

EMEA HEADLINES

UK House Prices Rise on Month But at Lowest Rate Since 2008

The average house price in the U.K. rose 0.5%, or 1,950 pounds ($2,374), in the month to Oct. 7, the smallest increase for this time of the year since 2008, according to new data from Rightmove released on Monday.

The average price of property coming to the market rose on month to GBP368,231, well behind the average rise of 1.4% for the month, the online property portal said. On an annual basis, house prices fell 0.8%, worsening from a 0.4% slip in September.

Poland's Vote Provides Donald Tusk With Path Back to Power

WARSAW-Poland's ruling Law and Justice Party fell short of the seats needed to form a government on Sunday, an exit poll showed, putting the opposition on track for a majority coalition after a divisive election watched closely by the U.S. and Ukraine.

The results potentially close a chapter of rule by PiS, as the party is known in Polish. It steered the country through the turmoil caused by Russia's invasion of Ukraine, but the opposition has said its leadership was marked by a steady rolling back of democratic freedoms and the rule of law. Without any one party with an absolute majority, the results portend a period of horse trading as parties decide among themselves the makeup of what would be a ruling coalition.

U.S. and Europe Clash Over Trump-Era Tariffs

BRUSSELS-The Biden administration's relationship with the European Union, a vital geopolitical ally in a time of crisis, is being tested by a Trump-era policy on metals tariffs that the White House had sought to unwind.

Former President Donald Trump in 2018 slapped hefty tariffs on most U.S. steel and aluminum imports, citing national security as grounds. The move infuriated U.S. allies-including other members of the North Atlantic Treaty Organization-and led some to impose retaliatory measures.

Clashes Intensify as Israel Prepares Gaza Invasion

TEL AVIV-Israeli forces struck Gaza in the south on Sunday ahead of an imminent ground attack and amid a growing humanitarian crisis, as fighting between Israel and Islamic militants along its northern border with Lebanon intensified.

Foreign diplomats meanwhile scrambled to find a solution to a crisis that threatens to engulf the Middle East.

GLOBAL NEWS

China's Central Bank Steps Up Liquidity Support; Keeps Policy Rate Unchanged

China's central bank stepped up its support of the economy with an increased injection of liquidity into the financial system, even as it kept a key lending rate unchanged.

The People's Bank of China Monday injected 789 billion yuan ($108 billion) worth of liquidity into the banking system via its one-year medium-term lending facility at an interest rate of 2.5%, the same rate as at its previous operation.

A Recession Is No Longer the Consensus

Economists are turning optimistic on the U.S. economy. They now think it will skirt a recession, the Federal Reserve is done raising interest rates and inflation will continue to ease.

In the latest quarterly survey by The Wall Street Journal, business and academic economists lowered the probability of a recession within the next year, from 54% on average in July to a more optimistic 48%. That is the first time they have put the probability below 50% since the middle of last year.

A Soft Landing in the U.S. Could Be Hard for Everyone Else

The U.S. economy might be heading for a soft landing. But the rest of the world could be in for a jolt.

Global financial officials say they are grappling with an increasingly fractured economic outlook, as many countries struggle with the lasting scars of the Covid-19 pandemic while others power ahead.

Write to [e-mail]

Write to us at [e-mail]

(MORE TO FOLLOW) Dow Jones Newswires

10-16-23 0530ET