MARKET WRAPS
Watch For:
EU Harmonised CPI, New Passenger Car Registrations; UK Retail Sales; Italy CPI, Foreign Trade EU; no major corporate updates expected
Opening Call:
Equities in Europe will likely track global losses as inflation pressures mount. In Asia, all major benchmarks were in the red; the dollar was a touch weaker; short-end Treasury yields continued to rise; oil prices were slightly firmer and gold extended its retreat.
Equities:
European stocks face heavy opening losses on Friday with investors considering the implications of a likely Federal Reserve interest rate rise next week.
On Wall Street, big tech led broad declines on Thursday in an erratic session, as investors looked to the next Fed meeting and the odds it will have to take tougher action to combat inflation than many had hoped.
“What the Fed is doing is they realized that dropping rates to zero created so many distortions across the market that they want to go the other way,” Exencial Wealth Advisors said.
“They’re going to want to err on too-tight side rather than too-loose side, because they know they had a big hand in causing this inflation.”
Forex:
Forex markets were calm following big swings earlier this week, with the dollar little changed against a basket of currencies.
However, Bank of America sees more forex volatility ahead: “The August CPI surprise was likely not a one-off shock and should contribute to more FX volatility for rest of the month as investors reprice central bank rate hike decisions.
The bank said the “higher for longer” view has been endorsed by several Fed speakers recently and the upside surprise to U.S. inflation reaffirms this notion. It sees the dollar gradually weakening next year as the Fed starts becoming more concerned about growth than inflation.
Bonds:
Treasury yields were mixed in Asia, with the continued rise in the 2-year rate outpacing that of the 10-year yield, leading to a more deeply inverted Treasury curve that’s seen as a worrisome sign of the outlook.
“Beyond the impact on the U.S. economy, investors remain cautious on the demand destruction linked to the tightening by all the major global central banks,” with the exception of the Bank of Japan, BMO Capital Markets said.
“Given this backdrop, we’re anticipating the run-up to the FOMC decision and the knee-jerk price action will be defining for the direction of U.S. rates during the fourth quarter.”
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With the looming prospect of a 100-basis point interest rate increase next week, the one-year Treasury yield “continues to hit new highs since it was reintroduced in June 2008,” Tradeweb said.
The one-year is taking turns with the two-year as the highest yield in the curve, “after spending much of the pandemic era low or even near 0%, ” as Tradeweb noted.
The one-year was recently at 4.021% and the two-year at 3.901%.
Other News:
Serbia has started discussions with the IMF to receive financial assistance as the country faces soaring borrowing costs on international bond markets.
Read: Serbia Asks For IMF Help Amid Bond-Market Squeeze
Energy:
Crude-oil futures edged higher in Asian trade, reversing earlier losses, in a likely technical rebound.
Also, markets appear increasingly skeptical about prospects for immediate resolution to the Iran nuclear deal, TD Securities said, citing its own in-house indicators. This suggests a resurgence in energy supply risks.
However, Fitch said demand concerns, due to expectations the Fed will deliver another big interest-rate increase next week, continue to weigh on oil prices.
“An ongoing economic slowdown and fears of recession in key markets including the U.S. and the EU continues to weigh heavily on prices, undercutting the outlook for demand.”
Fitch said the oil market remains fundamentally tight and reckons supply could tighten further after the EU imposes its ban on imports of seaborne Russian crude on Dec. 5.
Metals:
Gold futures were weaker again, having settled at a more than 2-year low on Thursday as bets for more Fed rate hikes fueled dollar strength and a rise in yields.
“Next week could see gold drift even lower if the Fed hikes the Fed funds rate by 100bps–market pricing is currently around +81bps,” CBA said.
It said gold is likely to fall to an average $1,650/oz in the fourth quarter and closer to $1,625/oz in the first half of 2023 before bouncing.
“We now see gold futures trading in the $1,600-$1,700/oz range over the next year given our new call on the Fed funds rate broadly mirrors market expectations,” CBA said.
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Aluminum was down around 1% as negative sentiment driven by declines in regional equity markets weighed. But ANZ said losses may be limited on speculation of broad cuts to China’s output of the metal.
Some aluminum smelters in Yunnan may cut capacity by 20%-30%, ANZ said, citing the Shanghai Metals Market.
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Copper prices edged lower, with Galaxy Futures pointing to continued investor concerns over U.S. inflation and aggressive interest-rate raises by the Fed, which tend to attract funding away from the commodities market.
However, it thinks copper prices are unlikely to suffer a significant decline given multiple supply issues, including port disruptions due to weather conditions in eastern China, which has limited copper imports. Domestic output is also affected by local pandemic outbreaks.
TODAY’S TOP HEADLINES
China’s Economic Activity Showed Signs of Improvement in August
China’s economic activity showed signs of improvement in August, beating market expectations, as the government’s measures to support growth started to kick in, the National Bureau of Statistics said Friday.
China’s industrial production in August rose 4.2% from a year earlier, higher than the 3.8% increase in July, the statistics bureau said. Economists surveyed by The Wall Street Journal had anticipated industrial production to grow 4% last month.
Biden Orders Deeper Scrutiny of Foreign Investment in Tech and Supply Chains
WASHINGTON-The Biden administration is ordering a panel that screens foreign investment for national security risks to heighten scrutiny of deals that may give China and other adversaries access to critical technologies or may endanger supply chains and personal data.
An executive order signed by President Biden on Thursday doesn’t expand the purview of the Committee on Foreign Investment in the U.S. Rather, it is intended to sharpen the interagency panel’s focus on administration priorities and signal to businesses the types of transactions that might deserve added screening, administration officials said.
Russia’s Vladimir Putin Says China’s Xi Jinping Raised Concerns on Ukraine War
Russian President Vladimir Putin said he sought to address Beijing’s concerns Thursday about the Ukraine war in his first meeting with Chinese leader Xi Jinping since the start of the conflict, which has recently brought major battlefield setbacks for Moscow.
Mr. Putin told his Chinese counterpart that Moscow highly values what he called Beijing’s balanced position regarding the Ukraine crisis. He added that the Kremlin would clarify its position on Ukraine, without explaining further.
For Shell’s Priorities, Follow the Money
Shell’s new chief has money to spend and the backing to move quickly. It is, as yet, unclear if the oil and gas giant’s incoming leader will try to chart a different course from his predecessor.
The oil and gas giant announced on Thursday that Wael Sawan will become chief executive at the start of next year. A chemical engineer with a Harvard M.B.A., the 25-year Shell veteran has experience across the group’s product areas and around the globe and currently heads up its catch all new-energy division, called integrated gas, renewables and energy solutions.
Justice Department Sues to Block $4.3 Billion Home Security Merger
The Justice Department on Thursday filed an antitrust lawsuit challenging a planned $4.3 billion deal in which leading lockmaker Assa Abloy AB is seeking to acquire a U.S. rival.
The civil lawsuit, filed in a federal court in the District of Columbia, seeks to block the Swedish company’s planned acquisition of Spectrum Brands Holdings Inc.’s home improvement division.
FedEx to Close Offices, Park Aircraft After Warning of Sales Shortfall
FedEx Corp. said its quarterly revenue fell below its expectations and it was closing offices and parking aircraft to offset declining volumes of packages moving around the world.
FedEx shares tumbled 13% on the warning, which came after markets were closed Thursday and about a week before the company was scheduled to report results for the quarter ended Aug. 31.
Write to paul.larkins@dowjones.com
Expected Major Events for Friday
06:00/EU: Aug New Passenger Car Registrations in Europe statistics (EU27 + EFTA3)
06:00/UK: Aug UK monthly retail sales figures
06:00/ROM: 2Q Employment and unemployment
07:00/SVK: Jul New orders in industry
07:00/CZE: Aug PPI
07:00/SVK: Aug Harmonized CPI
07:00/AUT: Aug CPI
08:00/ITA: Jul Foreign Trade EU
08:30/UK: 2Q Bank of England statistics on UK banks’ external claims
09:00/ITA: Aug CPI
09:00/CRO: Aug CPI
09:00/MLT: Aug Harmonised CPI
09:00/CYP: Aug Harmonised CPI
09:00/EU: Aug Harmonised CPI
11:00/UK: 3Q POSTPONED: Bank of England Quarterly Bulletin
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