MARKET WRAPS
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ECB bank lending survey; Germany Ifo business climate index; UK CBI industrial trends survey; trading updates from SAP, UBS, Remy Cointreau, Air Liquide, Orange, Novartis, Vinci, HSBC
Opening Call:
European shares face a cautious start Tuesday. In Asia, a selloff in Chinese and Hong Kong shares deepened; Treasury yields and the dollar fell; while oil and gold rose.
Equities:
Stock futures point to a subdued open in Europe at Tuesday’s open after notching gains on Monday following the appointment of a U.K. prime minister.
Former U.K. finance minister Rishi Sunak won the race to become the Conservative Party’s latest leader and prime minister, succeeding outgoing Liz Truss. While Sunak’s election is the best outcome for markets, it doesn’t eliminate the damage to U.K. credibility from the turbulent Truss days, Evercore said. “Nor does it resolve the underlying challenges of achieving satisfactory economic outcomes under the drag from Brexit,” Evercore added.
Meanwhile, U.S. stock indexes closed higher Monday as investors clung to hopes of a Fed pivot and look ahead to corporate earnings.
“Market participants are desperately looking for a Fed pause or pivot,” said Chris Senyek, chief investment strategist at Wolfe Research.
Still, he cautioned that such hopes would likely be dashed by continuing high inflation and low unemployment, which would pressure the central bank to maintain its hawkish stance. “We think a Fed pause is a long ways off,” Senyek said.
Investors are looking ahead to a busy week of earnings results. Quarterly reports are due this week from tech giants Apple, Amazon.com and Google parent Alphabet as well as blue-chip companies such as Coca-Cola and Boeing. Despite some early reports that have shown signs of optimism, fewer companies than usual are beating Wall Street’s earnings expectations.
Economic Insight:
The U.K. economy might need a bailout from the International Monetary Fund unless the country’s latest Conservative government revisits its deal with the EU, a veteran private-equity chief said.
If ministers don’t reopen Brexit negotiations with Brussels, “the economy is frankly doomed,” and the U.K. may have to ask the IMF for a bailout like that in the 1970s, Guy Hands, the founder of Terra Firma, reportedly told BBC Radio 4.
Since the 2016 Brexit referendum, the Tories had made a series of blunders and had interpreted the vote as a mandate to move towards a low-tax, low-benefit economy, Financial News reported him as saying.
“But the British people have never voted for the extremist Thatcherism Brexit needed,” Hands said.
Forex:
The U.S. dollar weakened in Asia as positive risk sentiment following Wall Street’s gains overnight will probably have a positive spillover effect across most Asian countries and lift Asia ex-Japan currencies, said MUFG Bank.
Better-than-expected U.S. corporate earnings reports have been driving U.S. equity markets higher, and this trend may persist this week with more earnings reports scheduled for release to drive risk-taking, MUFG added.
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Foreign-exchange markets are consolidating in October amid elevated political and intervention noise, JPMorgan said. “The dollar uptrend remains intact amid continued upside CPI surprises,” JPM said.
The breach of key levels in major USD pairs–150 on USD/JPY and 7.25 on USD/CNY–“indicates the limited efficacy of intervention amid broad dollar strength, and perhaps some permissiveness around FX weakness to absorb increased growth pressures,” JPM said, adding that it’s keeping its trade portfolio mostly unchanged, staying the course on USD length.
Bonds:
Treasury yields fell early Tuesday, after edging higher in the U.S. session overnight, as traders turned their focus back to the U.S. central bank’s efforts to contain inflation following the latest U.K. political developments.
“The bearish repricing that has brought most of the major Treasury benchmarks to [around] 4.50% will be challenged in the coming days as investors contemplate whether this is the dip to buy,” said rates strategists at BMO Capital Markets.
“To be fair, it hasn’t been a year in which attempting to lock in higher yields on each incremental backup in rates has been fulfilling. In fact, since closing 2021 at 1.51%, 10-year yields have increased by nearly 300 bp (basis points) as inflation has proven to be far more stubborn than initially anticipated,” BMO said.
Read: Yellen warns of ‘dangerous and volatile environment’ as she pledges to bolster Treasury market
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The cost of borrowing in the U.K. is expected to fall as yields on government bonds drop thanks to a calmer political environment, said Edward Park, chief investment officer at Brooks Macdonald, after Rishi Sunak won the race to become the new prime minister.
“Political stability in the U.K. should bring down the cost of government borrowing as well as providing strength to the pound,” Park said.
Energy:
Crude-oil futures edged higher early Tuesday, with supply issues in focus.
Traders’ attention will likely remain on the tight physical oil market amid constraints such as EU sanctions on Russian oil, ANZ said.
ANZ flagged data showing that seaborne shipments of Russian oil fell to a five-week low in the seven days to Oct. 21.
Meanwhile, a rising U.S. dollar along with uncertainty over global demand continues to weigh on commodity prices, said Walid Koudmani, chief market analyst at XTB.
“From a technical point of view, the price of oil remains in a very interesting spot as both Brent and WTI are testing key support levels which managed to halt previous strong downward moves despite the price being below” longer-term moving averages, he said.
“Furthermore, the situation could continue to be volatile, which could lead to another attempt to rebound from the current levels if sentiment and demand forecasts manage to improve despite the ongoing economic slowdown and troubling macroeconomic data,” Koudmani said. “In either case, a breakout in either direction could set the tone for the market in the short term in this time of increased volatility.”
Metals:
Gold prices pushed slightly higher in Asia as traders await major central bank decisions due this week.
“Gold traders are buckling in for a bumpy ride as this week’s risk flows will be determined by some heavyweight earnings and from a couple massive rate decisions from the European Central Bank and Bank of Japan, ” Oanda’s Edward Moya said.
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Copper fell early Tuesday, weighed by worries over China’s new leadership.
The leadership reshuffle in China suggests that the end of zero-Covid policies or major stimulus measures are unlikely anytime soon, said TD Securities.
This underscores ongoing hurdles for base-metals prices as the Western world’s macroeconomic outlook deteriorates while Chinese consumption remains limited by a beleaguered property sector and repeated Covid-19 lockdowns, TD added.
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Chinese iron-ore futures declined the prospect of weaker demand from steel mills.
Prices of the steelmaking raw material have been pressured as steelmakers have shown losses recently, which could lead to reduced output in the near term, Maike Futures said.
Economic data released Monday showed a relatively slow recovery in the real-estate sector, which is key for steel consumption, Maike added.
TODAY’S TOP HEADLINES
Shares in Chinese Companies Crash After Xi Jinping Stacks Party With Allies
U.S.-listed Chinese stocks plunged to their lowest level in nearly a decade, losing tens of billions of dollars in market value on Monday, one day after President Xi Jinping secured a third term as leader of the Communist Party.
The Nasdaq Golden Dragon China Index, which tracks dozens of Chinese companies listed on American exchanges, fell more than 14% to its lowest close since April 2013, erasing $73.4 billion in market cap since Friday’s close through Monday, according to Dow Jones Market Data.
Russia Moves to Defend Kherson Against Ukraine’s Advance Before Winter
KYIV, Ukraine-Russian-installed officials in Kherson said they were forming territorial defense units on Monday as Ukraine pushes to recapture the occupied regional capital before the onset of winter, and Russia accused Ukraine-without citing evidence-of preparing to use a so-called dirty bomb on the battlefield.
The announcement of the units, which will help Russia defend the occupied city, comes amid an organized evacuation of residents from Kherson using boats to transfer them to other parts of the southern Kherson region and to cities in Russia, Moscow’s officials in the region said.
Upstart European Lithium Is Valued at $970 Million in Deal for U.S. Listing
European Lithium Ltd., an upstart mining company hoping to be one of Europe’s only sources of the key metal for electric-vehicle batteries, has reached a deal that will value it at $970 million and list its shares in the U.S., company officials said.
The company has struggled to raise cash despite a possible agreement with BMW AG to buy its lithium. European Lithium, which now trades as a penny stock in Australia, is trying to fund its plan to mine and process lithium from a mine near Vienna.
Intel CEO Calls New U.S. Restrictions on Chip Exports to China Inevitable
LAGUNA BEACH, Calif.-Intel Corp. Chief Executive Pat Gelsinger said that recently imposed U.S. restrictions on semiconductor-industry exports to China were inevitable as America seeks to maintain technological leadership in competition with China.
Speaking at The Wall Street Journal’s annual Tech Live conference, Mr. Gelsinger said the restrictions, which require chip companies to obtain a license to export certain advanced artificial-intelligence and supercomputing chips as well as equipment used in advanced…
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