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European Midday Briefing: Stocks Gain on Recovery Hopes as Ifo Rebounds

MARKET WRAPS

Stocks:

European stocks edged higher on Thursday in a subdued session with U.S. markets closed.

A generally positive mood was supported by the latest Federal Reserve minutes which showed officials thought they should slow the pace of interest-rate increases.

However, market analysts don't see the minutes shedding any new light on the policy debate.

"There wasn't a lot of new information," Oxford Economics said. "Policy makers appear set to slow the pace of rate hikes. This mirrors comments from Fed officials since the last meeting and is consistent with our forecast for a 50 basis point rate hike in December."

A better-than-expected German Ifo reading, signaling a less severe recession in the country than originally feared, also cheered investors.

The Ifo business climate index rose to 86.3 points in November from 84.5 in October. Analysts polled by the WSJ had expected the index to hit 85.0.

Read German Business Sentiment Improves in November

Stocks to Watch

Credit Suisse's fourth-quarter outflows confirm the situation at the bank will likely get worse before it gets better, Jefferies said.

The magnitude of outflows the bank revealed at its update was surprising, especially at its wealth-management division, where 10% of assets under management were lost in just six weeks, Jefferies said.

Further deterioration was expected in the fourth quarter, after an already poor trend in the second and third quarters, but this is a significant acceleration, and much worse than forecast.

The update "confirms our concerns that the Credit Suisse ship is yet to stabilize," Jefferies said, which has a hold rating on the stock with a CHF3.80 target price.

Read Credit Suisse's Loss May Not Surprise, But Its Size Did

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Infineon is seeing strong demand for silicon carbide semiconductors in industrial applications, UBS said meeting with the president of Industrial Power Control and the president of Power & Sensor Systems.

Silicon carbide chips are more resistant and energy-efficient than traditional ones. Solar, grid-scale battery storage and electric vehicle charging are driving demand, UBS said.

"Infineon highlighted that new silicon carbide suppliers were emerging with up to 30% discounts to average price which could improve profitability," UBS said.

Economic Insight

The November eurozone inflation reading is a key data release ahead of the December European Central Bank meeting, Citi said, adding that it foresees CPI will post its first decline since mid-2020. The drop is expected to be driven by energy, but core dynamics are expected to remain strong, Citi said.

It has forecast the eurozone headline inflation rate will fall to 10.3% year-on-year in November from 10.6% in October. However, Citi warned that this might not yet be the start of a proper downturn.

"The latest German wage deal is a reminder that the inflation news flow looks set to remain skewed to the upside," Citi said.

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Freight rates for container ships and freight planes will drop to pre-pandemic levels next year as the appetite for consumer goods weakens on the back of high prices fanned by inflation, maritime data platform Xeneta said in its annual report.

"The cost-of-living crisis is eating into consumer spending power, leaving little appetite for imported goods," Xeneta said. "We expect ocean freight volumes to drop, possibly by around 2.5% or even more."

Daily freight rates have declined more than 90% since their peak last year, and with new vessels hitting the water in 2023, operators may engage in price wars to attract cargo customers.

Forex:

ING said lower energy prices and higher-than-expected eurozone PMIs have boosted European currencies, but this rally may prove limited.

"We remain doubtful that it will be a smooth ride to recovery for European currencies, and our commodities team continues to see upside risks for energy prices into the new year despite recent developments," ING said.

EUR/USD has broken above 1.0400 and may extend its rally to 1.0500-1.0550 in the near-term but the gains could run out of steam as the year-end approaches with a return to parity likely in December, ING added.

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The dollar was a touch lower in holiday-thinned trade as investors reacted to Wednesday's weak U.S. PMI data and the Fed's latest meeting minutes, which showed most Fed officials support slowing the pace of interest rate rises soon.

"Perhaps some [investors] got cold feet about entering the long Thanksgiving weekend in the U.S. with a too strong dollar," Commerzbank said.

Read Sterling Rises Vs Dollar After Fed Minutes, UK Data

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The Swedish krona initially wavered before turning lower after the Riksbank raised its policy rate by 75 basis points to 2.5%, as expected, and increased its guidance for future rises but signalled a slower pace of tightening.

Sweden's central bank now expects rates to reach around 2.8% by the fourth quarter of 2023, compared with its previous forecast of 2.5%, and then sees rates remaining at that level until the end of its forecast period in the fourth quarter of 2025.

EUR/SEK rose to a high of 10.9100 after the decision, from 10.8658 beforehand, according to FactSet.

Read more here .

Bonds:

The better-than-expected Ifo data has left bond investors unfazed, with eurozone yields continuing to fall.

DZ Bank said in the past two weeks, Bund yields have fallen and eurozone government bond spreads over Bunds have tightened, reflecting lower key interest rate expectations in the medium term.

The spread tightening also reflected the fact that potential political tremors in Italy in particular haven't yet materialized. "However, fundamental factors argue against an unabated continuation of the tightening trend."

Many eurozone countries' resolve to increase spending in the energy crisis will boost the volume of bond issuance in 2023, while, at the same time, the ECB is increasingly absent as a buyer, DZ Bank said.

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Curve flattening remains the most notable theme in developed market rates, Mizuho said. Investors seem reluctant to add risk at the front-end of the curve with the inflation picture "so inconclusive."

In euro rates, the selloff in the two-year segment makes sense in the context of the ECB raising rates a touch higher than expected, but also keeping them there for longer, Mizuho said, expecting long-end rates to be "fairly well" supported, even in the event of another bout of strong inflation.

"We still expect to see another period of yields moving higher before year-end, but we may need to wait until next year before a more definitive re-steepening is possible."

Read Short-Maturity Bonds Broadly Incorporate Interest-Rate Rise Expectations

Energy:

Oil futures edged lower as discussions continue between G-7 leaders on a price cap for Russian crude.

Goldman Sachs said that a higher cap could avoid retaliation from Russia, with the price much higher than production costs.

Elsewhere, rising Covid-19 cases in China were counterbalanced by a weakening dollar.

Metals:

Base metals and gold made modest gains, with sentiment moving to "risk-on" after the Fed minutes showed most officials favored slowing rate rises soon.

The dollar weakened following the publication of the minutes--something which has helped risk assets like commodities.

Silver Demand

Demand for silver is on course to reach a record high in 2022, led by jewelry and industrial usage, according to consultancy firm Metals Focus.

Demand is set to reach 1.2 billion ounces in 2022, up 16% year-on-year and above the 12-year average of 1 billion ounces. Much of this was on higher industrial usage--up 5% to 539 million ounces-- with strong demand from the photovoltaic sector in particular.

Jewelry and silverware fabrication are forecast to rise in 2022 by 29% and 72%, respectively, to 235 million ounces and 73 million ounces, driven by India buying.

Metals Focus added that the rise in demand would put the market into a 194 million ounce deficit, despite a 2% rise in physical supply.

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

European Energy Ministers Set to Clash Over Proposed Gas-Price Cap

BRUSSELS-European Union energy ministers are gathering to haggle Thursday over details of a new proposal from the bloc's executive body for an emergency cap on the price of natural gas.

The meeting convenes as EU diplomats struggle to agree on a separate, international plan to cap prices paid for Russian oil around the world.

   
 
 

German Business Sentiment Improves in November

Business confidence in Germany increased in November, beating expectations, as companies foresee a less severe recession than previously expected.

The Ifo business-climate index rose to 86.3 points in November from a revised reading of 84.5 points in October, data from the Ifo Institute showed Thursday. Economists polled by The Wall Street Journal had expected the index to come in at 85.0.

   
 
 

Riksbank Lifts Policy Rate to 2.50% From 1.75% and Raises Rate Path

Sweden's central bank on Thursday lifted its key policy rate to 2.50% from 1.75% and raised its rate path as it continues to fight stubbornly high inflation.

A majority of economists polled by The Wall Street Journal before the decision had expected a 75 basis points hike to 2.50%.

   
 
 

EU Fails to Reach Agreement on G-7's Price Cap for Russian Oil

European diplomats clashed over the price to cap Russian global oil sales on Wednesday as the bloc failed to reach agreement on a Group of Seven nations mechanism intended to crimp Russian oil revenues.

Diplomats involved in and briefed on discussions said they expected the 27-nation bloc to sign off on the price cap eventually as they race to put the system in place by Dec. 5, when both the cap and a European Union oil embargo would enter force. Discussions are expected to continue on Thursday.

   
 
 

Remy Cointreau Backs FY 2023 View Despite Likely Slower 2H

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November 24, 2022 05:52 ET (10:52 GMT)

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