European Midday Briefing: Gains in Europe Capped by Fed's Inflation Warning –

European stocks made modest gains on Monday, helped by China’s partial easing measures and despite a warning from a Federal Reserve official that the U.S. inflation fight had a ‘ways to go.’
China’s central bank and top banking regulator issued a wide-ranging series of measures aimed at bolstering housing demand and supply, according to a notice circulated on Friday to the country’s financial institutions and officials involved in policy-making.
The authenticity of the document was confirmed by people close to the central bank.
“It’s been quite a choppy start to the trading week, with much of the focus on China where Covid relaxation measures and property market support have brought some relief,” OANDA said.
Stocks to Watch
Richemont’s strong brands drove impressive growth in the first half of the luxury-goods group’s fiscal year, and the company can look forward to further uplift from a possible easing of pandemic restrictions in China, Bryan Garnier said.
Results were driven by sequential second-quarter acceleration at the mainstay jewelry division, though the watches division also performed well, Bryan Garnier said. The easing of some pandemic measures in China should meanwhile prove a gradual boon to sales, though it remains too soon to evaluate.
Bryan Garnier has kept a buy recommendation on Richemont stock but trimmed the target price to CHF150 on new equity risk and return calculations.
U.S. Markets:
Stock futures edged down and government bond yields rose after the Fed’s Christopher Waller cautioned against an overreaction to last week’s inflation data.
“We should get that one data point is not a trend, we shouldn’t get carried away. If the market is expecting a pivot on the back of this, I’m afraid we’re going to be disappointed,” Pictet Asset Management said.
The yield on the benchmark 10-year Treasury note edged up to 3.886% from 3.828% at last week’s close.
The dollar recovered modestly after last week’s selloff, helped by Waller’s warning on interest rates.
“The comments have helped to provide some much needed support for the dollar after one-way price action at the end of last week and at the very least should contribute to a slower pace of selling in the week ahead,” MUFG said.
Last week’s optimism over an easing of both inflation pressures and the Fed’s indications of aggressive rate rises ahead have now been “tempered somewhat,” it said.
German Bunds and eurozone government bonds remain vulnerable as hopes related to a Fed pivot has boosted risk sentiment, although less so at the front end, Commerzbank said.
“In addition, the domestic inflation outlook remains sticky and keeps the European Central Bank on course for more rate hikes and quicker quantitative tightening,” Commerzbank said.
Barclays said there are still potential upside risks for eurozone government bond yields, bearing in mind both expectations and term premium components, notwithstanding last week’s U.S. CPI surprise.
“While core U.S. CPI is showing signs of peaking, we have not seen meaningful signs in this respect in the euro area, which is facing an additional cost-push inflation shock from the energy crisis.”
Given the tone of European Central Bank Governing Council members’ recent commentary and the likely level of eurozone neutral rate, “we do not view current euro terminal rate pricing a little below 3% as particularly aggressive,” Barclays said.
It sees potential for euro terminal rate pricing to drift higher in the weeks ahead.
Oil prices were flat as a stronger dollar and rising Covid-19 cases in China halted crude’s two-day rally.
Hopes in China’s reopening were dented over the weekend after record daily Covid-19 cases in Beijing and in the major cities of Guangzhou and Zhengzhou.
OPEC is set to release its monthly market report later in the day.
Base metals and gold were lower in early London trading on more profit taking after an “explosive start” in Asia as the market digested possible positive sentiment drivers such as the meeting between Xi and Biden, Marex said.
Marex said those traders with longer positions across base metals have settled for profit taking, given copper is up 14.8% month-to-date.
China Covid Easing/Commodities
An easing in China’s Covid-19 quarantine rules “is definitely a positive for commodity markets,” ANZ said.
While ongoing restrictions are likely over the northern hemisphere winter, “the subtle shift in strategy does provide a window to a much better economic backdrop for commodity markets in 2023,” ANZ said. It called Beijing’s measures to support China’s housing market encouraging.
“The measures are more akin to support package, rather than a plan that contains any demand-boosting measures” but “what it does do is provide an avenue to a soft landing by preventing any massive defaults” which commodity markets such as for steel and iron ore had been increasingly pricing in over the past few months, ANZ said.
Commonwealth Bank of Australia said the sustainability of the current rise in commodity prices such as iron ore will depend on more announcements that China will gradually scale back Covid restrictions.
“If policy remains unchanged from here and we see restrictions and lockdowns spread to more parts of China, this recent rally is likely to lose steam,” CBA said.
To support sentiment, the markets ultimately need a more meaningful relaxation in China’s zero-Covid approach, with an explicit policy on living with the virus instead of eliminating it.
Roche Says Phase 3 Studies for Alzheimer’s Drug Failed to Meet Primary Endpoints
Roche Holding AG said Monday that Phase 3 Graduate studies of gantenerumab, for treatment of early Alzheimer’s disease, failed to meet its primary endpoints.
The Swiss pharma company said the drug failed to slow patients’ clinical decline, adding that the drug’s removal of beta-amyloid, a protein that builds up to make plaques in the brains of people with Alzheimer’s disease, was lower than expected.
Rheinmetall to Acquire Spanish Ammunition Maker Expal for $1.24 Bln
Rheinmetall AG said it has agreed to acquire Spanish ammunition maker Expal Systems SA for an enterprise value of 1.2 billion euros ($1.24 billion).
Expal, which is a subsidiary of Spanish explosives manufacturer Maxam, has scope for potential annual sales of EUR700 to EUR800 million, the German defense company said Sunday.
Vodacom First-Half Net Profit Fell Despite Higher Revenue
Vodacom Group Ltd. on Monday reported a decline in first-half net profit and operating profit despite a rise in revenue, hit by inflation, higher costs and start-up losses.
The South Africa-based telecommunications company posted net profit of 8.07 billion rand ($468.1 million) for the six months ended Sept. 30, compared with ZAR8.87 billion a year earlier.
Some Russia Sanctions Could Extend Beyond Ukraine War’s End, Janet Yellen Says
NUSA DUA, Indonesia-U.S. Treasury Secretary Janet Yellen said some sanctions on Russia could remain in place even after any eventual peace agreement with Ukraine, raising the prospect of a long-term U.S. effort to squeeze Russia’s economy.
As Ukraine makes advances on the battlefield, Western leaders have started to contemplate how and if an end to the war may be negotiated with Russia. Ukrainian President Volodymyr Zelensky recently said he was open to “genuine peace talks” with Russia, and U.S. officials have said that any settlement would be up to Ukrainians.
Turkey Blames Kurdish Militant Group for Istanbul Bombing
ISTANBUL-Turkey blamed Kurdish militants from neighboring Syria for a bombing over the weekend in the heart of Istanbul that killed six people and wounded 81 others, as authorities arrested a woman they accused of carrying out the attack.
Interior Minister Suleyman Soylu said the attack was perpetrated by members of the Kurdistan Workers’ Party, or PKK, a militant group, who crossed into Turkey from Syria.
As Ukraine Retakes Kherson, U.S. Looks to Diplomacy Before Winter Slows Momentum
Senior U.S. officials have begun nudging Kyiv to start thinking about peace talks in the event winter stalls its momentum, following Ukraine’s recapture of Kherson in one of its most stunning triumphs of the war.
The imminent onset of winter-coupled with fears of inflation spurred by mounting energy and food prices, the billions of dollars of weaponry already pumped into Ukraine, and the tens of thousands of casualties on both sides-has prompted talk in Washington of a potential inflection point in the war, now in its ninth month.
Israeli President Hands Mandate to Benjamin Netanyahu to Form Government
TEL AVIV-Israeli President Isaac Herzog on Sunday handed a mandate to Benjamin Netanyahu to form a new government as negotiations over a governing coalition gained momentum.
Mr. Netanyahu, Israel’s longest-serving prime minister until he was ousted from power a year and a half ago, prevailed in this month’s election, the country’s fifth in under four years. In consultations with Mr. Herzog last week, Mr. Netanyahu secured the recommendation of 64 lawmakers from his right-wing and religious bloc, giving him a clear majority in the 120-seat Parliament, or Knesset.
Fed Official Warns Inflation Fight Has ‘Ways to Go’
The Federal Reserve needs to keep raising interest rates to get inflation under control, even after last week’s report that it slowed in October, a central bank official said Sunday.
Markets rallied after the Labor Department reported Thursday that so-called core prices, which exclude volatile food and energy items, rose 0.3% from September, the smallest monthly gain in a year, and by 6.3% on a year-over-year basis, down from 6.6% in September. Investors and policy makers watch core readings closely as a reflection of broad price pressures and as a predictor of future inflation.
(MORE TO FOLLOW) Dow Jones Newswires
11-14-22 0545ET


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