European Midday Briefing: Fed Fears Outweigh China Covid Cheer


MARKET WRAPS

Stocks:

Most European stock markets edged lower on Monday, after a stronger-than-expected U.S. jobs report cast doubt on how quickly the Federal Reserve will ease its pace of interest-rate hikes.

The jobs data keeps the Fed on track to raise interest rates in two weeks by a half percentage point, which would bring the benchmark federal-funds rate to a range between 4.25% and 4.5% from its current range. It also underscores the risk that officials will lift the rate above 5% in the first half of next year.

The downbeat mood in Europe was despite strong gains in Hong Kong and China after local Chinese authorities took more steps to ease strict Covid-19 policies that have crimped the country’s growth.

Stocks to Watch

Saint-Gobain’s long-term growth potential should entice investors as green building renovations accelerate worldwide, Jefferies said. Ambitions from the European Union and the U.S. should boost confidence in long-term growth from global decarbonization.

“With a portfolio of products heavily focused on carbon reduction in existing buildings and new residential build, we believe continued momentum in government initiatives and regulation can drive Saint-Gobain revenues to out-perform its local construction markets through the longer term,” Jefferies said.

It raised its rating on the French company to buy from hold and its target price to EUR65 from EUR41.40.

Swisscom looks like a steady option in the European telecommunications sector, Deutsche Bank said, adding, however, that recent outperformance versus peers warranted a downgrade on the stock.

Swisscom’s reasonable competition environment, forensic attention to costs and stable dividend put the Swiss company at the steadier end of the telecom spectrum, Deutsche Bank said.

“Quality is worth paying for, but we now note, post recent outperformance versus peers, that the stock’s risk versus reward balance warrants a downgrade to sell [from hold],” Deutsche Bank said. It also cut its target price to CHF465 from CHF510.

Economic Insight

The U.K. economy is set to fall into a recession, which is likely to cause a 2% peak-to-trough fall in GDP, a bigger slump than what’s expected in other advanced economies, Pantheon Macroeconomics said.

Household finances will be hit hard by the rapid withdrawal of energy bills support, while higher interest rates will also squeeze incomes of those who have to refinance their mortgage. Better news might come on the inflation front, as price growth has likely peaked and is expected to fall fast in 2023, Pantheon said.

It expects inflation to average 6.5% in 2023, less than the 6.9% consensus estimate from economists taken from FactSet.

U.S. Markets:

Stock futures fell ahead of data on service-sector activity and factory output.

Meantime, the yield on 10-year government bonds rose to 3.538%, from 3.502% Friday. The yield has fallen for four straight weeks on hopes slowing inflation will encourage the Fed to slow interest-rate increases.

The increase in benchmark borrowing costs was helping contain demand for stocks, with some analysts also noting that techinical factors may hobble a rally that has seen the S&P 500 rise 13.8% from its 2022 low hit in mid October.

BTIG noted that though stocks were benefiting from lower Treasury yields in recent months, the S&P 500 remained within its downtrend, and the CBOE VIX index, a measure of expected market volatility, was now at the levels sometimes associated with trader complacency.

U.S. economic updates set for release on Monday include the final November S&P U.S. services PMI, the ISM services index for November and the October factory orders.

There will be no Fed speakers until after its policy-setting meeting on Dec. 14.

Forex:

The dollar’s gains after Friday’s stronger-than-expected jobs data proved brief and it soon turned lower, suggesting it won’t return to this year’s peak and will most likely weaken in 2023, Swissquote said.

However, the falls won’t be smooth as Fed interest rates still need to rise further, Swissquote said.

The broadly weak dollar helped sterling rise to a near six-month high of $1.2346, but the gains soon fade and ING said a rise beyond $1.25 looks unlikely.

“We struggle to see cable [GBP/USD] extend its rally to 1.25 and beyond, ” ING said. “A contraction below 1.20 seems more appropriate given global and U.K. macro fundamentals.”

Ahead of next week’s Bank of England decision–which comes alongside various other rate decisions, including in the U.S. and eurozone–the pound is likely to be driven largely by the dollar and by risk sentiment, ING said.

Bonds:

German 10-year Bund yields could trade in narrow…



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