European Midday Briefing: Shares Make Gains Despite Recession Fears

MARKET WRAPS

Stocks:

European stocks made gains on Monday as investors stayed upbeat despite lower Asia trading and lingering economic concerns.

“While there’s still scope for a rally into Christmas, this looks to be a fleeting bout of optimism, as worries about falling earnings and a recession in 2023 continue to stalk markets,” IG said.

Stocks to Watch

Volkswagen’s earnings are expected to decline modestly next year as the car maker’s price and sales mix deteriorate, Warburg Research said.

“For almost two years, the company has been able to benefit from advantageous price and mix effects thanks to a high demand situation and lower availability of vehicles because of semiconductor and other supply bottlenecks,” Warburg said, adding the volume segment and financial services benefited in particular.

Next year, however, a gradually improving supply chain should lead to better availability of vehicles, while demand in Volkswagen’s core market Europe should be restraint, Warburg added.

Economic Insight

German consumers’ loss of purchasing power amid soaring inflation, alongside depressed consumer sentiment, will likely cause private consumption to slump this winter, Deutsche Bank said.

On average, consumption is expected to decline by around 1% in Germany in the final quarter of 2022 and first quarter of 2023, although fiscal support measures, such as the gas and electricity price caps should prevent a more severe slump, Deutsche added.

Nominal disposal income will increase noticeably in 2023, but not enough to offset the rise in consumer prices as inflation remains stubbornly high. Deutsche said headline inflation is expected to average at 7.1% in 2023, before easing to 3.9% in 2024.

Read Germany’s Appeal as Industrial Powerhouse Endangered by High Energy Prices

U.S. Markets:

Stocks were on track for a modest rebound Monday after recession fears weighed on investors last week.

Bond prices ticked lower, driving the yield on the 10-year U.S. government note up to 3.504% from 3.481% on Friday.

Economic updates set for release include the NAHB home builders index for December.

Forex:

The dollar is likely to slip this week on a combination of potentially weak U.S. economic data and Thursday’s statement by the ECB that significant further interest-rate increases can be expected in the eurozone, ING said.

U.S. data this week include a variety of housing market data, which are “all expected to be soft,” consumer confidence figures and a November core PCE deflator that is likely to be “subdued,” ING added.

This is unlikely to support Treasury yields and “all tends to suggest that DXY risks sinking back to the 104.00/104.10 area this week,” ING said.

Read Euro Could Stutter as Interest Rates Rise

Bonds:

Eurozone government bond spreads are expected to widen further, at least in the first quarter of 2023, due to weaker fundamentals, a likely overshoot in ECB terminal rate expectations and a new issuance wave hitting markets, Societe Generale said.

“Overall, we expect country spreads to widen into 1Q23 on inflation and supply concerns but to narrow gradually afterwards,”

In the first quarter of 2023, SG targets the 10-year Italian BTP-Bund spread at 230 basis points.

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The ECB is expected to raise interest rates by a further 125 basis points–and potentially more–keeping volatility elevated in European bond trading in 2023, Danske Bank said.

Volatility will be less elevated than in 2022, Danske said, adding that next year is set to be a new rates environment in Europe compared with the last 10 years, with significant credit and liquidity tightening complementing the ECB’s interest rate rises.

Danske said it expects 10-year German Bund yields to trade in a wide range between 1.5% and 3% in 2023.

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Citi said it targets a 2.35% level for 10-year Bund yields in the coming weeks, with 2.55% being the medium-term fair value.

“The corrective sell-off has further to run in our view,” the bank said.

The ECB sent a crystal-clear message over its hawkish intentions, Citi said, adding that the market has been complacent in ignoring the hawkish warnings to date.

“At a minimum, the ECB will want to fully revere the rally across the curve and return to the October peak.”

The risk to the medium-term fair value is higher with 2.7% being on Citi’s radar.

Energy:

Oil prices edged higher as U.S. plans to refill its Strategic Petroleum Reserve counteracted concerns about global economic weakness.

Analysts have said the decision to refill the SPR could put a floor under tumbling oil prices, as it creates additional demand for crude just as concerns about slowing demand due to flagging economies have sent Brent below $80 a barrel.

Metals:

Metals prices were mixed as worries over demand rose in China amid a jump in Covid-19 cases.

“It does seem like the spread of Covid-19 in China is taking its toll on manufacturing and supply chains,” Marex said.

However, overall sentiment in western markets still remains strong “buoyed by the prospect of China’s reopening,” helping to outweigh bearish fundamental price signals, ANZ said.

Steel Sector

Europe’s Carbon Border Adjustment Mechanism remains imperfect but will be an important tool to protect the EU steel sector during the energy transition, Deutsche Bank

“Although the mechanism remains imperfect as it stands, the costs of the domestic marginal steel supply as well as imports are set to rise and, hence, volumes which continue to receive free allocations are likely to become more profitable.”

The rules governing indirect emissions not covered by the EU’s Emission Trading System, however, remain unclear, DB added.

Mills require time before they benefit therefore Deutsche Bank said it expects a further downsizing of the EU steel industry in the mid-term.

DOW JONES NEWSPLUS

EMEA HEADLINES

European Energy Ministers Push for Natural-Gas Price Cap

BRUSSELS-European energy ministers gathered Monday for the second time in one week, attempting to strike a deal on an emergency limit for natural-gas prices, which have been sent soaring by Russia’s invasion of Ukraine.

The debate over how and whether to intervene in the continent’s natural-gas market has emerged as one of the most divisive elements of the European Union’s response to Moscow’s war and its squeeze on the continent’s energy supplies. Some countries say a price cap is needed to ease the burden of high prices on consumers and businesses, while others worry such a move could inadvertently lead to shortages.

U.K. Companies Tested by Fallout From Ukraine War

LEEDS, England-Europe has been hit hard by the fallout from the war in Ukraine, putting its companies on the front line of what has become a war of economic attrition between the West and Russia that is playing out alongside the real war in Ukraine.

The U.K. is suffering more than other big countries in Europe, economists say. Inflation is running in the double digits, higher than all of its Group of Seven industrialized peers with the exception of Italy; gross domestic product shrank 0.2% in the third quarter year-over-year, setting the U.K. on course for a likely recession. Other big economies like Germany and France are increasingly looking like they may avoid one. The British economy is widely forecast to shrink in 2023, faring worse than every G-20 economy except Russia, the Organization for Economic Cooperation and Development says.

Qatar Warns Brussels Bribery Allegations Could Hurt Energy Talks With Europe

Qatar warned Sunday that an investigation by authorities in Brussels into its role in an alleged influence and bribery scheme could adversely affect energy talks with Europe and condemned a decision by the European Parliament to suspend dealings with the Persian Gulf kingdom.

The European Parliament’s move “will negatively effect regional and global security cooperation, as well as ongoing discussions around global energy poverty and security,” a statement by a Qatari diplomat to the European Union said Sunday, noting that Qatar is an important supplier of liquefied natural gas to Belgium.

Battle for Bakhmut Is Critical Test of Russia’s Prospects in Ukraine

BAKHMUT, Ukraine-Russian shells slammed closer and closer as Ludmyla Bondarenko and Zoya Shilkova, clad in fur coats atop layers of clothing, sat on a bench outside their apartment block, chatting and getting some fresh air on a frigid afternoon in what remains of this eastern Ukrainian city.

At an intersection nearby, Ukrainian troops used a crane to emplace concrete slabs, fortifying the neighborhood. Three freshly arrived tanks roared by, blue-and-yellow flags fluttering from their turrets. A distant staccato of machine-gun fire could be heard amid the thumps of artillery.

Tunisian Opposition Calls for President to Step Down After Low Voter Turnout

The leader of Tunisia’s opposition alliance called for President Kais Saied to step down on Sunday after only a fraction of eligible voters turned out for parliamentary elections.

More than 160 seats were up for vote. Yet once polls closed on Saturday night, only 8.8% of eligible voters, or roughly 803,000 people, had participated, according to the government. Tunisia has a population of roughly 12 million people, with about 9 million eligible voters.

Vatican Dismisses U.S. Antiabortion Activist From Priesthood

The Vatican dismissed antiabortion activist Frank Pavone from the priesthood, citing his “blasphemous communications on social media” and disobedience of his bishop.

The defrocking of Mr. Pavone, a vocal supporter of the Republican Party and former President Donald Trump, is the latest sign of tension in the Catholic hierarchy over the politics of abortion. Last year, the U.S. Conference of Catholic Bishops debated whether to adopt guidelines on denying Communion to President Biden and other Catholic politicians who support abortion rights, before deciding not to do so under pressure from the Vatican.

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December 19, 2022 06:17 ET (11:17 GMT)

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