European Midday Briefing : Mood Cautious Ahead of Central Bank Meetings

MARKET WRAPS

Stocks:

European stocks struggled for momentum on Monday at the start of a busy week of central bank announcements.

The Federal Reserve's rate decision Wednesday will be followed by the ECB, Norges Bank, Bank of England and SNB on Thursday.

"[They] are expected to signal that while inflation risks persist, there have been significant and positive strides made in addressing them," SEB said.

Economic Insight

The ECB is unlikely to proceed with interest-rate cuts as quickly as the market prices it, Julius Baer Research said.

"Interest-rate cut expectations for the ECB are excessive," it said, referring to 125 basis points of cuts priced in.

With lower inflation rates and economic stagnation in the eurozone, the debate about ECB rate cuts is gathering momentum, it said, adding the ECB's monetary policy is restrictive and interest-rate cuts to a more neutral level seem justified.

"[However] after initially paying too little attention to the inflation in 2021 and only reacted late, it is now very keen to regain its lost credibility in the fight against inflation."

U.S. Markets:

Stock futures pointed to a slightly weaker start for Wall Street following six straight weeks of gains for the S&P 500.

Stocks to Watch

Macy's rose 19% premarket after an investor group made a $5.8 billion offer to buy the company , in a bid to take the famed department-store chain private after stiff competition from online rivals took a big bite out of its value.

Forex:

Danske Bank Research is looking to buy EUR/USD on any dips in the near term due to the impact of any weaker U.S. economic data.

"The recent significant easing of financial conditions, the most substantial monthly decrease since the April 2020 Covid shock, suggests a favorable environment for EUR/USD in December," Danske Bank Research said.

"We aim to counter the recent downward move, and hence we still see upside potential for EUR/USD in the short term."

The U.S. economy is expected to slip into a recession next year, prompting the Fed to start cutting interest rates before the ECB and causing the dollar to weaken versus the euro, LBBW Research said.

A recession should help U.S. inflation approach the 2% mark in 2H, and "against this backdrop, the Fed is likely to initiate a phase of interest rate cuts as early as summer 2024," it said.

LBBW expects the ECB to start cutting rates next autumn. It expects EUR/USD to remain stable at 1.08 in 1Q and 2Q before rising to 1.10 by the end of next year.

Bonds:

UBS Research remains bullish on Greek government bonds--seeing room for yields to fall--despite the strong performance this year.

"While Greek bonds appear now as more fairly priced relative to the country's new credit rating, we remain bullish for Greek government bonds," it said.

The inclusion of Greek debt in investment-grade-only bond indices is expected to boost demand from investors tracking these indices, UBS added.

Ten-year Greek bonds have rallied by more than 100 basis points since mid-October--currently 118 basis points, according to Tradeweb--, following the credit rating upgrades to investment grade from S&P Global Ratings and Fitch Ratings, it said.

Energy:

Oil prices rose as U.S. demand outweighed worries over weak global growth.

Prices gained some support after the U.S. energy department said Friday that it will refill its strategic petroleum reserve through to May, hoping to buy 3 million barrels of crude in March.

Still, worries remain over demand, with Brent down 17% this quarter, amid slower global growth and market skepticism over OPEC+ cuts.

"The 1.7 million barrel a day reduction in output should provide some support to physical balances but the market will have to be convinced before any (of) these cuts are priced in," ANZ said.

Metals:

Base metals and gold prices were sliding, with investors awaiting key central bank meetings due later this week.

"The macro environment is a tug-of-war between the dovish Fed and risk-on trading and lower growth/demand expectations," Peak Trading Research said.

Investors will be looking to see how Tuesday's U.S. consumer inflation data as well as ECB and the Fed meetings, due later in the week, shape the macroeconomic environment, Peak said.

Weak inflation and dovish comments from the Fed should weaken the dollar, it added.

EMEA HEADLINES

UK House Prices Fell Sharply in December

The average house price in the U.K. fell 1.9% in the month to Dec. 2, the largest fall for this period for more than 20 years, according to new data from Rightmove.

The average price of property coming to the market fell on month to 355,177 pounds ($447,345), a bigger fall than the usual seasonal slip of 1.5%, the online property portal said Monday.

Sweeping Regulation of AI Advances in European Union Deal

BRUSSELS-European lawmakers reached a political deal on regulating artificial intelligence, marking a step toward establishing a comprehensive AI law in Western countries.

The European Union's Artificial Intelligence Act would be the latest in a series of regulations the bloc has pushed forward that is expected to reverberate through the global tech industry and affect some of its biggest players. Earlier legislation from the EU set out new competition and online content rules that affect large U.S. tech companies including Meta Platforms, Apple and Google's parent, Alphabet.

Alarm Grows Over Weakened Militaries and Empty Arsenals in Europe

The British military-the leading U.S. military ally and Europe's biggest defense spender-has only around 150 deployable tanks and perhaps a dozen serviceable long-range artillery pieces. So bare was the cupboard that last year the British military considered sourcing multiple rocket launchers from museums to upgrade and donate to Ukraine, an idea that was dropped.

France, the next biggest spender, has fewer than 90 heavy artillery pieces, equivalent to what Russia loses roughly every month on the Ukraine battlefield. Denmark has no heavy artillery, submarines or air-defense systems. Germany's army has enough ammunition for two days of battle.

GLOBAL NEWS

Jerome Powell's Inflation Fight Is Succeeding, Raising Questions About Rate Cuts

When Federal Reserve Chair Jerome Powell met on an October afternoon with small-business owners in Pennsylvania, Julie Keene lamented how her family farm and food market had been blindsided by high inflation over the past two years.

"Predictability is just gone," said Keene, co-owner of Flinchbaugh's Orchard & Farm Market in Hellam, Pa. "It is very hard to operate a business in a world where there is not predictability."

When Bond Yields Dropped, the Everything Rally Kicked Off

Investors spent most of 2023 fretting about inflation and interest rates. Now they are snapping up everything from stocks and bonds to crypto and even gold.

The simultaneous surge across assets has sparked debate about whether the "everything rally" marks the arrival of a lasting bull market-or just a fleeting sugar high at the end of the Federal Reserve's tightening cycle.

Israel Detains Hundreds of Palestinian Men in Search for Hamas

The Israeli military is searching and detaining hundreds of Palestinian men in and around Gaza City, triggering concerns from human rights groups that prisoners are being mistreated.

The Israeli military says many of the men are militants who are surrendering, a sign that Hamas is losing control of the Gaza Strip, where intense fighting between both sides continued Sunday. But images circulating of what appear to be scores of men, stripped down to their underwear, come as international pressure mounts on Israel to abide by the rules of war and help alleviate the growing humanitarian crisis in Gaza.

Hong Kong Sees Record-Low Turnout for 'Patriots'-Only Election

HONG KONG-Four years ago, millions of voters streamed to the polls in Hong Kong, riding a wave of political anger after months of failed antigovernment protests to give a landslide victory for pro-democracy candidates in district elections.

On Sunday, with elections now engineered to allow only pro-Beijing candidates, the torrent became more of a trickle. The city saw its worst turnout on record as a little more than a quarter of the city's registered voters went to cast a vote. More than 70% voted at the last district poll in 2019.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

12-11-23 0621ET