MARKET WRAPS
Stocks:
European stocks fell again on Tuesday, as a combination of economic and geopolitical worries continued to hit risk appetite.
U.S.-China tensions, rising coronavirus cases in China and the Ukraine war all sapped the mood in Europe, while U.K. jobs data--which showed the unemployment rate fell to its lowest level since 1974--fueled expectations the Bank of England will maintain its aggressive rate rises.
"There is growing pessimism in the markets now and with some big data points to come from the U.S. this week, not to mention the start of earnings season with JPMorgan among those getting us underway, investors should probably brace for more volatility ahead," Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA said.
Stocks to Watch:
Credit Suisse has three key issues: revenues are down, costs are trending up and capital is below target, Jefferies said as it cut its target price to CHF4.40 from CHF5.
The Swiss lender is due to lay out a new strategic plan on Oct. 27, but Jefferies estimates that the costs to fix the bank are high. Given the current gap to CS's 14% CET1 ratio target, likely restructuring costs of CHF2 billion, potential litigation of up to CHF1.6 billion and regulatory headwinds around CHF4 billion, CS might need to build CHF9 billion of CET1 capital in the next two to three years.
Since a rights issue would be dilutive at CS's market cap, the bank will likely prioritize asset disposals first to fund the capital, Jefferies said.
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Pandora's third-quarter earnings are expected to show a continued deceleration in underlying revenue growth driven by the U.S., RBC Capital Markets said, as it kept a sector perform rating on the stock but lowered its price target on the stock to DKK440 from DKK530.
RBC expects to see the strongest revenue growth in Australia due to soft comparative and healthy recovery, with mid-single digit growth in key European countries and negative mid-single digit revenue decline in North America.
Pandora shares are down 55% year-to-date versus the Stoxx 600 down 20%, reflecting investor concerns around slowing consumer spending and lower price points, and RBC estimates are 2%-4% below consensus on earnings in 2022-2024.
U.S. Markets:
Stock futures were falling, pointing to major indexes extending declines while the bond market returned from a holiday with a fresh selloff, with Treasury yields testing the 4% level again.
Forex:
GBP/USD dropped 0.3% to a 12-day low of 1.0999 following the latest U.K. labor market data and the BOE's decision to widen its emergency bond-purchase operations.
"We continue to see downside risks for the pound, as levels around [GBP/USD] 1.10 do not mirror the fragility of the UK bond market," ING said.
ING said the dollar could strengthen further as there are still few signs the Federal Reserve will pivot from its aggressive interest rate rise cycle this year, adding that a pivot is unlikely until the first quarter of 2023 at the earliest.
The Fed looks set to push ahead with tightening policy into a recession with rates peaking at 4.25-4.50% early next year from 3.00-3.23% currently, which should keep the dollar firm, ING said.
"We could easily see further [dollar] gains of 5-7% across the board."
Bonds:
The gilt markets are again showing "highly concerning signs," Mizuho said.
Monday's jump in long-end real yields, after a selloff on Friday, "means that we likely have another situation whereby LDI funds will be struggling to post margin quickly enough, and gilt selling will encourage more selling," Mizuho said.
ING said ongoing volatility could well force the Bank of England back to the gilt market, maybe as early as Tuesday.
The BOE, which said earlier that it will include index-linked gilts in its temporary bond purchases, has so far bought only limited volumes of gilts in the program which it plans to cease on Friday.
"We think a longer period of support for gilts will be necessary to restore market confidence," ING said.
Citi said breakevens offer value at current levels and could attract investor demand at the U.K. Debt Management Office's GBP900 million tap of the 0.125% March 2051 index-linked gilt.
"The context is that of great real yield/breakeven volatility [+63bp and -33bp yesterday, respectively], both are back towards historically cheap levels."
Nevertheless Citi said it would be more cautious about real yield prospects. "While breakevens have room to retrace and 10y gilt yields have pretty much reached our medium-term target [4.47% as of yesterday's close vs. 4.5% target], gilts are prone to overshooting and conditions are ripe."
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German government bond yields hovered near 11-year highs after reports Chancellor Olaf Scholz was prepared to back European Union-wide joint debt issuance to help the bloc's members tackle the energy crisis.
The new stance, first reported by Bloomberg, would mark a notable about turn by the leadership of Europe's biggest economy, who have long resisted the idea of raising funds in conjunction with countries it considers more fiscally profligate.
Read more here.
Energy:
Oil futures fell more than 1% as concerns about demand returned to the fore, with a weak outlook for the Chinese economy also weighing on prices.
Oil prices are unwinding the gains they made after the 2 million barrel-a-day supply cut by OPEC+. Brent has declined nearly 3% so far this week.
"Oil is trading lower as demand concerns temporarily outweigh tight markets," SPI Asset Management said.
Metals:
Metals prices were weaker as traders looked to mitigate against risk assets.
Rising tensions within Ukraine have pushed a number of commodity markets lower, with investors piling toward the dollar.
Marex said that "chatter in Asia's time zone has increasingly been more about the Covid situation within China."
It said that "sentiment remains weak under such a backdrop, which might attract Western selling given recent support has been reliant on optimism that there will be a reopening."
DOW JONES NEWSPLUS
EMEA HEADLINES
Bank of England Further Expands Bond-Market Rescue
LONDON-The Bank of England expanded its bond-market rescue on Tuesday as it warned that the threat of a fire sale in some U.K. government debt posed a risk to the country's financial stability.
The central bank said it would buy up to GBP5 billion of index-linked gilts each day through Friday, equivalent to $5.5 billion. On Monday, the bank doubled the total daily amount of bonds it could buy to GBP10 billion.
German bond yields near 11-year highs on reports Scholz will sanction joint debt sales
German government bond yields BX:TMBMKDE-10Y hovered near 11-year highs after reports Chancellor Olaf Scholz was prepared to back European Union-wide joint debt issuance to help the bloc's members tackle the energy crisis.
The new stance, first reported by Bloomberg, would mark a notable about turn by the leadership of Europe's biggest economy, who have long resisted the idea of raising funds in conjunction with countries it considers more fiscally profligate.
Bio-Rad Laboratories in Talks to Combine With Qiagen
Bio-Rad Laboratories Inc. is in talks to combine with fellow life-sciences company Qiagen NV in a deal that would be worth more than $10 billion, according to people familiar with the matter.
The talks have been going on for a while but any agreement isn't likely for another few weeks or more-and there may not be one.
Givaudan 3Q Sales Rose; Increases Prices to Offset Higher Input Costs
Givaudan SA on Tuesday reported a rise in its third-quarter sales as it implements price increases to overcome higher input costs.
Sales reached 1.81 billion Swiss francs ($1.81 billion) compared to CHF1.69 billion for the prior-year period, the Swiss flavor-and-fragrance company said.
UK Unemployment Rate Fell in Three Months to August
The U.K.'s unemployment rate decreased in the three months to August and pay growth accelerated, signalling that the country's job market remained tight.
The U.K.'s unemployment rate was 3.5% in the three months to August, down from a revised 3.8% in the preceding three-month period, data from the Office for National Statistics showed Tuesday. Economists polled by The Wall Street Journal expected the jobless rate at 3.6%.
Russia Resumes Strikes After Mass Bombardment of Ukraine
ODESSA, Ukraine-Russia launched another round of strikes across Ukraine on Tuesday as the death toll rose from the previous day's barrage, one of Moscow's broadest assaults in nearly eight months of war.
Ukraine's air-defense systems intercepted Russian missiles across the country Tuesday morning, though strikes in the southeastern Zaporizhzhia region left at least one person dead, according to regional governors.
Russia's Putin Seeks to Escalate With Ukraine Strikes as Pressure Builds at Home
President Vladimir Putin's missile strikes on cities throughout Ukraine Monday drew condemnation from the West but praise from a growing chorus in Russia-critics who say that Moscow, despite the brutality of its invasion, hasn't shown enough toughness.
Speaking hours after one of the broadest and most intense barrages of the war, Mr. Putin said Russia responded to a weekend attack on a key bridge that links Crimea, the Ukrainian peninsula that Moscow illegally seized in 2014, to Russia. Mr. Putin warned of a harsh response if Kyiv were to conduct further "terrorist attacks."
NATO Aims to Better Align Arms Purchases in Response to Russian Hostility
BRUSSELS-NATO member states are working on ways to align their weapons purchases to better prepare for future conflicts, as they gear up for a major increase in military spending to replace the huge amounts of materiel sent to Ukraine and shore up their potential defenses against Russian aggression.
(MORE TO FOLLOW) Dow Jones Newswires
10-11-22 0531ET
