Written by 4:16 am EU Investment

EMEA Morning Briefing: Cautious Start Seen for Stocks as Nord Stream Closure Continues to Weigh

MARKET WRAPS

Watch For:

OECD CPI; Germany manufacturing orders, manufacturing turnover; UK construction PMI; trading updates from Ashtead Group, DS Smith

Opening Call:

European stocks face a cautious start Tuesday, as the economic outlook for Europe remains bleak amid energy pressures. In Asia, major stock benchmarks were mixed; Treasury yields and gold rose; the dollar steadied; while oil futures were mixed.

Equities:

European shares appear poised for a muted open Tuesday after closing mostly lower Monday, after Russia indefinitely halted natural-gas flows through a major pipeline, sending energy prices soaring.

U.S. stock futures rose early Tuesday, with markets closed Monday for the Labor Day holiday. Major U.S. indexes fell Friday as strong labor-market data bolstered the case for the Fed to continue its pace of policy tightening.

Russia’s move Friday to extend a halt to flows through the Nord Stream pipeline to Germany is set to exacerbate energy pressures that are already straining households and businesses across the continent.

“It’s inevitable now that Europe is going to be in a recession,” said Craig Erlam, senior market analyst at Oanda. “It’s just a case of how much support governments are going to offer against that backdrop and how inflationary that’s going to be.”

Forex:

The dollar steadied in Asia, as fears over slowing growth outside the U.S. continued to support the greenback.

USD/JPY appeared to be back to making fresh multidecade highs, as the currency pair continues to be driven to new heights by a hawkish Fed while the BOJ stands pat, HSBC said.

“The recent bout of risk aversion is related to concerns about central banks hiking the global economy into a hard landing.”

HSBC thinks the yen is reacting more to the narrative of hawkish central banks than to recession fears and pushed back expectations for the Japanese currency’s recovery to 2023.

Bonds:

Treasury yields mostly moved higher in Asia early Tuesday.

Morgan Stanley is more confident that bonds have bottomed. The yield on the 10-year Treasury was 3.19% on Friday.

“If Friday marked a short-term low for long-duration bonds (high in yields), the S&P 500 and many stocks could get some relief again as rates come down prior to the next round of earnings cuts. However, make no mistake, as the weather turns chilly this fall, so will growth, which will weigh mightily on stocks given the paltry ERP investors are getting paid to take this risk,” said Morgan Stanley strategist Mike Wilson.

Energy:

Oil futures were mixed in Asia after OPEC+ agreed that the producer group will trim production by 100,000 barrels a day in October.

This move effectively reverses the output hike of the same volume made in September, ANZ said.

While the cut is unlikely to change supply-and-demand dynamics, it indicates that the group is serious about supporting prices, ANZ adds.

However, ANZ said the impact of the OPEC+ announcement on Brent could be muted due to growing concerns about demand from China.

Metals:

Gold rose early Tuesday in Asia. The strength of the U.S. dollar hasn’t damped the appeal of the precious metal, which is now trading around a key level of support, said Oanda.

Oanda sees $1,680/oz as a key barrier for the metal, and reckons that a break below that level could signal further pressure on gold, especially if accompanied by aggressive tightening from central banks.

Jefferies has taken a more bullish view of lithium markets, raising its demand projection by 14% in 2023 and by 6-10% in 2024-2025 to reflect a stronger outlook for electric vehicles.

The investment bank also raised its supply forecasts for lithium carbonate equivalent by 80,000 tons in 2023, 200,000 tons in 2024 and 370,000 tons in 2025 to account for aggressive expansion in China and accelerated growth from recycling.

“As incentivized by high lithium price, recycled output in China already reached 35,000 tons LCE in July year-to-date (versus 22,000 tons in 2021 according to SMM), indicating circa 10% of mined output in 2022,” Jefferies said.

“We thus raise recycled volume to 15% of mined output in 2025.”

Chinese iron-ore futures rose amid signs of improving demand.

Market sentiment has become somewhat more positive in the steel and iron ore markets after China increased its support of the economy, ANZ said, noting that the PBOC cut banks’ foreign-exchange reserve requirement ratio and Beijing has said it would accelerate its stimulus rollout.

   
 
 

TODAY’S TOP HEADLINES

OPEC+ Agrees to Small Production Cut Amid Recession Fears

OPEC+ agreed Monday to cut oil production for the first time in over a year, delegates said, saying it should pull back about 100,000 barrels a day amid fears of a global recession and more Iranian crude coming to the market in the event of a revived nuclear deal.

The move shows how worries over an economic slowdown are dominating a global oil market that has experienced a 25% decline in Brent crude prices in the past three months. Fears of oil shortages after Russia’s invasion of Ukraine had driven prices above $100 a barrel for months this year, but the market’s recent slide prompted the Organization of the Petroleum Exporting Countries and Moscow-led allies, collectively known as OPEC+, to prop up a market that had been lifting petrostate economies from Moscow to Riyadh.

   
 
 

Russia’s Nord Stream Pipeline Closure Lands Economic Blow Against Europe

Power prices surged, European currencies hit multidecade lows and governments scrambled to contain the economic hit after Russia cut its main natural-gas pipeline to Europe.

The cutoff, which the Kremlin blamed Monday on Western sanctions and said would be long-lasting, realizes the worst-case scenario Europe had been girding for since Russia invaded Ukraine in February.

   
 
 

Japan Should Consider New Gas-Consumption Rules, Ministry Says

TOKYO-Japan should consider new rules that would allow the government to order big users of natural gas to curtail their consumption in an emergency, the Ministry of Economy, Trade and Industry said Monday.

The proposal for new regulations reflects heightened concerns about gas shortages in Europe and how they could affect Japan, which relies on imported liquefied natural gas for generating much of its electricity. In addition, many homes use gas for cooking.

   
 
 

Volkswagen to List Porsche in One of Biggest IPOs in Years

BERLIN-Volkswagen AG said Monday that it would list its iconic sports car maker Porsche AG in one of the biggest initial public offerings in years and a crucial test of investors’ confidence as high inflation and the war in Ukraine put a damper on the global economy.

The offering could value Porsche at as much as 85 billion euros ($84 billion), according to analyst estimates, injecting fresh cash into VW’s coffers that executives say will help the company bankroll its transition to electric vehicles and self-driving cars.

   
 
 

Rio Tinto Enters Binding Agreement to Acquire Turquoise Hill

SYDNEY–Rio Tinto PLC said it has entered a binding agreement with Turquoise Hill Resources Ltd. to acquire the remaining shares in the Mongolia-focused copper miner that it doesn’t already own.

Rio Tinto said Turquoise Hill’s independent directors had unanimously recommended its cash offer of 43.00 Canadian dollars (US$32.72) per share for all shares outstanding. It previously offered C$40.00 per share.

   
 
 

Ernst & Young Leaders Expected to Approve Plan to Split Accounting Company

Ernst & Young’s leaders are expected this week to give the green light to splitting its auditing and consulting businesses, paving the way for the biggest shake-up in the accounting profession in more than 20 years, according to people familiar with the matter.

The accounting giant’s global executive committee, which oversees the firm’s 312,000-person worldwide network, met on Labor Day to put the finishing touches to the plan for a worldwide breakup, the people familiar with the matter said. The committee is expected to approve the plan later this week, which will trigger votes on the deal by EY’s roughly 13,000 partners, who stand to make windfalls averaging more than a million dollars each.

   
 
 

Instagram Fined $402 Million in EU for Allegedly Mishandling Children’s Data

Instagram is being hit with the second-largest European Union privacy fine for allegedly mishandling data about children, ramping up the bloc’s enforcement of its privacy law against big technology companies.

Ireland’s Data Protection Commission said Monday that it fined Instagram owner Meta Platforms Inc. 405 million euros ($402 million) in a long-running investigation that had looked at minors who operated business accounts on the service, potentially exposing more of their contact information than if they operated a personal account.

   
 
 

Write to hoishan.chan@dowjones.com

   
 
 

Expected Major Events for Tuesday

04:30/NED: Aug CPI

06:00/GER: Jul Manufacturing orders

06:00/GER: Jul Manufacturing turnover

06:00/FIN: Jul Foreign trade

07:00/SVK: 2Q GDP

07:00/CZE: Jul Industry, Construction

07:00/CZE: Jul External trade

08:30/UK: Aug S&P Global / CIPS UK Construction PMI

10:00/FRA: Jul OECD CPI

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

 

(END) Dow Jones Newswires

September 06, 2022 00:16 ET (04:16 GMT)

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