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European Midday Briefing: Credit Suisse Slide Adds to Broader Market Worries

MARKET WRAPS

Stocks:

European stocks were deep in the red on Monday after Credit Suisse shares plunged to fresh lows, raising concerns about the health of the financial sector in Europe.

The Swiss bank tried to assuage fears about its health in a memo to employees and in a round of phone calls to investors and clients over the weekend, according to people familiar with the matter.

Credit Suisse shares tumbled 9% early Monday and are down nearly 30% over the past month. Spreads on its credit-default swaps, a type of insurance against default, rose to their highest level of the year on Friday. The deteriorated market condition indicates that Credit Suisse could struggle to raise new shares to pay for a planned restructuring and that its funding costs could rise sharply.

Read: Credit Suisse Seeks to Calm Market Jitters

Meantime, news of the U.K. government's decision to scrap a plan to cut taxes for wealthiest earners provided support to U.K. assets, with the pound and gilts rising.

"This move is rather symbolic, being less about the amount of money it will save and more about the poor signal it had delivered of ideological tax cuts," said Chris Turner, an analyst at ING Bank.

Read: U.K. Makes Major U-Turn on Tax Cuts

Economic Insight:

Berenberg has cut its forecasts for the U.K. economy in the near term due to the sudden tightening of financial conditions triggered by recent policy announcements. It has lowered its 2023 call to a 1.5% contraction from the 1% GDP drop previously forecast.

After a peak-to-trough recession of 2.5%, deeper than the 1.9% previously forecast and lasting three quarters from the third quarter of 2022 to first quarter 2023, Berenberg has raised its 2024 call to 2.1% GDP growth from 1.9%.

"Of course, a more pro-growth approach to taxes and regulation could still support U.K. growth potential in the long run if the tax cuts are sufficiently funded," Berenberg said.

U.S. Markets:

Stock futures were starting the final quarter on a muted note as fears about the impact of tighter Fed policy continued to suppress sentiment.

The S&P 500 has fallen for three consecutive quarters, off 24.8% over that time, and it lost 9.3% in September, the biggest monthly fall since March 2020.

The U.K. tax U-turn news helped push sovereign bond yields lower. The benchmark 10-year Treasury dipped 2.8 basis points to 3.803%.

Stocks to Watch:

Tesla's deliveries rebounded to hit a record in the most recent quarter, though the figure was short of Wall Street's forecasts. Its shares slid more than 5% premarket.

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TV channels owned by Walt Disney are back on Dish Network's satellite broadcasting and streaming platforms after the two companies reached a tentative agreement on a new contract. Dish shares added 0.5% premarket.

Economic Data:

Updates set for release on Monday include the S&P U.S. manufacturing PMI report for September, the ISM manufacturing index for September and the construction spending report.

Forex:

The U.K. government backtracking on its pledge to cut the 45% rate of income tax lifted the pound, but this boost is likely to be limited, MUFG said.

The U-turn is "another small step to help restore investor confidence in the U.K.'s public finances although it is unlikely to be sufficient on its own," MUFG said. The measure is only a relatively small element of the recent mini-budget--costing GBP2 billion versus the total cost of the tax-cutting package at GBP45 billion--that sent the pound sliding, MUFG added.

GBP/USD rose 0.3% to 1.1207, having hit a high of 1.1280 earlier Monday but MUFG doesn't believe it has much room to rise further.

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The euro has recovered somewhat against the dollar over recent sessions but this isn't unusual given its low levels and global risk aversion, Danske Bank said.

"Indeed, we have seen many times over the recent year that EUR/USD may very well go up during substantial global risk aversion if this does not emanate directly from Europe [e.g. the war in Ukraine]," Danske Bank said.

The key release for EUR/USD this week is Friday's U.S. nonfarm payrolls report any weakness in the data could add further downward pressure on the dollar, Danske said.

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The dollar edged lower against a basket of currencies but its declines are likely to be short-lived given the prospect of another strong nonfarm payrolls report, ING said.

"Our team looks for a solid 200,000 increase in jobs and the unemployment rate staying low at 3.7% [in September]-- both pointing to another 75 basis points [interest rate] hike from the Federal Reserve on November 2," ING said.

Foreign exchange interventions by Asian authorities along with the Bank of England's bond market intervention are potentially behind the dollar's correction lower but this move will be limited, ING added.

Bonds:

U.K. borrowing costs should calm after the government announced its tax U-turn, although questions remain over credibility, Hargreaves Lansdown said.

"A big part of the questionable battle plan to try and stimulate growth is being ripped up, which may actually help calm the feverish rise in borrowing costs for companies, homeowners and the government."

The yield on 10-year gilts fell around 10 basis points to dip just below 4% after the announcement, down from last week's peak around 4.554%, according to Tradeweb.

However, the government's credibility at a time of economic uncertainty "has been lost, perhaps irrecoverably."

Energy:

Oil prices rose more than 3% ahead of this week's OPEC+ meeting at which the cartel is expected to debate a one million barrel a day production cut.

If the group goes ahead with the cut it will be the second in as many meetings, though a one million barrel a day reduction in output would be ten times as large as its most recent cut. Members of the group are split, however.

DNB Markets said the cartel is currently missing its output targets by 3.5 million barrels a day due to tight spare capacity and poor infrastructure. A one million barrels a day reduction would likely translate into only a 400,000 barrels a day decline in actual output.

With most members of the cartel underproducing "the majority of the group will feel no pain by supporting a production cut," DNB said.

Read: OPEC+ to Weigh Production Cut to Bolster Oil Prices

Other Market Comment:

Pictet Wealth Management said reduced gas inflows from Russia means Europe will rely more on existing storage capacity and consumption-reduction measures to get through the winter.

EU countries have successfully increased their reserves ahead of winter, with inventory levels hovering around 88% of maximum capacity, Pictet noted. However, should Europe experience a colder-than-average winter, gas consumption would rise, depleting gas stores quickly and leading to rationing.

Pictet sees a 25% probability for a cold winter with a complete shut-off of Russian gas and 60% for a shut-off of gas inflows combined with a mild winter. There is a 15% probability of Russian gas inflow remaining at their current level, with a mild winter, Pictet's third scenario.

Metals:

Metals edged lower, as growth jitters lingered and with analysts still mulling what impact an LME ban on Russian metals would have on European markets.

Goldman Sachs said a ban would make it harder, but not impossible, for Western buyers to obtain Russian metals, with aluminum likely to be the most affected by any restrictions.

Trading volumes were muted, with Chinese markets closed for a weeklong holiday.

Read: LME Ban on Russian Metal Wouldn't Halt Imports

DOW JONES NEWSPLUS

   
 
 

EMEA HEADLINES

Credit Suisse Seeks to Calm Market Jitters

Credit Suisse Group AG tried to assuage fears about its health in a memo to employees and in a round of phone calls to investors and clients over the weekend, according to people familiar with the matter.

Credit Suisse shares tumbled 9% early Monday and are down nearly 30% over the past month. Spreads on its credit-default swaps, a type of insurance against default, rose to their highest level of the year on Friday. The deteriorated market condition indicates that Credit Suisse could struggle to raise new shares to pay for a planned restructuring and that its funding costs could rise sharply.

   
 
 

U.K. Government Abandons Plan to Cut Rate of Income Tax for Top Earners

LONDON-The U.K. government Monday said it won't proceed with the removal of a 45% top rate of income tax, scrapping a key element of a plan announced late last month that triggered turmoil in the country's financial markets and an intervention by the Bank of England.

The decision to retain the tax rate on high incomes was announced during the ruling Conservative Party's annual conference, where a number of lawmakers had expressed their opposition to the move. But the government was defending the measure as recently as Sunday.

   
 
 

ConEd Agrees to Sell Clean Energy Business for $6.8 Billion to RWE

Consolidated Edison Inc. has agreed to sell its renewable energy business to German energy company RWE AG for $6.8 billion, the companies said Saturday.

The deal nearly doubles RWE's renewable energy portfolio in the U.S. and will make it the second-largest solar operator in the country, the company said in a statement. ConEd's portfolio includes more than 10 gigawatts of renewable projects in operation or under development.

   
 
 

Naspers' $4.7 Bln Agreement to Acquire BillDesk Through Prosus Terminated

Naspers Ltd. said Monday that a $4.7 billion agreement to acquire BillDesk through its Prosus NV subsidiary has been terminated automatically, as certain conditions weren't fulfilled by the long stop date.

The South African investor said on Aug. 31, 2021 it had agreed to buy Indian digital payments provider BillDesk through Prosus NV's subsidiary PayU Payments Private Ltd.

   
 
 

OPEC+ to Weigh Production Cut to Bolster Oil Prices

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October 03, 2022 05:43 ET (09:43 GMT)

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