European Midday Briefing: The Global Bond Selloff Continues

MARKET WRAPS

Stocks:

European stocks traded higher on Wednesday, despite benchmark borrowing costs around the globe rising as investors continued to adjust to the prospect that interest rates will likely stay higher for longer.

"This fresh bout of anxiety has been prompted by new jobs data in the U.S. indicating that vacancies unexpectedly jumped in August," Hargreaves Lansdown said.

Stocks to Watch

Air France-KLM's decision to buy a stake in SAS will help the Franco-Dutch carrier group grow its market share on transatlantic flights, Citi said. Read more .

Legal & General is seen with limited catalysts in the near term until its new CEO--who is joining at the start of next year--provides an update on his strategy, which should provide clarity around capital allocation priorities, Jefferies said, cutting its rating to hold from buy and trimming its target price to 230 pence from 335 pence. Read more .

An upcoming tour of Rio Tinto's iron-ore operations in Australia's Pilbara should give investors better visibility on its next mine replacement cycle, operating cost drivers and ESG risk mitigation, Morgan Stanley said. Read more .

U.S. Markets:

Stock futures were mixed as the relentless surge in Treasury yields continued.

Yields were also propelled higher by concerns that the first ever ousting of a speaker of the House of Representatives presented a picture of dysfunction from a government that expects to sell about $850 billion of debt in the last three months of the year.

Economic data releases due include the ADP employment report and readings on services activity and factory orders.

Stocks to Watch

Apple was downgraded to Sector Weight from Overweight at KeyBanc. The stock was down 1.4%.

Intel was up 2% after it said it plans to spin off its programmable solutions group in a public offering over the next two to three years.

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Forex:

The dollar's strong gains should continue due to higher bond yields and the "relentless run of strong data," including Tuesday's bumper Jolts jobs data, ING said.

Strong data mean money markets continue to reduce expectations for how far the Fed will cut interest rates and they now price a low point above 4.50% in two to three years' time, up from 3.68% at the start of September, ING added.

"There seems little reason to sell the dollar at present--perhaps only a shock drop in ISM services could weigh on the dollar today." The DXY dollar index could rise to 108, from 107.204 currently, it said.

Julius Baer reduced its forecasts for the euro versus the dollar, now expecting it at $1.04 in three months compared with a previous forecast of $1.10, reflecting recent price movements and as the economy favors a stronger dollar.

Julius Baer forecasts EUR/USD at 1.08 in 12 months' time. Read more .

Bonds:

The German 10-year Bund yield reached 3% for the first time since mid-2011, according to Refinitiv data, as the tightening of financing conditions continued in the wake of central banks' interest-rate increases.

"One key question for the coming weeks is how comfortable the European Central Bank is with the speed of tightening in financing conditions," Citi said.

Energy:

Oil prices fell ahead of a key OPEC meeting later, with Standard Chartered saying it is unlikely producers at the meeting will be less cautious around production due to uncertainties around the global economy and central-bank policy.

"In particular, we think it is too early for the market to start to factor in any reduction in Saudi Arabia's voluntary output cuts," the bank said.

The recent slide from $97 a barrel for Brent should demonstrate that the current price situation remains fragile, Standard Chartered added.

Metals:

Base metals and gold prices remained under pressure, with the prospect of further monetary tightening from the Fed boosting safe-haven assets.

"Subdued manufacturing activity in China and in the U.S. added to the bearish market sentiment," ANZ said.

ANZ also highlighted that LME copper inventories rose to 168,000 tons-the highest level since June 2022.

Read Lithium Tipped to Fall Further Now, Rally Harder Later

Read Mining Stocks to Take Cues From China Stimulus, U.S. Economy

DOW JONES NEWSPLUS

EMEA HEADLINES

SAS Shares Tumble as Recapitalization Plan Wipes Out Shareholders

Shares in SAS fell as much as 96% after the airline presented a recapitalization plan that will see existing shareholders left empty-handed.

To avert bankruptcy, SAS agreed to an investment plan late Tuesday that will see investors including Air France-KLM, the Danish state, and investment firms Castlelake and Lind Invest put in a total of $1.18 billion to rescue the airline in return for around 86% of the company. The remaining stake will likely be distributed among creditors, and a delisting of the shares will follow next year.

Tesco Lifts Views After Cost Cutting, Easing Inflation Boosts Performance

Tesco upgraded its guidance on retail earnings after significant cost reductions resulted in a strong performance in the first half, supported by easing inflation, improved volumes and sales trends.

The U.K. grocer expects retail adjusted operating profit-the company's preferred metric, which strips one-off items-for fiscal 2024 between 2.6 billion pounds and 2.7 billion pounds ($3.14 billion-$3.26 billion), up from previous guidance of GBP2.49 billion.

Bond buyers battered as Austria's 100-year note shows danger of duration risk

When Austria sold a fresh batch of 100-year bonds in the summer of 2020, the 0.85% coupon was deemed so juicy that Vienna received some EUR16 billion of orders.

On Tuesday, the yield on that 'century bond' maturing in 2120 was flirting with 3%, its price having fallen below EUR33, according to Tradingview.

GLOBAL NEWS

Pro Take: As the Fed's Inflation Fight Drags On, Government Interest Payments Climb

The Federal Reserve dashed hopes for quick interest-rate cuts at its policy meeting last month when it indicated higher rates could be around longer to really stick a fork in inflation. Since then, stock prices have swooned while bond yields have ticked up.

Another ramification: the potential for an additional $1 trillion to $3 trillion in interest on U.S. debt over the next decade, according to the Peter G. Peterson Foundation, a nonpartisan think tank that focuses on U.S. fiscal challenges. Because the U.S. doesn't pay off its total outstanding debt, now at over $32 trillion, the government must refinance it at going interest rates that have headed higher.

Bond Selloff Threatens Hopes for Economy's Soft Landing

A sudden surge in long-term interest rates to 16-year highs is threatening hopes for an economic soft landing, all the more because the exact triggers for the move are unclear.

The Federal Reserve has been raising short-term rates for 1 1/2 years. Those increases are designed to push up longer-term bond yields, combating inflation by slowing the economy. But the speed of the latest jump might be a case of "be careful what you wish for." It comes as inflation has eased and the Fed has signaled it is nearly done lifting rates.

Why 8% Mortgage Rates Aren't Crazy

Treasury yields are jumping higher, but even that doesn't explain how high mortgage rates are getting. Home buyers might wonder whether typical mortgage rates could soon hit 8%.

Historically, the answer might have been that this was unlikely without a dramatic change in Treasury yields. Even 10-year yields going to 5%, from 4.8%, wouldn't have implied mortgage rates at that level. That is because what it costs to borrow to buy a home usually hews fairly close to 10-year Treasury yields.

Kevin McCarthy Ousted as House Speaker in Historic Vote

WASHINGTON-The House removed Kevin McCarthy as speaker, after a small band of GOP dissidents moved to oust the Republican leader and Democrats didn't come to his rescue during a dramatic vote with no precedent in U.S. history.

The California Republican was dethroned after nine months of fighting with hard-line party conservatives and just days after he engineered legislation to avert a government shutdown with the help of Democrats, which drew sharp criticism from the GOP dissidents led by Rep. Matt Gaetz (R., Fla.).

Some Americans Jailed in Russia Fear Being Left Behind

When Marc Fogel, a teacher at the Anglo-American School of Moscow, was sentenced to 14 years in prison after being convicted of marijuana smuggling last year, he joined a growing number of Americans held in Russia.

Fogel had transported roughly 17 grams of marijuana on a flight into Russia. He said he intended to use the drug for medical purposes to treat chronic pain. Fogel's Russian lawyer, Dmitry Ovsyannikov, said in an interview with The Wall Street Journal that the sentence was significantly longer than those given for similar offenses, which Ovsyannikov said suggested a political motive. U.S. Embassy staffers have for decades sent their children to the school where Fogel taught.

U.S. Funding Cutoff Threatens Ukraine's Economic Stability

WASHINGTON-The U.S. funding system for Ukrainian salaries and Kyiv government expenditures is expected to run out in the next month absent a fresh infusion of money from Congress, Ukrainian and American government officials said.

As a government shutdown loomed, Secretary of State Antony Blinken warned Senate Minority Leader Mitch McConnell on Sept. 24 that Ukraine would face a severe economic and political shock in the middle of the counteroffensive this fall if Congress cut off assistance to Kyiv.

Write to ina.kreutz@wsj.com

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

(END) Dow Jones Newswires

October 04, 2023 06:43 ET (10:43 GMT)

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