European Midday Briefing : Bayer Tumbles, Hit by Double Whammy of Disappointments

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European equities edged lower on Monday, at the start of a busy week of data and other key events that include the latest Federal Reserve minutes and the UK Autumn Budget Statement.

Stocks on the Move

Bayer shares lost around a fifth of their value after the company stopped a late-stage study for a cardiovascular drug early, due to lack of efficacy, and was ordered to pay $1.6 billion in a lawsuit relating to its Roundup weedkiller.

The news underscored the challenges Bayer’s two largest businesses face as the company weighs options to overhaul its corporate structure.

Stocks to Watch

The main uncertainty for Maersk in 2024 is the rising trend in container shipping freight rates, AlphaValue said, as it downgraded the stock to add from buy and lowered the target price to DKK12,105 from DKK13,951.

New vessels and low scrapping has led to overcapacity since the beginning of 2H 2023, and while Maersk saw contract rates continue to be positive in the third quarter, this will disappear progressively.

The company is focused on cost reduction and lower capex in 2023-24, while the return to shareholders should be much lower than during the boom years, AlphaValue said.

“The share price has returned a negative performance year-to-date and there is no trigger for a rebound in the short term.”

Major iron-ore producers, such as Rio Tinto and BHP, have driven the sell-side turning bullish on the mining sector, Citi said.

“Iron ore–which is a key earnings driver–has increased 10% in the past six months, taking stock prices of the iron-ore heavy miners along with it,” Citi said.

Over the past six-to-nine months, stock ratings on miners have changed in favor of buy ratings with 55% of analysts recommending buy and 4% sell, from 50% and 12% respectively in April, Citi added.

“It would appear as though the upward moves in equity prices are already a few steps ahead of consensus ratings and target price upgrades.”

Economic Insight

Both the European Central Bank and the Federal Reserve could keep interest rates high for long as economies weather the impact of rate hikes well, despite slowing down somewhat, DNB Asset Management said.

“Economies have proved resilient to higher rates and labor markets are still quite tight, indicating that rates may need to be kept at elevated levels for some time to come.”

The first rate cuts could come in the second half of 2024, but it is possible that rates could remain at present levels for the whole year, DNB said.

U.S. Markets:

Microsoft stock jumped premarket after the company said Sam Altman would join to lead a new advanced artificial-intelligence research team.

The OpenAI board fired Altman as chief executive last Friday and named a former chief executive of Twitch as interim CEO.

For investors, the AI news will continue on Tuesday, when Nvidia is due to publish results. Its stock rose premarket.

In other market news:

Stock futures inched up along with Treasury yields, with the 10-year yield above 4.45%.

Forex:

The dollar extended its retreat on speculation that interest rates have peaked, hitting two-and-a-half-month lows against a basket of currencies including the euro, but Swissquote said selling of the currency may be set for a pause.

“The U.S. dollar index flirts with oversold conditions and tests critical 200-day moving average support, indicating a potential pause in the ongoing dollar selloff absent fresh news.”

USD/JPY’s medium-term uptrend since mid-January is in jeopardy , based on technical analysis, Oanda said.

USD/JPY is trading below its previous upward-sloping 20-day and 50-day moving averages after a bearish move on Nov. 13, while its daily relative strength indicator has triggered a bearish breakdown of momentum below the 50 level.

Bonds:

Italian government bonds outperformed eurozone peers after Moody’s affirmed Italy’s Baa3 rating, as broadly expected, while it raised the outlook to stable from negative.

“The decision to change the outlook to stable from negative reflects a stabilization of prospects for the country’s economic strength, the health of its banking sector and the government’s debt dynamics,” Moody’s said.

Morgan Stanley Research said the outlook upgrade favors some further short-term tightening dynamics for Italian government bonds.

“Nevertheless, given the current traded levels, further upside in the 10-year BTP-Bund spread could be limited to the 160/165bp range,” Morgan Stanley said.

“Moody’s decision added to several other factors that were behind the recent outperformance of BTPs,” including a rebound in the performance of risky assets; the strength of iTraxx indices and the fact that the ECB didn’t discuss quantitative tightening on the PEPP at the October meeting, Morgan Stanley added.

Federated Hermes agrees with Moody’s updated view on Italy. “The best way to capitalize on this positive development for Italy would be for the government to renew its efforts to agree on the new stability pact and future governance of the Euro area.”

Investors could consider switching into Finland’s 3% September 2033 government bond at Tuesday’s auction from the 10-year Irish peer to benefit from better carry and relative supply, Danske Bank Research said.

Energy:

Oil futures pushed higher with all eyes on this weekend’s OPEC meeting in Vienna.

Prices fell for the fourth week in a row last week, despite seeing a 4% bounce on Friday. “The recent weakness has increased noise over what OPEC+ will decide to do at its meeting on Nov. 26,” ING said.

It expects Saudi Arabia and Russia to continue cutting supply into early 2024, but the wider OPEC+ group may also consider cutting.

“A deeper group cut combined with the Saudis and Russians rolling over their voluntary cut would be more than enough to ensure that the surplus currently expected in 1Q24 disappears.”

Metals:

Base metals were mixed and gold lower as worries about the global economy added pressure to markets.

BMI downgraded its 2024 price outlook for aluminum to $2,400 a ton from $2,500 a ton amid weak demand.

“The sluggish growth of the global economy is expected to weigh on aluminum demand in 2024, capping the upside to aluminum prices,” BMI said.

However, prices should rise from current levels, with demand growth expected to outstrip supply.

EMEA HEADLINES

Julius Baer Sees Lower Net Profit on Credit Provisions, Higher Taxes

Julius Baer Gruppe expects a net profit for 2023 below last year’s level due to a rise in credit provisions and an increased tax rate, but recorded net new money inflows until October.

The Swiss private-banking group said Monday that it booked valuation adjustments of 82 million Swiss francs ($92.6 million) on its loan book, of which CHF70 million was against its credit portfolio after Oct. 31.

This Coal Giant Now Wants to Get Out of Coal

Glencore Chief Executive Gary Nagle made his name running the commodity giant’s sprawling coal operations. Now he’s leading an effort to get the company out of coal altogether.

Glencore this past Tuesday agreed to a multibillion-dollar deal that will eventually rid it of its coal mines, a move that represents the company’s biggest strategic shift in years. That leaves it to focus on bolstering its position as a major supplier of the metals needed for electric-vehicle batteries and other green technologies.

GLOBAL NEWS

Stock market surges toward 2023 high. Will holiday shoppers put it over the top?

U.S. stocks have jumped back near to their summertime highs, a big rebound as investors enter the holiday season with Black Friday just days away.

The shopping frenzy expected on Friday, the day after Thanksgiving, kicks off a spending spree for the holidays that could help buoy stocks after their surge this month.

China Keeps Benchmark Lending Rates Steady

China kept its benchmark lending rates steady after the country’s central bank kept its key policy rates unchanged earlier this month.

The one-year loan prime rate was maintained at 3.45% while the five-year LPR was retained at 4.2%, the People’s Bank of China said in a statement Monday.

Some experts balk at talk that Fed must cut rates soon if inflation keeps coming down

Over the summer months, as reporters and the markets were pondering how many more times the Federal Reserve would hike interest rates this year, New York Fed President John Williams mentioned one reason the central bank might actually start cutting rates in 2024.

In an interview, Williams explained that, assuming inflation comes down, if the Fed doesn’t cut interest rates at some point, then real – or adjusted-for-inflation – interest rates will go up and up and up.

Israel, Hamas Close In on Hostage Deal Amid Mounting Scrutiny of Gaza Death Toll

Israel and Hamas are closing in on an internationally brokered deal to pause fighting and free some of the roughly 240 hostages taken by the militant group, officials close to the talks said, amid heightened scrutiny of the civilian toll of Israel’s invasion of Gaza.

The hostage talks, brokered by Egypt, Qatar, and the U.S., have moved in fits and starts for weeks and could break down again. But they represent the most active channel of diplomacy since Hamas’s Oct. 7 attacks and the launch of an Israeli military campaign that has claimed more than 13,000 lives, more than half of them women and children, according to health authorities in the Hamas-run Gaza Strip.

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

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