European stocks remained under pressure on Wednesday in another cautious session amid rising bond yields and concerns that recent bets on interest-rate cuts in 2024 may have been overdone.
Heavyweight mining and oil-linked stocks were weaker due to lower crude and commodity prices.
Stocks to Watch
Eurozone banks’ profitability, asset quality and capital structures are expected to decline modestly in 2024, CreditSights said.
This is due to the impact of inflationary pressures and “high, although probably declining, interest rates.”
However, banks’ overall fundamentals are likely to remain resilient in that period. “We are not expecting any material [regulatory] developments in 2024.”
Banks’ credit losses are likely to rise gently while operating expenses are seen staying flat or increasing modestly, CreditSights said.
GSK is expected to guide for at least low single-digit EPS growth for 2024 and settle the Zantac litigation case within the coming months, Jefferies said, raising its rating on the stock to buy from hold and lifting its target price to 1,900 pence from 1,550 pence.
It estimates GSK will pay $3-$4 billion to settle the case. The company’s growth profile is under appreciated and the current share price offers attractive risk reward, Jefferies said.
Economic Insight
U.K. business sentiment ended 2023 stuck in a weak position , according to a survey of company directors.
The Institute of Directors Economic Confidence Index, which gauges prospects for the country’s economy, dipped to minus 28 in December from minus 21 in November, nearing its recent low in June of minus 30.
“Although aspects of the business environment have improved in the last couple of months, particularly with regard to inflation, this is not yet exerting a meaningful impact on business decisionmaking,” the IoD said.
U.S. Markets:
Stock-index futures were lower after the previous session saw technology stocks suffer a sell-off on concerns the recent rally has come too far too fast.
And investors remain wary of a move higher in Treasury yields, which continued on Wednesday, with the 10-year note up to 3.985% having traded around 3.80% just last week.
With the Fed’s policy trajectory in mind, investors will be keen to see the minutes from its December meeting, due to be released after the European close. Richmond Fed President Tom Barkin is due to speak earlier, before the opening bell.
Economic updates set for release on Wednesday include the job openings survey for November, alongside the December ISM manufacturing report.
Forex:
EUR/USD’s pullback from its late-December high of 1.1139 may extend further, based on technical charts.
Despite EUR/USD reaching 1.1139, there’s no clear increase in upward momentum and the pullback from 1.1139 was accompanied by bearish divergence on daily moving average convergence divergence indicator, UOB Global Economics & Markets Research said.
Downward momentum is also starting to build, which suggests 1.1139 may be a peak for the next 1-2 months. The rising trendline that connects lows of November and December and the 55-day exponential moving average, both around 1.0860, should offer strong support, UOB said.
Bank of America Global Research expects the recent strength in the Swiss franc to fade and recommends investors buy a three-month EUR/CHF 1×1.5 ratio call spread option.
The Swiss franc was a G10 outperformer in 2023, particularly in December, which BofA attributes to end-of-month rebalancing flows rather than a directional play for lower EUR/CHF. The Swiss National Bank’s messages in December suggest it could favor a weaker currency, BofA said.
“Whilst the symmetrical language on FX raises the chances of intervention to weaken CHF, more likely is that FX sales to taper the balance sheet…is likely to be the path of least resistance.”
Bonds:
The 20 basis point rise in 10-year German Bund yields over the last three trading sessions took place in the absence of any fundamental impulses, Commerzbank Research said.
“This is likely to change in the coming days with key U.S. activity and eurozone inflation data due as central bankers return from their holidays.”
Austria, Belgium, Ireland, Italy, Portugal and Spain are all expected to launch syndicated transactions , mostly in the 10-year maturity segment, in the coming weeks, UniCredit Research said, with January often the busiest month of the year in terms of government bond issuance.
Energy:
Oil futures were weaker, pressured by a broader fall in risk assets and despite a rise in Middle East tensions.
“While the geopolitical situation is a concern for the oil market, a fairly comfortable oil balance over the first half of 2024 does help to ease some of these worries,” ING said.
Metals:
Base metals and gold edged lower as a stronger dollar added pressure to risk assets.
ING said gold investors will be eyeing this week’s U.S. jobs data, with Federal Reserve policy likely to be led by key economic data releases.
“We believe that the Fed policy will remain key to the outlook for gold prices in the months ahead.”
A modest cyclical revival in China’s growth in the first half of 2024 should help support most commodity prices, Capital Economics said, adding that its in-house proxy of China’s economic growth points to a pick-up in activity and reckons recent PMI surverys “are not reflecting economic reality.
Activity and import data all point to resilient commodity demand,” it said.
HSBC expects commodity prices to rise an average 2% in 2024 , before falling 4% in 2025. That follows a sharper-than-expected fall in 2023.
Despite the pullback, commodity prices remain at elevated levels and “squeezed supply, better Chinese demand and the energy transition are all set to support commodity prices in 2024,” HSBC said.
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