MARKET WRAPS

Stocks:

European shares struggled for direction on Monday, wavering between minor gains and losses, as investors digested a widely-anticipated right-wing coalition victory in Italy's general election, a fresh selloff of U.K. assets and some disappointing German economic data.

MUFG Bank said Monday's steep slide in the pound and sharp rise in gilt yields following Friday's expensive tax cuts, and measures to cap energy prices, signaled that investors are losing confidence in U.K. domestic economic policy.

With the U.K.'s finance minister saying over the weekend that more tax cuts are on the way, the Bank of England will need to act quickly to restore confidence, MUFG said.

"Without timely policy action this week, cable could quickly fall below parity."

Economic Insight:

The European Central Bank has a window to raise interest rates until the end of this year or early next year, Danske Bank said, reiterating its long-held view.

However, it has adjusted its expectations, forecasting the deposit rate--currently at 0.75%--to peak at 2.5%, with a 75-basis-point rate rise in October, 50bps in December and 50bps in February.

"The biggest risk to the call of ECB stopping its hiking cycle in February is the fiscal measures."

U.S. Markets:

Futures for the S&P 500, Dow industrials and Nasdaq-100 flitted between small gains and losses, suggesting investors aren't ready to buy back into a market that fell sharply on Friday.

"In addition to the ongoing flight of the dollar, overarching concerns around the possibility of a global recession are weighing on equity markets generally. The risk of a hard landing for economies following a period of over-tightening are becoming elevated," said Interactive Investor.

In addition, option markets are pointing to heightened pessimism that may prove attractive to contrarian traders.

The CBOE Vix index, informally known as Wall Street's fear gauge, has moved up to a three month high around 32, and large money managers over the past four weeks have spent $34.3 billion on put options for stocks and ETFs, the most since such data started in 2009.

Forex:

The euro fell to a 20-year low against the dollar as the greenback strengthened across the board and as investors digested Sunday's Italian general election.

Far-right leader Giorgia Meloni claimed victory after exit polls gave her coalition a clear majority.

The "biggest concern for investors" is whether the new far-right Italian government will deviate from reforms under Mario Draghi that helped Italy get the EU on its side, Swissquote Bank said.

EUR/USD could remain under pressure as Italian government bond yields will rise further, widening the gap with other eurozone yields, Swissquote said.

In terms of GBP/USD, Swissquote said parity is now "seen as almost certain," after sterling continued its slide against the dollar as investors reacted very negatively to Friday's announcement of sweeping U.K. tax cuts and a cap on energy price rises.

"What the market is hearing is: who will finance this spending? The only hope here is to see at least a sugar rush in the British economy to help investors digest information, but the next couple of years will probably be harsh for the U.K.," Swissquote said.

Read: BOE Unlikely to Deliver Emergency Rate Rise as Pound Plunges, Says ING

Bonds:

Italian government bonds underperformed their eurozone peers after election results broadly matched expectations.

"We expect market participants to focus on policy, especially in the context of European integration and fiscal policy," Goldman Sachs said, adding that the focus on Italy will be especially strong from mid-October onward.

Capital Economic said the likely coalition victory doesn't pose an immediate risk to bond markets but warned that the fact the country will be governed by a group of historically euroskeptic parties under an untested leadership raises the risk of a loss of confidence in Italy's public finances.

"Concerns about Italy's public finances could flare up at any point given the size of the country's public debt burden."

This is specially true against the current context of monetary tightening, an imminent recession and pressure for the government to cushion the hit to households and firms from the energy crisis, Capital said.

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The massive selloff in gilts on Friday should have limited repercussion on the eurozone rates markets, though the risk-off moves warrant caution, Commerzbank said.

In particular, another record print in eurozone HICP is due and should underpin market expectations of European Central Bank interest-rate rises.

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The unwarranted stabilization of 10-year German Bund yields has ended, with Morgan Stanley's year-end target of 2% reached on Friday, which now expects more moves upward.

"With the marked upward revision on the [Federal Reserve's] dot plots at the September FOMC [meeting], and recurrent hawkish ECB comments, we do not see any reason to question our bearish duration view, with the 2.25% level being a credible target next month," Morgan Stanley said.

The strategists added that the yield is now on the cheap side by 13 basis points versus September fair value, but it is around fair value for October.

Energy:

Oil prices fell to the lowest levels since January following a week of central bank interest-rate hikes that refreshed worries about the strength of the world economy.

The stronger dollar was also weighing on oil. The ICE Dollar index is at a fresh 20-year high, weakening demand for dollar-denominated oil among holders of other currencies.

Metals:

Gold and base metals moved lower in London trade as investors still looked toward risk-off assets with the macro sentiment remaining weak.

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Any future aluminum-price surges on fresh production cuts are likely to be brief, as demand fears outweigh tightening supply, Citi said.

"The aluminum market has become reluctant to price in power-related curbs, having switched its focus to concerns of demand destruction amid supply-chain destocking."

Investors worry about a Europe-led recession amid increased energy prices, tighter liquidity and China's pandemic-related restrictions, Citi said.

But in the coming months, "any sizable power-related curbs in Yunnan, China, or Europe may see transitory spikes in prices," while there is also the risk the London Metal Exchange may delist or halt inflows of Russian metal, Citi added.

DOW JONES NEWSPLUS

EMEA HEADLINES

Russia's War in Ukraine to Cost Global Economy $2.8 Trillion, OECD Says

Russia's invasion of Ukraine will cost the global economy $2.8 trillion in lost output by the end of next year-and even more if a severe winter leads to energy rationing in Europe-the Organization for Economic Cooperation and Development said Monday.

The estimate by the Paris-based club of advanced economies lays bare the magnitude of the economic fallout from Moscow's invasion of its neighbor seven months ago, the worst military conflict on the continent since World War II, which is Russia's attempt to redraw the map of Europe by force.

Italian Right Is On Course to Win Elections

ROME-Italians elected a right-wing coalition to lead the country, according to projected results, choosing an untested leader who will confront Europe's gathering economic downturn and energy crisis resulting from Russia's invasion of Ukraine.

Giorgia Meloni is favored to become Italy's new prime minister after her Brothers of Italy party won the biggest share of the vote in Sunday's parliamentary elections, according to projections based on counting nearly half of the votes for Italy's Senate. She would require approval from junior partners in her coalition to assume the role.

British Pound Sinks to Record Low Against the Dollar

The British pound tumbled to a record low of $1.0349 against the U.S. dollar early Monday as the U.K. government's planned tax cuts continued to spook traders.

The pound also fell against all major global currencies, slipping below EUR1.08 against the euro - its lowest level since September 2020. The currency has recovered some ground, last trading at $1.0721 and EUR1.1064.

German Business Sentiment Slumps Amid Energy Concerns

Business confidence in Germany worsened considerably in September as companies turned more pessimistic due to the energy crisis.

The Ifo business-climate index fell to 84.3 points in September from a revised figure of 88.6 points in August, data from the Ifo Institute showed Monday. This is its lowest value since May 2020. Economists polled by The Wall Street Journal had expected the index to come in at 87.1.

Credit Suisse Says Strategic Review is on Track

Credit Suisse Group AG on Monday said its comprehensive strategic review is on track, including potential divestitures and asset sales.

The Swiss bank said it will provide further updates when it reports its third-quarter results on Oct. 27.

Sainsbury's Talks with LXI REIT Over Sale of 18 Stores Collapse

J Sainsbury PLC said Monday that it is no longer in discussions with LXI REIT PLC over the sale and leaseback of a portfolio of 18 supermarket stores, due to LXI's market volatility concerns.

The British grocer said the investment trust isn't proceeding with a share issue that would have partly funded the transaction due to stock market volatility concerns, and the two parties are no longer in discussions.

Unilever CEO Alan Jope to Retire at End of 2023

Unilever PLC said Monday that Chief Executive Officer Alan Jope has decided to retire from the company at the end of 2023 after five years in the role.

The Anglo-Dutch retailer--which owns consumer brands such as Ben & Jerry's ice cream, Dove soap and Cif and Domestos cleaning products--said it will start a formal search for a successor, and that it will consider both internal and external candidates.

Anglo American Begins Copper Operations at Peru Site; Revises Production Guidance

Anglo American PLC said Monday that it has started commercial copper operations at its Quellaveco project in Peru, and narrowed 2022 guidance for copper from Chile.

The mining company said it expects the site, of which it owns 60%, to produce more than 300,000 metric tons a year of copper equivalent volume on average over its first 10 years. The mine alone is expected to lift the company's total global output by 10% in copper equivalent terms and take its total copper production close to 1 million tons a year.

Iran's Hard-Line Government Faces Growing Unrest Over Women's Rights

Antigovernment protests in Iran gathered strength Sunday with new demonstrations in scores of cities and indications that unrest was growing, posing one of the biggest challenges the country's conservative Islamic rulers have faced in years.

A movement initially led by young people that focused on the country's strict Islamic dress code for women appeared to be broadening into a mass outpouring of pent-up dissatisfaction among middle-class workers and even religious Iranians at the regime's treatment of its own citizens.

U.S. Warns Russia of 'Catastrophic Consequences' of Using Nuclear Weapons in Ukraine

WASHINGTON-National security adviser Jake Sullivan said the U.S. has warned Russia that it would face "catastrophic consequences" if it uses nuclear weapons in Ukraine.

"We have communicated directly privately to the Russians at very high levels that there will be catastrophic consequences for Russia if they use nuclear weapons in Ukraine," Mr. Sullivan said Sunday on the ABC News show "This Week."

Gucci, Burberry Join Booming Secondhand Luxury Trade

LONDON-The booming market for secondhand luxury goods is creating a dilemma for makers of high-end handbags, fashion and jewelry: Join the trend, or ignore it.

Secondhand luxury isn't new, but its popularity is surging. Steep price hikes by prestigious brands like Chanel SA are driving some luxury buyers to look for less expensive used items. Others are seizing on secondhand goods' sustainability bona fides: A used pair of designer jeans doesn't cost any more of the planet's resources to make.

In Brexit's Wake, U.K. Still Lacks a U.S. Trade Deal

One of the big dividends of Brexit was supposed to be a U.K. trade deal with the U.S., helping offset the economic pain of putting up trade barriers with the European Union, Britain's largest trading partner.

That isn't happening soon, further adding to the woes of a U.K. economy beset by slow growth, a plummeting pound and high inflation.

Climate Change Forces French Vineyards to Alter the Way They Make Wine

BORDEAUX, France-The wildfire began on an usually dry summer day in a forest bordering the Liber Pater vineyard. Winemaker Loïc Pasquet saw the flames rise and spread toward his precious vines, which produce Bordeaux that sells for $30,000 a bottle.

Hours before evacuating Mr. Pasquet and his staff destroyed the grass around the vineyard to prevent it from catching fire and dug trenches to block the blaze's path. He also sprayed local trees with water drawn from the vineyard's ponds. The vineyard was spared.

GLOBAL NEWS

Central Banks May Stoke Risks by Raising Interest Rates Together

Central banks around the world are raising their key interest rates in the most widespread tightening of monetary policy on record. Some economists fear they may go too far if they don't take into account their collective impact on global demand.

According to the World Bank, the number of rate increases announced by central banks around the world was the highest in July since records began in the early 1970s. On Wednesday, the Federal Reserve delivered its third 0.75 percentage-point increase in as many meetings. This past week its counterparts in Indonesia, Norway, the Philippines, South Africa, Sweden, Switzerland, Taiwan and the U.K. also upped rates.

China PBOC Raises Forex Risk Reserve Ratio for Forward Trading

China's central bank said Monday that it would increase the risk reserve requirement ratio for financial institutions when conducting foreign-exchange forward trading, as the yuan faces increasing depreciation pressure.

The People's Bank of China said the risk reserve requirement for forward foreign-exchange sales will be raised to 20% from currently zero. The move, which the central bank said is aimed at stabilizing expectations in the foreign-exchange market, will take effect Wednesday.

Japan's Intervention to Buy Yen Was Appropriate, BOJ Governor Says

OSAKA -- Bank of Japan Gov. Haruhiko Kuroda said Monday that the Ministry of Finance's decision to intervene in the currency market last week by buying yen and selling dollars was an appropriate move.

The recent weakening of the yen was "rapid and one-sided," Mr. Kuroda said at a news conference after meeting with business leaders in Osaka.

China Stresses Its Taiwan Stance at U.N.

NEW YORK-China's foreign minister promoted one issue above all others in a flurry of diplomatic meetings at the United Nations this week: Beijing's sovereignty over Taiwan.

Addressing the U.N. on Saturday on behalf of President Xi Jinping, Chinese Foreign Minister Wang Yi described Taiwan as China's sovereign territory since ancient times and vowed resolute action to forestall separatist activity.

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(END) Dow Jones Newswires

September 26, 2022 05:40 ET (09:40 GMT)