- Italy Helps European Stocks Stage a Modest Recovery But Growth Worries Linger
European shares rose modestly at the end of a volatile week, led by rebounding banks and technology stocks, while Italian equities rallied as bond yields fell.
The pan-European STOXX 600 was up 0.4 percent by 0940 GMT, while Italy’s FTSE MIB .FTMIB outperformed with a 0.8 percent rise.
The European index was still set for its second straight week of losses as investors’ concerns about slowing global growth, weak earnings, and a U.S.-China trade war drove them away from the region’s equities.
“The market seems to still be concerned about the growth outlook and this comes along with a lot of discussions that we have on politics,” said Britta Weidenbach, Europe portfolio manager at German asset manager DWS.
“The U.S.-China trade conflict, Brexit negotiations, Italy to some extent, all of this is causing worries that companies will further delay their investment decisions.”
Growth-sensitive oil and mining sectors were the worst-performing on Friday.
Italian banks climbed after a media report that Italy’s EU Affairs Minister Paolo Savona is considering resigning over the government’s decision to challenge European Union budget rules. Savona denied the report.
Italy’s banks’ index .FTIT8300 climbed 1.9 percent as bond yields slid, boosting lenders who have large sovereign bond portfolios.
Banco BPM’s (BAMI.MI) shares rose 3.4 percent, while Mediobanca (MDBI.MI), Unicredit (CRDI.MI), UBI Banca (UBI.MI), and Intesa Sanpaolo (ISP.MI) gained 1.6 to 2.6 percent.
Renault (RENA.PA) shares rose 2.8 percent after Deputy CEO Thierry Bollore said he would safeguard the carmaker’s interests in its alliance with Nissan (7201.T), following the ouster of Carlos Ghosn as Nissan chairman over financial misconduct allegations.
Jefferies analysts upgraded Renault shares to “buy”, writing: “The most likely outcome from the current crisis, in our opinion, is a re-balancing of the Alliance with cooperation continuing and Renault reducing its stake to a “fairer” level.”
The carmaker’s shares dropped 8.4 percent on Monday when CEO Carlos Ghosn was arrested over allegations of financial misconduct.
Telecoms equipment makers Ericsson (ERICb.ST) and Nokia (NOKIA.HE) climbed 2.5 and 1.5 percent respectively as traders saw a positive read-across from a Wall Street Journal report that the U.S. government is asking allies to shun telecoms equipment from China’s Huawei HWT.UL.
Earnings disappointments drove the biggest losses on the STOXX.
Shares in stone wool insulation maker Rockwool (ROCKb.CO) dropped 9.9 percent after its third-quarter results.
German industrial machinery group GEA (G1AG.DE) fell 13.4 percent after it cut its outlook for 2018 cashflow margin.
Industrials firms have delivered weaker results as the slowdown in European growth, and trade war fears, hit those most vulnerable to the cycle first.
Data on Friday showed Germany’s economy saw its first quarterly contraction since 2015 in Q3, driven by weaker exports.
Overall expectations for 2018 earnings growth in European stocks have fallen recently as investors price in a weaker economy.
“Markets do look really attractively priced by now, but the question is about the earnings,” said Weidenbach.
“For next year consensus (earnings growth) is still at around high single digits, but certainly there are some clouds in the sky that might make the consensus a little bit too optimistic because of the economic environment,” she added.
Oil Prices Recover Slightly Amidst Demand Concerns in U.S. and China
Oil Prices Continue Slide as Market Skepticism Grows Over OPEC+ Cuts
Global oil markets witnessed a continued decline on Wednesday as investors assessed the impact of extended OPEC+ cuts against a backdrop of diminishing demand prospects in China.
Brent crude oil, the international benchmark for Nigerian crude oil, declined by 63 cents to $76.57 a barrel while U.S. WTI crude oil lost 58 cents to $71.74 a barrel.
Last week, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, agreed to maintain voluntary output cuts of approximately 2.2 million barrels per day through the first quarter of 2024.
Despite this effort to tighten supply, market sentiment remains unresponsive.
“The decision to further reduce output from January failed to stimulate the market, and the recent, seemingly coordinated, assurances from Saudi Arabia and Russia to extend the constraints beyond 1Q 2024 or even deepen the cuts if needed have also fallen to deaf ears,” noted PVM analyst Tamas Varga.
Adding to the unease, Saudi Arabia’s decision to cut its official selling price (OSP) for flagship Arab Light to Asia in January for the first time in seven months raises concerns about the struggling demand for oil.
Amid the market turmoil, concerns over China’s economic health cast a shadow, potentially limiting fuel demand in the world’s second-largest oil consumer.
Moody’s recent decision to lower China’s A1 rating outlook from stable to negative further contributes to the apprehension.
Analysts will closely watch China’s preliminary trade data, including crude oil import figures, set to be released on Thursday.
The outcome will provide insights into the trajectory of China’s refinery runs, with expectations leaning towards a decline in November.
Russian President Vladimir Putin’s diplomatic visit to the United Arab Emirates and Saudi Arabia has added an extra layer of complexity to the oil market dynamics.
Discussions centered around the cooperation between Russia, the UAE, and OPEC+ in major oil and gas projects, highlighting the intricate geopolitical factors influencing oil prices.
U.S. Crude Production Hits Another Record, Posing Challenges for OPEC
U.S. crude oil production reached a new record in September, surging by 224,000 barrels per day to 13.24 million barrels per day.
The U.S. Energy Information Administration reported a consecutive monthly increase, adding 342,000 barrels per day over the previous three months, marking an annualized growth rate of 11%.
The surge in domestic production has led to a buildup of crude inventories and a softening of prices, challenging OPEC⁺ efforts to stabilize the market.
Despite a decrease in the number of active drilling rigs over the past year, U.S. production continues to rise.
This growth is attributed to enhanced drilling efficiency, with producers focusing on promising sites and drilling longer horizontal well sections to maximize contact with oil-bearing rock.
While OPEC⁺ production cuts have stabilized prices at relatively high levels, U.S. producers are benefiting from this stability.
The current strategy seems to embrace non-OPEC non-shale (NONS) producers, similar to how North Sea producers did in the 1980s.
Saudi Arabia, along with its OPEC⁺ partners, is resuming its role as a swing producer, balancing the market by adjusting its output.
Despite OPEC’s inability to formally collaborate with U.S. shale producers due to antitrust laws, efforts are made to include other NONS producers like Brazil in the coordination system.
This outreach aligns with the historical pattern of embracing rival producers to maintain control over a significant share of global production.
In contrast, U.S. gas production hit a seasonal record high in September, reaching 3,126 billion cubic feet.
However, unlike crude, there are signs that gas production growth is slowing due to very low prices and the absence of a swing producer.
Gas production increased by only 1.8% in September 2023 compared to the same month the previous year.
While the gas market is in the process of rebalancing, excess inventories may persist, keeping prices low.
The impact of a strengthening El Niño in the central and eastern Pacific Ocean could further influence temperatures and reduce nationwide heating demand, impacting gas prices in the coming months.
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