Five Things You Need to Know to Start Your Day: Europe

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0:13UnmuteECB Preview: What to Expect From Today’s Decision

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By Sungwoo Park

September 12, 2024 at 12:00 PM GMT+7

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Good morning. The ECB meets today. Traders pare their bets on Fed easing. Stocks are in the green on a tech-fueled rally. Here’s what people are talking about.

Second cut looms

The European Central Bank is expected to reduce interest rates at its meeting on Thursday for a second time this cycle, as the region’s economy struggles to maintain growth momentum. Though the ECB will likely remain tight-lipped on the pace and extent of further action with inflation not yet fully defeated. Bloomberg Economics forecasts another move in December and quarterly reductions throughout 2025. Earlier this week, Morgan Stanley forecast the euro sliding toward parity with the dollar within months on the risk markets move to price in more aggressive easing by the ECB. The euro is little changed today against the greenback, the second-best performer among G-10 currencies so far this year.

Half-point move?

After the ECB decision, all eyes will turn to the Federal Reserve’s next move. Traders are rallying around the likelihood of a quarter-point cut next week after Wednesday’s data showed an unexpected pickup in underlying US inflation. The consumer price read for August mostly eliminated the case for a bigger half-point rate reduction. Fed officials have identified a weakening labor market as a reason to push for a faster pace of easing in the coming months. Once the Fed begins lowering borrowing costs, the debate will center around the pace of subsequent easing. Meanwhile, Goldman Sachs CEO David Solomon said there’s still a chance the Fed could opt for a bigger rate cut than expected.

Tech-fueled rally

Looking at the stock market, risk appetite has returned. Equities in Asia climbed to follow a tech-fueled rally on Wall Street, with the MSCI Asia-Pacific Index rising by the most in almost a month. Taiwan Semiconductor Manufacturing Co. was among top gainers on the regional stocks gauge. In US trading Wednesday, AI bellwether Nvidia rose 8.2%. The chip giant’s CEO Jensen Huang said the limited supply of their products has frustrated some customers and raised tensions. And OpenAI is in talks to raise $6.5 billion from investors at a valuation of $150 billion, according to people familiar with the situation.

Pan-European bank

UniCredit’s potential takeover of its German rival Commerzbank would create the largest lender in the country, giving a significant boost to CEO Andrea Orcel’s goal of becoming a true pan-European bank. Such a transaction would add some €560 billion of assets to the Milan-based lender’s balance sheet, or a 70% increase. Orcel has a background in dealmaking, and has repeatedly said UniCredit wants to be the “Bank for Europe.” Commerzbank’s executive board is reviewing its defense strategy, with labor representatives expected to make a concerted effort to build political backing for a rejection of the approach, say people familiar with the matter.

Rethinking EV tariffs

German Chancellor Olaf Scholz joined Spanish Prime Minister Pedro Sanchez in calling for the European Union to drop its plan to impose extra tariffs on Chinese-made electric vehicles. This development could potentially undercut the bloc’s primary tool for pushing back against Beijing’s state-backed industry. EU countries are due to give a final nod next month on whether to move forward with the tariffs. Over in China, Beijing has strongly advised Chinese carmakers to make sure advanced EV technology stays at home, people familiar with the matter said, even as they build factories around the world to escape punitive tariffs on Chinese exports.

And read here for more on the latest voice from the European car industry.

Coming up

Besides the ECB rate decision, we also get Spain inflation, Israel trade and Turkey current account, as well as US initial jobless claims and PPI later in the day. The International Energy Agency publishes its oil market report.

What we’ve been reading

This is what’s caught our eye over the past 24 hours.

And finally, here’s what Garfield s interested in this morning:

The unusual equities reactions overnight after US inflation data came in largely as expected say much about how nervous investors are, with a range of event risks looming large into the end of the year. Headline CPI growth matched expectations for both the monthly pace and the annual pace — the latter representing a notable cooling in inflation — while the year-on-year core prices reading also met estimates to come in unchanged.

Monthly core was just above expectations, and that seemed to be enough to get traders to fully close the door on pricing for a 50-basis-point interest-rate cut from the Federal Reserve next week. Equities promptly sold off sharply — but then the dip buyers came in just as fast to drive the S&P 500 up so relentlessly that it ended with a better-than-1% gain. Looking back over this year’s releases, the initial selloff was the most extreme seen in response to CPI — a 1.5% drop in the space of just over 2 hours. In fact, only one of the previous data saw a rout of that scope. Back in February a second-straight strong upside CPI surprise sent the US equity gauge down 1.6% within six hours from the announcement.

The initial drop on Wednesday seemed out of proportion — a quarter-point cut had been looking like far and away the consensus case for the Sept. 17-18 meeting before CPI hit and only a very strong downside surprise would have brought a larger move into play. Investors look to be in a state of high — if at times suspended — anxiety as they wait to see whether the Fed will manage to engineer a soft economic landing.

Ultimately, a data outlook that validates a gradual easing path could be argued to be the most likely scenario when a calm, smooth slowdown in the economy can be achieved. The dump overnight may have been a reflection of nerves in case the evaporation of bets on large Fed cuts roiled Treasuries and sent yields spiking. When that didn’t occur, equity investors could focus on the potential that earnings will hold up because the economy is decelerating, not heading for a crash. That’s a far cry from some of the concerns that seemed to be bubbling up earlier on Wednesday when a surging yen sent equity index futures lower to remind traders that the Aug. 5 meltdown could yet prove to be a prologue rather than an isolated incident.

We can expect at least a few more gyrations in the coming weeks as investors face major central bank decisions plus the potential for fresh bouts of volatility associated with the US elections.

Garfield Reynolds leads Bloomberg’s Markets Live blog in Asia and is based in Sydney.

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