European shares faced challenges in gaining momentum as the latest economic data revealed Germany’s struggles to rebound from a winter-induced downturn and the increasing impact of rising borrowing costs. The third-quarter contraction in Germany, driven by a decline in household spending, highlighted the challenges faced by Europe’s largest economy amid a budget crisis and the likelihood of recession. Despite a separate report indicating a third consecutive monthly improvement in business confidence in November, the measure fell short of analysts’ expectations.
While some cyclical economic indicators in Europe may have stabilized, they do not necessarily signal positive conditions. According to Karsten Junius, Chief Economist at Bank J. Safra Sarafin Ltd., these indicators still point towards a negative fourth quarter, suggesting a recessionary phase in the latter half of 2023.
The Stoxx Europe 600 index experienced fluctuations, aiming for a modest weekly gain. BASF SE led the chemical sector’s advance following reports that Abu Dhabi National Oil Co. is exploring an acquisition of its Wintershall Dea unit. Meanwhile, U.S. equity futures remained steady.
Treasuries saw a decline after the holiday break, reducing gains for the month, with the 10-year yield rising over seven basis points. European bonds extended their decline following reports that Germany would suspend debt limits for the fourth consecutive year, raising concerns about increased borrowing. The Bloomberg dollar index stabilized.
Despite the uncertainties in European markets, global stocks are on track for their best month in three years, with the MSCI All Country World Index showing an 8.6% increase this month, driven by growing optimism around peaking U.S. interest rates.
Kyle Rodda, a senior analyst at Capital.com in Melbourne, pointed out that lower bond yields are influencing equity valuations, although the underlying cause of reduced yields—lower inflation due to weaker growth—has not been fully factored into earnings estimates. Rodda emphasized that profit expectations will eventually need to align with economic reality.
European Central Bank President Christine Lagarde is scheduled to speak later in the day, providing insights amid mixed messages from other policymakers. Governing Council Member Robert Holzmann suggested an equal probability of a rate hike or cut in the second quarter of 2024, while Francois Villeroy de Galhau asserted that the central bank would not increase borrowing costs unless an unexpected event occurred.
In Asia, Hong Kong and mainland Chinese equities experienced a decline after Thursday’s rally inspired by Beijing’s widening property rescue campaign. Japanese stocks rose following a national holiday, and Australian stocks also gained ground.
In China, developer stocks fell in mid-afternoon trade, reversing a surge from the previous day. This change followed reports that China might allow banks to offer unsecured short-term loans to qualified builders for the first time, in an effort to address a housing slump.
Oil prices stabilized following the news that OPEC+ would hold its delayed meeting online instead of in-person, causing uncertainty about further production cuts.
In Japan, inflation accelerated, though the October reading was slightly below expectations. Consumer prices rose 3.3% year-over-year, slightly shy of the 3.4% consensus estimate. This deviation contradicts the Bank of Japan’s view that prices would decelerate, potentially strengthening expectations of policy normalization, with the yen edging stronger against the dollar.
