5 things to start your day: Europe

Good morning. European stocks may be falling behind US peers. Pimco is scouring emerging-market debt. And oil's demand woes worsen. Here's w

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Good morning. European stocks may be falling behind US peers. Pimco is scouring emerging-market debt. And oil's demand woes worsen. Here's what people are talking about.

Europe slipping behind

The promise of European stocks gaining an edge over their US counterparts is fading after a brief spell of outperformance, as concerns of an economic slowdown weigh on the outlook for earnings. Where Europe stood to gain from a shift away from big tech stocks, investors are instead turning to undervalued sectors of the US market. Their preference is driven by data showing the US economy's resilience and expectations that the Federal Reserve would cut interest rates sooner and more aggressively than previously anticipated. On its own, the picture in Europe looks robust with the Stoxx 600 at a record high. Still, the gauge underperformed the S&P 500 in August. On an annual basis, too, the index has lagged by nearly 9 percentage points so far in 2024, a second straight year of underperformance. See Mark's outlook on US equities, below.

Pimco tweaking playbook

Top-performing emerging-market bond managers are recalibrating positions as the most anticipated US rate cut in decades brings fresh impetus to an asset class buffeted by nearly $15 billion in outflows this year. Investors from Pacific Investment Management Co. to Neuberger Berman and Grantham Mayo Van Otterloo & Co. are eyeing local-currency debt and select reform stories from countries including Ecuador and Argentina, which they say stand to benefit most from the boon the Fed cuts should provide to risk assets. Emerging markets have been mired by volatility as global economic uncertainty and regional conflicts roil buoyant forecasts.

Oil's headwinds mount

Oil pushed lower on signs OPEC+ will progress with a plan to lift output from October, while economic headwinds mount in China. The cartel is due to add 180,000 barrels a day as it gradually restores production that's been halted since 2022, according to delegates involved in the discussions. Over the weekend, Chinese data showed factory activity contracted for a fourth month in August and a residential slump deepened, raising concerns the world's top crude importer may struggle to meet this year's economic growth target. Meanwhile, one of the most contentious investing strategies on Wall Street might be a lot less beleaguered right now if its defenders had shown a bit more moderation, according to Kyle Bass. The hedge fund veteran says the backlash that's been building against  environmental, social and governance investing in recent years is largely due to climate activists' demands that fossil fuels be abandoned here and now. As a proposition, that was never tenable, he says.

Historic populist surge

Investors will be watching Germany, where Chancellor Olaf Scholz's ruling coalition was punished in two regional elections on Sunday. Populist parties on the extreme right and left took more than 60% of the vote in Thuringia and almost half in Saxony. While initial market reaction is expected to be limited in a nation where the benchmark DAX equity index hit a record last week, the Alternative for Germany party is on course for a clear victory in Thuringia on 32.8%, according to projections for public broadcaster ARD. That represents the first triumph for a far-right party in a German state ballot since World War II, even if it's highly unlikely to be able to form a government as it's shunned by the other parties represented in parliament.

Rightmove in play?

REA Group is considering a takeover offer for Rightmove, a UK property portal with a market value of £4.38 billion ($5.8 billion), in a bid to create a global digital real estate company. The Australian property listing company, which is controlled by News Corp., said Monday it's considering a possible cash and share offer for Rightmove. REA said it hasn't approached Rightmove nor had any talks with the company about a bid. REA's disclosure, triggered by media speculation, now forces the company into a decision one way or the other. Under the UK's takeovers code, REA must announce a firm intention to bid, or not, for Rightmove by Sept. 30 at 5 p.m. London time.

Coming up

Europe will see a host of PMI data reported today with August numbers coming from Spain, Italy, France, Germany, the UK and the eurozone.

What we've been reading

This is what's caught our eye over the past 24 hours. Israel braces for labor strikes as cease-fire pressure grows Yen forecasters chart path past 140 as global rate tracks emerge Macron to meet ex-Socialist, Conservative as premier pick looms HSBC exit makes Matos one of Europe's most sought-after bankers Turkish firms face 'groundswell' of problems as 50% rates bite Even UK's most Tory district has turned off from leadership race Ticketmaster faces Oasis fans' anger as demand crashes site

And finally, here's what Mark is interested in this morning:

US stocks may look as though they are Teflon coated, but the Federal Reserve is set to provide a reality check this month. Indeed, traders are likely to be disappointed to learn that a well-telegraphed cut in interest rates in September isn't going to be the start of rapid reductions as far as the eye can see. Instead it will be an opportunity for the central bank to temper expectations — especially as there are signs that inflation will start picking up again. That's an outlook which will jive with this week's US employment data where the jobless rate is seen rising modestly to 4.34% by Bloomberg Economics. Such an outcome isn't going to be enough to satisfy equity investors with a total of around 200 basis points of cuts being priced into US curves well into next year. When the mood turns negatively for US equities it looks as though the tech sector will be the driving force, much as it has been in terms of gains this year. At which point investors will look more closely at valuations with Nasdaq running at a lofty six times price to book. In a rampant bull market these are the kind of numbers which are easily overlooked but can become an excuse for traders to lean into when the overall mood sours. Meanwhile, time appears to be running out on this phase of Nasdaq strength as the gauge looks to be peaking after a time series which is similar to the one which ended badly toward the end of 2021. Mark Cranfield is a macro strategist for Bloomberg's Markets Live team, based in Singapore.

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