5 things to start your day: Europe

Good morning. The UK's Labour government may have oversold its negative message. AI fires up stock markets again. And a record interest-rate

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Good morning. The UK's Labour government may have oversold its negative message. AI fires up stock markets again. And a record interest-rate trade. Here's what people are talking about.

Grim tidings

A fresh round of UK economic indicators are bolstering arguments that the Labour government's efforts to prepare the public for a tough budget next month have backfired on sentiment. Two surveys released Thursday underscored the concerns being felt by consumers and businesses about the prospect of tax hikes and spending cuts to close what Chancellor of the Exchequer Rachel Reeves has said is a "black hole" in the public finances. Prime Minister Keir Starmer tried to brighten the message in his speech to the Labour Party's annual conference in Liverpool on Tuesday, promising "light at the end of the tunnel." Reeves, meanwhile, pledged "no return to austerity" and real-terms spending increases over the Parliament term. Starmer is set to meet with US business executives including Blackstone President Jon Gray, JPMorgan Asset Management CEO Mary Callahan Erdoes and Bank of America CEO Brian Moynihan as he seeks to attract investment to boost Britain's flagging economy.

AI reignites stocks

Asian stocks rallied Thursday as fresh signs of vigor in technology stocks spread. Equity benchmarks in the tech-heavy markets of Japan and South Korea advanced alongside futures for the Nasdaq 100 that compounded Wednesday gains for the index in New York trading. The move was partly driven by an after-hours rally in Micron Technology. The largest US maker of computer memory chips surged after giving surprisingly strong sales and profit forecasts, helped by demand for artificial intelligence gear. Meanwhile, OpenAI is discussing giving CEO Sam Altman a 7% equity stake in the company and restructuring to become a for-profit business, people familiar with the matter said — a major shift that would mark the first time Altman is granted ownership in the AI startup.

China banks boon

China's government is considering injecting up to 1 trillion yuan ($142 billion) of capital into its biggest state banks to increase their capacity to support the struggling economy, according to people familiar with the matter. Chinese equities erased early losses to post solid gains as investors bet further stimulus may be revealed ahead of next week's four-day holiday. The bank funding will mainly come from the issuance of new special sovereign bonds, said the people. The details have yet to be finalized and are subject to change, the people added. Such a move would be the first time since the global financial crisis in 2008 that Beijing has injected capital into its big banks. China is rushing to replenish its banks — even though the top six have capital levels that far exceed requirements — after unveiling broad reductions to mortgage rates and slashing key policy rates to revive the economy.

Earnings downgrades?

While global corporate earnings estimates for the rest of the year appear optimistic, stock markets are likely to be able to absorb moderate downgrades for now, according to BlackRock's Helen Jewell. Profit projections for 2024 have been "back-ended" into the second half, and "I would not be surprised if that did start to nudge down a little bit," said Jewell, chief investment officer at BlackRock Fundamental Equities EMEA. "That doesn't necessarily mean the market will drop," she added, citing valuations that are "not crazily high." Equities have rallied this year even as worries about a possible recession and weaker consumer demand have dulled the outlook for corporate earnings. Analysts now expect S&P 500 profits to rise about 9% in 2024, slightly lower than an 11% forecast as of December, according to data compiled by Bloomberg Intelligence.

Record trade

A massive trade was made in the short-term interest rates market Wednesday. If not an outright bet on less Federal Reserve easing than currently priced for the year, the transaction could also be an investor taking profits and unwinding their long position as the contract traded close to its yearly highs. Some 118,000 contracts changed hands at 9:38 a.m. New York time in the futures market — the largest such transaction on record. The block trade was linked to the Secured Overnight Financing Rate, where performance is closely attuned to the immediate path of the Fed's monetary policy. Swaps traders are speculating there will be around three-quarters of a percentage point of additional easing in 2024, ahead of policymakers' stated target of an additional half a percentage point of rate cuts.

Coming up

Today's economic calendar includes German consumer confidence, a Swiss rate decision, and US core PCE price index, jobless claims, and pending home sales. Central bank speakers include the Fed's Powell, Collins, Kugler, Williams, Bowman and Kashkari and the ECB's Lagarde, Guindos and Schnabel. Can you tell which EVs are Chinese? Take our quiz.

What we've been reading

This is what's caught our eye over the past 24 hours. US, Europe and allies offer truce plan to avert Lebanon war Apple tax windfall will go toward housing, Irish Premier says Commerzbank backer calls for UniCredit talks with CEO Congress averts government shutdown with temporary funding bill NYC Mayor Eric Adams indicted after corruption probe Putin broadens nuclear doctrine to counter Western 'aggression' UK workers expected to see more salary ranges in job postings

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

Though stocks are at record highs, investors are showing caution toward the consumer. Companies selling essential goods are outperforming those selling discretionary items, both in equity and debt markets. In the S&P 500, consumer staples have outperformed consumer discretionary stocks year-to-date. Valuations reinforce this trend: the price-to-earnings ratio for the S&P 500 Consumer Staples index has risen above its five-year average, while the Consumer Discretionary sector's P/E remains below its recent mean. There are caveats that might be distorting the results. Tesla, a major member of the discretionary basket with a 14% weight, has been volatile this year, up a mere 2% year-to-date. Yet, a similar trend can been seen in the junk bond market. In the high-risk CCC-rated group, consumer staples bonds have rallied more than their consumer discretionary peers, which are trading at a steeper discount to par. Staples are also outperforming in the BB basket, the largest in the Bloomberg US Corporate High Yield Bond Index. However, discretionary bonds are performing slightly better in the B-rated basket. This highlights rising caution on consumers as the labor market shows signs of softening and spending has moderated. Tatiana Darie writes for Bloomberg's Markets Live blog in New York. Follow her on X at @tatianadariee.

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