Eurozone, Germany, France, U.K. Flash PMI; updates from Mediaset, Berkeley, Babcock, NN Group, ASML, Provident Financial
The Fed's reassurance on inflation should buoy European stocks this morning. In Asia, most shares rallied, while the dollar and gold also gained. Oil was mixed, with Brent a touch firmer but still below $75 and Treasury yields eased further lower.
European equities should open higher on Wednesday, but may struggle for solid gains, despite reassuring comments on inflation from Jerome Powell.
The Federal Reserve Chairman said it's highly unlikely that inflation will rise to levels seen in the 1970s but acknowledged significant uncertainty as the economy reopens.
While the Fed anticipated that the end of the pandemic would temporarily push up inflation this year, Mr. Powell said on Capitol Hill that the increases in prices have been larger than central bankers had expected and may prove more persistent. But he underscored his view that shortages-including of used cars, computer chips and workers-will fade over time, bringing inflation closer to the Fed's 2% long-run target.
"If you look behind the headline and look at the categories where these prices are really going up, you'll see that it tends to be areas that are directly affected by the reopening," Mr. Powell said in a hearing before a House subcommittee. "That's something that we'll go through over a period. It will then be over. And it should not leave much of a mark on the ongoing inflation process."
Asian stock markets mostly rallied on Wednesday, following Wall Street higher. Nasdaq closed at a record high, lifted by Big Tech, as investors put their money in growth stocks. Other sectors had a good day too, though, after two Fed members made comments that reassured that interest rates will remain low-at least for now.
Stocks to Watch: It's catchup time for BHP's shares, said Morgan Stanley, with the bank upgrading the miner's London-listed stock to overweight from equalweight and its price target to GBP23.60 from GBP21.10. That brings its view on BHP's U.K. shares in line with its outlook for BHP's Australian stock.
The "merits of BHP's low-cost assets, strong free cash-flow generation, oil-and-gas exposure, and capital-returns prospects remain underappreciated," said Morgan Stanley.
BHP's London shares are implying a long-term iron-ore price of $71/ton versus spot at $207/ton, it added. Plus, Morgan Stanley reckons a partnership on BHP's Jansen potash project, which is still being evaluated, could reduce project risk, and ongoing work to jettison its thermal-coal assets could materially improve its ESG credentials.
The dollar was a touch firmer in Asia, steadying after a two-day drop, as Jerome Powell played down the threat of surging inflation. He also said that no currency could compete with the dollar's reserve status.
MUFG said the currency may have scope to rise further in the near term, although these gains won't last. "We still do not believe this will mark a turning point and maintain that the dollar will remain on a weak footing in the second half of the year," the bank said, referring to the Fed's hawkish shift last week.
Although MUFG was "as surprised as the rest of the market" that the Fed "shifted so markedly," it still expects the central bank will "move cautiously to end QE."
Meantime, Pictet Wealth Management has cut its three-month projection for EUR/USD to $1.17, from $1.21 previously, on the view that short-term interest-rate and growth differentials will support the dollar. Pictet has left its six-month projection unchanged at $1.24, compared with a current EUR/USD rate of 1.1904.
In the medium term, Pictet expects the Fed will remain content to stay behind the curve. Coupled with a narrowing of the U.S.'s economic performance relative to the rest of the developed world, this should weigh on the dollar.
Elsewhere, sterling is BNP Paribas's top pick among G10 currencies as markets start to anticipate a move by the Bank of England to pull away from monetary stimulus.
"We expect earlier and more aggressive BOE policy tightening to be priced into the GBP," analysts at BNP Paribas said. It has forecast the currency at $1.40 against the dollar in the third quarter, compared with the current rate of $1.3884. The BOE announces its decision on Thursday.
Treasury yields continued to fall in Asia, extending Tuesday's retreat, as Jerome Powell reaffirmed the go-slow approach to peeling back easy money.
Short-dated rates saw their biggest climb in three months as Powell said the central bank had to be patient and "very humble" about its ability to draw signals out of pandemic-era economic data given "such an unusual setting of reopening the economy."
Cleveland Fed President Loretta Mester, also speaking Tuesday, said she didn't want to adjust the central bank's easy monetary policy stance until the labor market made more progress over the summer.
San Francisco Fed President Mary Daly also pointed to the fall as a goal post, saying the economy was getting to the "substantial further progress" benchmark more quickly than she had thought at the start of the year.
"Day four post FOMC produced the first noticeable decline in 2-year and 3-year yields as portfolio managers gradually think about valuations rather than panic trade," wrote Jim Vogel, a rates strategist at FHN Financial.
The addition of EU bonds to benchmark euro government bond indices would be a game changer for demand for the issuer's bonds and flow in them, said Mizuho's rates strategist Peter McCallum.
"Index providers may find it difficult to omit once it's the fifth larger euro market in a couple of years' time, but while it may trade like an EGB [eurozone government bond], it will still very much be a supranational issuer structurally," he said.
He added that indices whose name or criteria revolves around government bonds are unlikely to include the EU without undergoing a rebranding, but for now it seems more likely to become its own category amongst ETFs.
Oil futures were mixed in Asia, with Brent nudging higher but still below $75.
ANZ said oil may be supported in the near term on improving air travel demand, thanks to progress in global Covid-19 vaccination rollouts. The number of people passing through TSA checkpoints at U.S. airports hit 2.1 million in recent days, the highest level since the start of the pandemic.
Late Tuesday, the American Petroleum Institute reported inventories of crude oil in the U.S. fell by 7.2 million barrels in the latest week, according to a source, while gasoline supplies rose by 959,000 barrels. The mostly bullish results were released ahead of official inventories data from the Department of Energy due later Wednesday.
Average forecasts in a WSJ survey indicate the DOE report will show crude supplies fell by 4.1 million barrels and that gasoline supplies rose by 800,000 barrels.
Gold prices inched higher but OCBC said the precious metal may break the crucial support at $1,770 this week if there is more hawkish rhetoric from Fed officials in the coming days.
Jefferies said more sales of China's strategic reserves of metals such as copper are highly likely and, combined with seasonal market weakness, should put a lid on metals prices in the very near term. But looking more than three months out, the bank expects the rally to resume and reach new highs.
"The longer-term positive fundamental outlook for these base metals is based on a combination of global cyclical demand growth following a deep recession in 1H20, secular demand growth due to the green energy transition, and major supply constraints," said Jefferies. That outlook hasn't changed and consequently prices should recover from recent weakness, even if they fall a little further first.
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WASHINGTON-Federal Reserve Chairman Jerome Powell said it's highly unlikely that inflation will rise to levels seen in the 1970s but acknowledged significant uncertainty as the economy reopens.
While the Fed anticipated that the end of the pandemic would temporarily push up inflation this year, Mr. Powell said Tuesday on Capitol Hill that the increases in prices have been larger than central bankers had expected and may prove more persistent. But he underscored his view that shortages-including of used cars, computer chips and workers-will fade over time, bringing inflation closer to the Fed's 2% long-run target.
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