MARKET WRAPS

Watch For:

Eurozone Retail Sales; Germany Manufacturing Turnover/Orders; U.K. Narrow Money, Construction PMI; Poland interest rate decision; updates from Repsol, BMW, Bang & Olufsen, Tesco, Sberbank, Norwegian Air Shuttle, Frasers Group, Imperial Brands

Opening Call:

Europe faces a downbeat opening session, as fears over inflation continue to dog the markets. In cautious Asian trading, stocks and gold fell; the dollar and Treasury yields strengthened, while oil paused at multiyear highs.

Equities:

European stocks face steep opening losses on Wednesday, as Treasury yields extended their advance on inflationary pressures and despite Wall Street's rebound.

Asian shares mostly dropped in cautious trading on Wednesday, shrugging off the U.S. rally.

"The choppy week continues as markets continue to chase their tails in a light data week ahead of Friday's non-farm payrolls main event," wrote Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA.

Stocks to Watch: A jury for the first time has ruled in Bayer's favor in a lawsuit alleging the company's widely used weedkiller Roundup causes cancer.

The mother of Ezra Clark, a minor, alleged that exposure to the pesticide caused her son's non-Hodgkin lymphoma; the judge hearing the case in California Superior Court for Los Angeles County instructed the jury first to determine whether the weedkiller had the capacity to cause cancer, versus considering the company's handling of safety reviews and research, attorneys for the company and the plaintiff said.

Bayer said the jury's ruling is consistent with regulatory reviews that have backed the herbicide's safety. Fletch Trammell, a lawyer representing the family, said they will consider appealing.

Forex:

The dollar climbed in Asia against a basket of currencies as inflation concerns, driven by rising energy prices, lifted longer-term Treasury yields.

The higher yields provide support for the dollar, said Mizuho Bank, adding that China's credit problems and contagion risks haven't abated, with property developer concerns still emerging, so caution hasn't been thrown to the wind.

Minh Trang, senior FX trader at Silicon Valley Bank, said: I think there's still underlying weakness in the markets that should keep the dollar stable at current levels. I don't see it going weaker in the near future because of the current pessimism in markets."

Trang added that forex markets are looking ahead to Friday's nonfarm payrolls.

TD Securities said the dollar should strengthen into year-end as long-term Treasury yields and U.S. yields adjusted for rising inflation.

The DXY Dollar Index could transition to a higher trading range around 94.00-96.00 in coming weeks even though it is likely to undergo a modest pullback in the first half of October, said forex strategist Mazen Issa. "That is also in agreement with seasonality biases, which point to a broadly firmer dollar profile in November and December."

Rabobank said the euro could weaken versus the dollar even as rising eurozone price pressures stir European Central Bank "hawks," or policymakers who favor monetary policy tightening.

"In contrast to the USD which has found support in the debate that the Federal Reserve may be minded to hike the Fed funds rate by the end of 2022, the market consensus sees no such reaction from the ECB," said Rabobank's Jane Foley.

The dollar will remain supported by expectations of a Fed rate rise and safe haven demand on such concerns as the surge in energy prices and fears of a China slowdown, she said. Rabobank has maintained its medium-term EUR/USD target of 1.15.

In an interview with Dow Jones Newswires on Tuesday, Nordine Naam, currency and EM strategist at Natixis said risk aversion is lifting the dollar for now, but the euro could turn higher against the U.S. currency by the end of the year, supported by a solid eurozone economic outlook and as market sentiment improves. Read more here.

Bonds:

The Treasury selloff has continued in Asia, pushing the 10-year yield to its 13th gain in 16 trading days, with investors focused on Friday's key labor data.

U.S. government bond yields rose Tuesday, pushing the long-dated 30-year bond to its highest level in three months, extending a climb that has been under way since late September when the Fed signaled that it could begin tapering its monthly bond purchases by the end of 2021.

Markets have been processing a host of issues in a seasonally turbulent period, September and October. Those include the federal debt-limit debates in Congress, rising inflation, the Fed's policy moves, and concerns about the possibility of so-called stagflation--an economic environment marked by high unemployment, high inflation, and low economic growth, experienced in the U.S. in the 1970s.

In an interview with Dow Jones Newswires on Tuesday, Mark Nash, portfolio manager and head of fixed income alternatives at Jupiter Asset Management said inflation concerns have become the main driver for bond markets, pushing yields higher. Read more here.

Saxo Bank said corporate bond valuations are not taking into account the possibility of a sustained rise in inflation and more aggressive central bank action.

"The market isn't pricing aggressive monetary policies at all, providing ample support to all corporates, including those with weak balance sheets [also known as zombies]," said fixed income strategist Althea Spinozzi.

She has warned that if inflationary pressures become persistent central banks may need to taper more aggressively than the market forecasts and a credit selloff would likely result. "As soon as central banks become aggressive, we can expect spreads to widen substantially and defaults to rise."

Energy:

Oil prices were little changed in Asia after Tuesday's solid gains, with U.S. futures stretching their advance into a fourth straight session to their highest settlement since late October 2014, supported by the OPEC+ decision.

"The decision guarantees a tight supply picture in November and December" and has spurred buying interest, said Rystad Energy. However, the Asian market could ease slightly on Saudi Arabia lowering the selling price of its Asia-bound flagship Arab Light crude by $0.40/bbl. The lower price could spur more Saudi oil exports to Asia.

Natural-gas futures also rallied on Tuesday, with prices up by more than 9% to post the highest finish in nearly 13 years, with global supplies tight ahead of the winter heating season.

"With the global crude market consistently undersupplied already, record [natural] gas prices across key demand regions are expected to cascade into a strong uptick in heating demand for products like diesel and fuel oils," said Robbie Fraser, global research & analytics manager at Schneider Electric.

That is ultimately supporting further draws of combined crude and product stocks, which "already sit well below normal for this time of year."

Metals:

Gold continued to fall in Asian trade, weighed by a stronger dollar and higher Treasury yields.

The precious metal is likely to trade in a choppy $1750-$1785 range ahead of the U.S. payrolls data, said OANDA. "None of that will save gold if the U.S. non-farm payrolls are firm on Friday, putting the Fed taper, and higher U.S. yields back in play," OANDA added. It has put support for gold at $1750.00.

Copper prices were also lower, hit by investor fears over the state of China's property market, said ANZ. Copper is used in the construction of buildings, so a weakening property market is likely to weigh on the metal.

Capital Economics said a surge in natural gas and coal prices should lend a little support to industrial metal prices given it raises the production costs of those products, especially aluminum and steel.

"Nevertheless, we doubt this will be enough to prevent industrial metals prices from edging lower in tandem with weaker economic growth in China, " the research group said.

TODAY'S TOP HEADLINES

Biden Backs Powell After Sen. Elizabeth Warren Intensifies Opposition

President Biden said he has confidence in Federal Reserve Chairman Jerome Powell after Sen. Elizabeth Warren (D., Mass.) on Tuesday escalated her criticism of the central bank's leader.

"Thus far, yes," Mr. Biden said when asked by a reporter during a trip to Michigan if he had confidence in Mr. Powell. "But I'm just catching up to some of these assertions," he said, referring to senior officials' trading activities that sparked Ms. Warren's most recent volley of disapproval.

Democrats Wrangle Over How to Shrink $3.5 Trillion Proposal

WASHINGTON-Democrats wrestled Tuesday with how to squeeze their wish list of programs and tax changes into a social policy and climate package whose size and scope centrists in the party are willing to support.

President Biden acknowledged in a series of meetings with Democrats this week and on Friday that a package once pegged at $3.5 trillion would have to be smaller, given opposition from centrist Senate Democrats to a bill of that magnitude. Now, they are grappling with the tougher next step: deciding exactly how much narrower-and which of-their proposed child care, education or health programs would have to get trimmed or culled.

Democrats Float Changes to Filibuster Amid Debt Ceiling Standoff

WASHINGTON-Top Senate Democrats and Republicans blamed each other for the failure of Congress to raise the nation's debt ceiling, with some Democrats floating possible changes to the Senate's filibuster rule to resolve the impasse, ahead of a possible default in as little as two weeks.

Senate Majority Leader Chuck Schumer (D., N.Y.) has set up a Wednesday vote-the third one in the past two weeks-on clearing a procedural hurdle that stands in the way of raising the debt ceiling. But Republicans, protesting Democrats' separate spending ambitions, indicated they would continue to stand united in withholding their support for a debt-ceiling increase, which needs 60 votes to move forward in the 50-50 Senate.

(MORE TO FOLLOW) Dow Jones Newswires

10-06-21 0038ET