MARKET WRAPS

Watch For:

Eurozone, Italy Unemployment; U.K. CBI SME Trends Survey, Narrow Money, Services PMI, Official Reserves; U.S. Interest Rate Decision; updates from Naturgy Energy, Suez, Telefonica Deutschland, Zalando, BMW, Lufthansa, Intesa Sanpaolo, Geberit, EDP Renovaveis, Siemens Healthineers, Kloeckner, Orpea, Deutsche Boerse, ABB, Orsted, Novo Nordisk, Pandora, Next, Provident Financial, Smurfit Kappa, Wolters Kluwer, DSM, SKF

Opening Call:

Europe faces a cautious open, with pre-FOMC nerves likely to keep investors' confidence in check. In Asia, shares were mostly lower, along with oil and gold; the dollar was steady and Treasury yields a touch higher.

Equities:

European stock futures were slightly lower heading into Wednesday's session, with trading likely to be cautious ahead of a Federal Reserve policy statement that is expected to bring confirmation of a start to a reduction in its bond purchases.

"The markets are in a bit of a holding pattern," said Jeffrey Schulze, investment strategist at ClearBridge Investments. "I'm expecting the Fed to announce the tapering decision, but I don't think the Fed is going to give much guidance on the path of rate hikes."

Oanda's Jeffrey Halley said "although Asia and Europe already look to be in pre-FOMC wait-and-see mode, U.S. markets are likely to have a choppy session." He pointed to a raft of key data including ADP employment and factory orders "all due to hit the wires pre-FOMC."

The U.S. market's autumn rally continued Tuesday, with stock indexes hitting more records and the Dow closing above 36,000 for the first time.

The Dow, S&P 500 and Nasdaq all picked up traction as Tuesday's session wore on, breaking out of a lifeless trading pattern that had kept the benchmarks close to the flatline earlier in the day. The latest batch of earnings reports appeared to aid the market's advance, with Pfizer, Under Armour and others rising after solid quarterly disclosures.

Forex:

The dollar was steady in Asia with the U.S. Dollar Index above the 94.00 level, as investors awaited the Fed's monetary policy decision.

Minh Trang, senior FX trader at Silicon Valley Bank thinks a firmer tapering guideline will be given that will open the Fed up to rate increases in the near future, which he said is bullish for the dollar.

Sterling may not move sharply in either direction after Thursday's Bank of England policy decision, said BMO Capital Markets.

Any gains in sterling would be limited because a high number of interest rate rises are already priced in and because an "aggressively hawkish" BOE would dent demand for the currency through weaker risk appetite.

A potential sterling depreciation would also be contained because it's an "open question" whether the market will attach a high weight to any efforts by the BOE to push back against rate rise expectations.

The Norges Bank is likely to confirm at Thursday's policy meeting that it will raise interest rates again in December but that won't trigger any significant krone appreciation, said ING, since the prospect is "very much" priced in by markets.

"As markets are already pricing in around 95 basis points of tightening by Norges Bank in the next 12 months, there also appears to be limited room for more hawkish re-pricing. We see only limited downside room for EUR/NOK in the fourth quarter, and we expect 9.70 as a year-end value."

Bonds:

Treasury yields edged higher. The moves came as the yield curve steepened again Tuesday, following last week's volatile moves in global bond markets.

The Fed is fully expected to lay out plans to begin tapering its $120 billion in monthly bond purchases, a process that's expected to end by mid-2022.

A key question is whether Jerome Powell will push back against a shift in market expectations that has seen traders price in the potential for multiple policy interest rate increases in 2022.

Bank of America said Powell could fail to convince the market that the expected announcement on tapering bond purchases doesn't mean interest rate rises are imminent.

The market probably won't separate the timing of future rate increases from tapering despite Powell's best efforts, particularly if there is a "discernable upgrade" to his assessment of inflation risks and a discussion of a potentially more rapid taper schedule that would bring forward a rate liftoff, said BofA analysts.

The popularity of green government bonds has led to a tendency to hoard them, reducing liquidity and widening pricing differentials compared with conventional peers, said Kris Atkinson, portfolio manager of the Fidelity Sustainable Reduced Carbon Bond Fund.

"Those attempting to justify the greenium could argue that green bonds' relative scarcity should make it easier to sell them. But that is little comfort to those wishing to rebalance portfolios who need to buy green bonds as well," said Atkinson, adding that in some cases, a lack of liquidity also increases trading costs.

The greenium, or green premium, implies that yields on green bonds trade at lower levels compared with conventional peers.

Energy:

Oil futures were in the red in Asia, as traders awaited Thursday's meeting of OPEC+ amid rising pressure to boost output more than planned.

Oanda said oil may trade within a limited range ahead of the meeting, although pre-meeting rumors will likely lead to some volatility. It has put support for Brent at $82.20 and resistance at $85.10.

Fitch Solutions said Brent looks set to fall in the first half of 2022 on expectations of slowing demand and an increase in supply next year.

"From 2022, market conditions will become more challenging, as demand growth decelerates and OPEC+, the U.S. and potentially Iran ratchet up large production gains, tipping the market back into oversupply."

Fitch expects Brent prices to average $72 in 2022 and $73 in 2023. It thinks prices will enter the new year around $80, supported by short-term supply constraints and the broader energy shortage.

Metals:

Gold extended its losses lower with the Fed in focus.

"The market is anticipating the Fed will announce its taper strategy," said Peter Grant, senior metals strategist at Zaner Metals and Tornado Precious Metals Solutions. "If that is indeed the case, and the first step in a longer-term tightening strategy is about to occur, I'd say gold is pretty buoyant. I believe that the Fed's initial move to taper will be a tentative baby step in light of the current risks to growth."

Aluminum prices were lower on signs the global power crunch was easing, said ING.

It noted energy-commodity costs were declining, with European TTF natural gas prices more than 24% lower from a month ago and Chinese thermal coal prices on the Zhengzhou Commodity Exchange falling 29%. The lower costs for producing the energy-intensive metal were weighing on prices, said ING.

However, it added that China's power market reforms could "add to a secular shift towards higher costs for primary aluminum smelting," and may affect long-term supply.

Spot iron ore fell 6.6% on Tuesday, with Chinese demand concerns pushing prices back below $100 a ton, said Commonwealth Bank of Australia.

"Authorities have applied restrictions on sintering and blast furnace activity in Tangshan -- circa 14% of crude steel output -- to reduce air pollution levels," signaling the prospect of strictly enforced winter steel output cuts.

Economic conditions in China's basic-materials sector look so poor that it makes Credit Suisse upbeat about the 2022 outlook for the likes of iron ore and coking coal.

While "Beijing seems willing to allow the property crisis to drag on," it may need solid infrastructure stimulus next year to offset real-estate investment weakness. That's because, while this year's GDP target looks like a certainty, next year's isn't such a shoo-in. "That should be positive for steel from the second quarter of 2022, and iron ore and coking coal," said Credit Suisse.

Fitch said a rebalancing of the tin market is on the horizon, after a divergence between hot demand and weak supplies sent the metal's price rocketing higher.

"Market tightness should begin to ease by the end of 2021 and this should start to stabilize prices," although demand is expected to remain strong and keep prices elevated. Supplies are improving, said Fitch, and Chinese tin output bounced in October as an energy shortage there eased.

"At the same time, as of October, 80% of Malaysia Smelting Corporation's production was back online following Covid-19 lockdowns in Malaysia earlier in 2021."

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11-03-21 0137ET