MARKET WRAPS

Watch For:

Eurozone Trade Balance; Germany WPI; Balance of Payments; France Jobless Rate, CPI; updates from Fresenius Medical Care, Deutsche Wohnen, Rosneft, Babcock International

Opening Call:

Stocks' mostly steady climb in Europe is likely to continue on Friday, following fresh records on Wall Street. In Asia, however, shares were mainly weaker as fears over the delta variant of the coronavirus continued to dent sentiment. Elsewhere, the dollar, Treasury yields and oil dipped, while gold and base metals were a touch firmer.

Equities:

European stocks are likely to inch higher on Friday and cling to a winning streak that is on its tenth day.

On Wall Street, the Dow and S&P 500 climbed to fresh records on Thursday but Asian shares have mostly retreated on continued worries over China's regulatory clampdown and ongoing Covid-19 risks.

Melissa Brown, managing director of applied research at Qontigo, said it is important to note that market rallies during low trading volumes of the summer months can be hard to maintain come fall when volumes increase.

"I'm skeptical about whether that is a sustainable rally; it's not quite as certain when stocks are going up on low trading volumes," Ms. Brown said.

Forex:

The dollar eased down slightly against a basket of currencies, with more U.S. economic data in focus. The University of Michigan's consumer survey will be watched for its indicator of long-run inflation expectations, which have increased materially in recent months and could lead to higher wage and price inflation, said CBA.

Deutsche Bank said EUR/USD is on track for the narrowest range in 30 years, at 6 cents, which is well short of the average 19 cents. "The narrow range means making new lows [or highs] would be far from surprising, while history also suggests a large extension of the range later in the year is unlikely," said Deutsche Bank, adding that it "can't see a catalyst that will meaningfully extend the range this year."

Meantime, Commerzbank said the euro should recover against the dollar later this year as U.S. inflation eases considerably, prompting the market to push back expectations for the Federal Reserve's first post-pandemic interest rate rise.

Inflationary pressures are likely to ease very significantly as early as the fourth quarter of 2021 and inflation will fall markedly in the first half of 2022, said Commerzbank currency analyst Ulrich Leuchtmann. "If our outlook for rapidly falling U.S. inflation is correct, the lift-off [the first Fed rate hike] currently priced in by the market for 2023 at the latest should appear increasingly unlikely," he said. Commerzbank expects EUR/USD to rise to 1.20 by year-end and to 1.26 by December 2022.

Rabobank said the pound looks set to rise versus the euro but only moderately as the European Central Bank maintains its accommodative policy stance while the Bank of England moves closer to scaling back stimulus.

The market's perception is that the BOE took a "very slight hawkish turn" at its policy meeting last Thursday, said Rabobank forex strategist Jane Foley. "While GBP picked up a little ground vs. the EUR on the bank of the more hawkish sounding commentary last week, bulls will be wary that their advantage is still vulnerable to bad news on the U.K. economy and potentially on Covid-19."

Rabobank continues to expect EUR/GBP to fall to 0.84 by year-end.

Bonds:

Treasury yields dipped in Asia after they ended higher on Thursday following a $27 billion auction of 30-year bonds and the release of U.S. producer price index data, which came in hotter than economists had expected.

Inflation running hot, in theory, should push up yields for longer dated bonds because rising pricing pressures can erode government debts fixed value.

Ultimately, "we suspect that the most rapid monthly price increases are now behind us, as used vehicle prices are starting to cool and price rebounds in some Covid-affected sectors like lodging may be complete," JPMorgan Chase's Jesse Edgerton wrote in a note.

"The current market consensus is a late fourth-quarter Fed tapering announcement [Nomura's house view is December, with risk of November], which seems reasonable," wrote Nomura research analysts in a research note.

However, they warned that the Fed could surprise the market by announcing tapering earlier and that the market is ill prepared for a September tapering announcement. "It is conceivable that Jay Powell will start to prepare the markets for tapering at his Jackson Hole speech, followed by a formal taper announcement at the September [FOMC] meeting, " the analysts wrote.

Declining jobless claims Thursday, in line with expectations, eased fears of renewed pandemic disruptions and fuelled forecasts of a speedy recovery likely prompting the Fed to reduce demand for U.S. government debt soon.

"We expect more big declines in total continuing [jobless] claims in the months ahead, reflecting both reopenings, and 25 states opting out of extra federal unemployment benefits," said Cornerstone.

Energy:

Oil futures posted more losses in Asia, extending Thursday's modest retreat, after monthly reports from the IEA and OPEC raised concerns over prospects for demand growth.

"Demand concerns connected to the spread of the Covid-19 delta variant continue to serve as the primary market driver, with the IEA recently announcing a downward revision to demand expectations," said Robbie Fraser, global research and analytics manager at Schneider Electric.

"Those revisions could accelerate the potential for oil to slip into oversupplied conditions after an extended undersupply following the initiation" of production cuts last by OPEC+, he said, in a note.

Additionally, concerns over Chinese demand for oil persist as the nation pursues a Covid-zero strategy, said CBA. "China's oil demand is expected to fall this quarter as the nation's zero--tolerance for Covid--19 has resulted in widespread restrictions," said CBA, which sees downside risks to its Brent price forecast of $85 in the fourth quarter on weaker-than-expected demand.

Metals:

Gold recovered Thursday's mild losses in early Asian trade, helped by some dollar weakness and lower Treasury yields. The precious metal has been trading within a tight range and there doesn't seem to be any conviction at all to push prices above Monday's high. The prevailing mood is wait-and-see for now, said Pepperstone.

Copper rose around 0.5% as workers from Chile's Andina mine go on strike, a move that will likely disrupt supply of the base metal, said ANZ. This follows an earlier strike at the Caserones copper mine, also in Chile, it added, noting that the two mines produce a combined 310,000 tons of copper a year.

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08-13-21 0026ET