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EMEA Morning Briefing: Positive Start in Prospect as Powell's Take on Tapering Awaited

08/23/2021 | 12:20am EDT

MARKET WRAPS

Watch For:

Eurozone, Germany, France, U.K. Flash PMI; Eurozone Flash Consumer Confidence Indicator; U.K. CBI Industrial Trends Survey; Bundesbank Monthly Report; no major earnings expected

Opening Call:

Europe is primed for a positive open on Monday, as investors look ahead to this week's key Jackson Hole meeting. In Asia, stocks were broadly higher, with Treasury yields, oil and gold also posting gains. In currencies, the dollar and the yen dipped.

Equities:

European equities should extend their rally on Monday, tracking gains in Asia and following Wall Street's positive finish.

Investors will be watching for more details on the Federal Reserve's plan to cut its bond-buying at the virtual Jackson Hole meeting later this week. The Economic Policy Symposium starts Thursday and Jerome Powell gives his keynote address on Friday.

Fed officials appear on track to begin reversing their easy-money policies later this year, though there are several wild cards that could alter the timing of their plans. Those include higher-than-expected inflation and rapidly rising Covid-19 cases associated with the spread of the Delta variant.

Deutsche Bank said monetary policy discussions and the evolution of the Delta variant are likely to drive markets this week, while U.S. PMI data could help understand the pandemic's impact on the nation's economy. "There isn't much in the way of earnings, though there'll be continued attention on U.S. politics as the Democrats in Congress seek to pass their economic agenda."

Meantime, Bank of America said concerns over the Delta variant have had a varied impact on flows to risk asset funds. While "rising uncertainty on the back of Delta has weighted on risk sentiment...credit has remained strong over the past weeks and months."

By contrast, even if investors have continued to pour money into equity funds, the pace has slowed. "Inflows into credit funds have continued to be robust," and equity fund flows, though still broadly on the positive side, have lost pace over the past couple of months, BOA said.

Forex:

The dollar and the yen weakened slightly against most G-10 currencies as risk-on sentiment was spurred by gains in Asian regional equity markets and last Friday's comments from the Fed's Rob Kaplan. Those remarks indicated a less-hawkish tone compared with his stance at the start of the month, said IG. This could offer some reassurance for market players on accommodative monetary support to remain for longer if Covid-19's Delta variant persists and hurts economic progress.

Commonwealth Bank of Australia said Jay Powell's speech at Jackson Hole is the key event this week. Powell will be bolstered by the recent strong labor market data and as a result, he may provide more clarity around when the FOMC will announce a taper which can support the dollar. CBA's base case is that the FOMC will announce a taper in September if the August non--farm payrolls are strong.

Goldman Sachs said that "relatively hawkish Fed pricing has played a role" in supporting the dollar, but "a bigger factor has been the downgrade in global growth expectations." It added that both drivers "likely need to turn for the broad dollar to move lower on a sustained basis."

The Hungarian forint could weaken even if the central bank raises interest rates further at Tuesday's policy meeting, said ING. Hungary's central bank could lift its benchmark rate by 30 basis points to 1.50% and signal further increases, but much of this tightening is already priced into the forint, said ING analyst Chris Turner.

Expectations of a "hawkish" central bank have helped the forint outperform its Central and Eastern European currency peers over the past month. "Given that a lot of the good news looks priced into the HUF, and fragile emerging market foreign exchange in general, we would say the balance of risks in EUR/HUF lie towards the 353, possibly 355 area."

Bonds:

U.S. government bond yields extended their rally in Asia after they made their largest one-day gain in over a week on Friday, following signals that the Fed is on track to begin reversing easy-money policies later this year. However, yields still closed the week down the most in three weeks as the hawkish tone struck by the Fed minutes prompted some analysts to change their tapering forecast to a late-2021 start.

Some investors are betting the Fed's coming Jackson Hole conclave won't spark big moves in the market.

"The economic data that is really coming out here is really suggesting that the Fed has plenty of time on its hands to really wait and watch, and I would expect that this will be a very boring but risk asset friendly message," said David Wagner, portfolio manager at Aptus Capital Advisors.

The dollar-denominated high-yield corporate bond market is more exposed to troubled Chinese issuers than the euro junk market, said Commerzbank.

China Evergrande, the country's largest real-estate developer by contracted sales and its largest junk-bond issuer, is in talks with financial regulators to tackle debt issues. A default could have widespread repercussions. Chinese real-estate developers alone account for 44% of all distressed high-yield dollar-denominated corporate bonds, said Marco Stoeckle at Commerzbank.

More broadly, Chinese companies have issued $285 billion in investment-grade and $115 billion in high-yield benchmark dollar-denominated bonds versus less than EUR12 billion in euro benchmarks, which highlights the greater exposure of the dollar market, though the debt doesn't feature in any of the standard dollar corporate bond indices.

Energy:

Oil prices climbed more than 2% in Asia, recovering most of Friday's losses, on hopes of post-Covid-19 demand. Despite the recent price weakness and near collapse to bear market territory, a strong reversal may not be too far away, said OANDA. It added that fundamentals still support robust demand once most of the world is beyond the latest wave of Covid-19's Delta variant.

Meanwhile, U.S. shale oil production has been "creeping higher," said Third Bridge's McNally, adding that the U.S. drilling rig count is on the rise. Baker Hughes on Friday reported a third straight weekly increase in the number of active oil-drilling rigs, up by eight to 405.

Metals:

Gold futures ticked higher, with some safe-haven demand still supporting bullion. ANZ said geopolitical tensions appear to be rising, citing the deteriorating situation in Afghanistan. Market participants are also being cautious ahead of this week's Jackson Hole symposium as Fed officials will probably discuss whether to start tapering asset purchases.

Copper gained 1% on concerns about tight supply. Workers at the Caserones mine in Chile have been on strike since Aug. 10 and plant workers at the Adina mine have recently started a strike, while protesters in Peru have held up deliveries from the Las Bambas operation, said ANZ.

Wood Mackenzie said iron-ore prices have plummeted by roughly 40% since mid-July, which could lead to some weakness in scrap prices too. That's because iron ore and steel scrap can be substituted to some extent, said analyst Rohan Kendall.

However, steel prices are likely to remain robust: "Steel production cuts will keep steel supply tight which will support steel prices even as steelmaking costs fall. The real test for steel prices will be if there is sharp slowdown in steel intensive sectors of China's economy such as property and construction."

TODAY'S TOP HEADLINES

What We Still Don't Know About the Fed's Bond-Buying Spree

Three vital issues for investors remain uncertain as the Federal Reserve moves toward tapering its bond buying. Will this quantitative tightening mean Treasury yields go up or down? Will stocks do better with rising or falling bond yields? And, a linked issue, is the stock-bond relationship that has held for the past three decades going into reverse?

Few people share my first uncertainty, because it seems so obvious that if the Fed buys fewer Treasurys, the price will drop and hence the yield rise. It is basic supply and demand, goes the response: Duh.

Pelosi, Centrist Democrats in Standoff With Key Vote Ahead

WASHINGTON-Centrist House Democrats were locked in a weekend standoff with House Speaker Nancy Pelosi (D., Calif.) over when to vote on a roughly $1 trillion infrastructure bill, imperiling the chamber's ability to advance a sweeping segment of President Biden's agenda in votes expected early this week.

A group of nine centrist Democrats has been at an impasse with Mrs. Pelosi and liberal Democrats for more than a week over a strategy to tie together the infrastructure bill, already passed with bipartisan support in the Senate, and Mr. Biden's $3.5 trillion package of healthcare, education and climate provisions currently being crafted. That bill is expected to rely on just Democratic support under a process tied to the budget. To unlock that process, Mrs. Pelosi needs nearly all of her caucus on board for a procedural step planned for this week in the House.

Cryptocurrency Companies Are Leaving China in 'Great Mining Migration'

When China vowed to crack down on cryptocurrency mining early this summer, Nasdaq-listed Bit Digital Inc. ramped up efforts to get its more than 20,000 computers out of the country.

The machines are the heart of the New York-based company, which makes money by plugging the high-powered computers into cheap electricity sources so they can work through mathematical problems to unlock new bitcoin. The process, called mining, has gone from something any individual with a PC could do a decade ago, to a massive industry that uses numerous computers and lots of electricity.

Fed's Kaplan says he may rethink his call for taper to start in October if delta variant slows economy

Dallas Federal Reserve President Rob Kaplan said he may rethink his call for the Fed to quickly start to taper its $120 billion per month in bond purchases if it looks like the spread of the coronavirus delta variant is slowing economic growth.

(MORE TO FOLLOW) Dow Jones Newswires

08-23-21 0020ET

Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / EURO (AUD/EUR) 0.29% 0.647 Delayed Quote.1.86%
AUSTRALIAN DOLLAR / JAPANESE YEN (AUD/JPY) 0.49% 85.656 Delayed Quote.6.91%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) 0.19% 0.75057 Delayed Quote.-2.93%
BAKER HUGHES COMPANY 2.68% 25.84 Delayed Quote.20.67%
BANK OF AMERICA CORPORATION 1.40% 48.17 Delayed Quote.56.75%
BIT DIGITAL, INC. 0.80% 10.15 Delayed Quote.-54.18%
BITCOIN (BTC/EUR) -1.11% 53726 Real-time Quote.121.61%
BITCOIN (BTC/USD) -1.10% 62300 Real-time Quote.110.59%
BRITISH POUND / EURO (GBP/EUR) 0.14% 1.18693 Delayed Quote.5.67%
BRITISH POUND / JAPANESE YEN (GBP/JPY) 0.33% 157.099 Delayed Quote.10.88%
BRITISH POUND / US DOLLAR (GBP/USD) 0.02% 1.3765 Delayed Quote.0.64%
CANADIAN DOLLAR / EURO (CAD/EUR) 0.05% 0.69617 Delayed Quote.7.89%
CANADIAN DOLLAR / JAPANESE YEN (CAD/JPY) 0.28% 92.13 Delayed Quote.13.26%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) -0.04% 0.80725 Delayed Quote.2.92%
CHINA EVERGRANDE GROUP -4.12% 2.56 End-of-day quote.-82.82%
COMMERZBANK AG -0.46% 6.444 Delayed Quote.22.94%
COMMONWEALTH BANK OF AUSTRALIA -0.34% 105.1 End-of-day quote.28.00%
DEUTSCHE BANK AG 2.20% 11.902 Delayed Quote.30.14%
DJ INDUSTRIAL 0.17% 35803.53 Delayed Quote.16.57%
EURO / HUNGARIAN FORINT (EUR/HUF) -0.25% 364.561 Delayed Quote.0.38%
EURO / JAPANESE YEN (EUR/JPY) 0.23% 132.35 Delayed Quote.5.02%
EURO / US DOLLAR (EUR/USD) -0.09% 1.15981 Delayed Quote.-4.70%
GOLD -0.85% 1793.38 Delayed Quote.-5.45%
INDIAN RUPEE / EURO (INR/EUR) 0.33% 0.01151 Delayed Quote.2.20%
INDIAN RUPEE / JAPANESE YEN (INR/JPY) 0.56% 1.523902 Delayed Quote.7.17%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.15% 0.013339 Delayed Quote.-2.60%
JAPANESE YEN / SWISS FRANC (JPY/CHF) -0.35% 0.8049 Delayed Quote.-6.05%
LONDON BRENT OIL 0.31% 86.3 Delayed Quote.65.76%
MSCI PERU (GDTR) 1.58% 5523.041 Real-time Quote.-14.68%
NASDAQ COMP. 0.21% 15260.880815 Real-time Quote.17.08%
NEW ZEALAND DOLLAR / JAPANESE YEN (NZD/JPY) 0.27% 81.729 Delayed Quote.9.64%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) -0.04% 0.71619 Delayed Quote.-0.42%
US DOLLAR / EURO (USD/EUR) 0.09% 0.86221 Delayed Quote.4.94%
US DOLLAR / HUNGARIAN FORINT (USD/HUF) -0.14% 314.37 Delayed Quote.5.36%
US DOLLAR / JAPANESE YEN (USD/JPY) 0.32% 114.12 Delayed Quote.10.12%
WTI 0.79% 84.471 Delayed Quote.70.78%
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