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Opening Call:
Shares in Europe are likely to drift lower again on Tuesday, as investors struggle to find fresh reasons to buy into equities. In Asia, most stocks were modestly higher, commodities managed to stem their losses, the dollar held its recent gains and Treasury yields dipped.
Equities:
The lackluster start to the week for European stocks will likely continue on Tuesday, although less stress in the metals and oil sectors and modest gains for some Asian benchmarks should cap losses.
U.S. stock indexes closed mostly lower on Monday, as the spread of the delta coronavirus variant, profit-taking and a downgrade of China growth by Goldman Sachs dinged bullish sentiment on Wall Street. But all three major averages remain near all-time highs.
"The continuing spread of the Delta variant remains in sharp focus, with new U.S. cases hitting a six-month high last week and hospitalizations increasing by roughly 40% from the prior week," wrote Saira Malik, chief investment officer for Nuveen's $450 billion global equity division.
"We maintain our view that equity markets are likely to remain highly susceptible to pullbacks and may react negatively to economic data that misses consensus expectations."
Forex:
The dollar was steady in Asia with the USD Index hovering around the 93.00 level. Westpac thinks the index should continue to find support in the 91.50-92.00 area and as Fed taper talk rises to a crescendo in the third quarter, it could reach new highs beyond 93.50.
JPMorgan said the upbeat jobs report combined with a strong ISM last week "is helping to intensify a setup for a potentially pivotal September for the dollar and FX markets." Hawkish speak from two Fed governors challenged assumptions that a dovish FOMC core will keep a hawkish fringe at bay, JPM added.
"Risks of an early taper has risen. The inevitably of the taper itself is less consequential given universal expectations that it will happen. But its delivery, especially if it comes early, will trigger a closer look and a repricing of the path of the Fed funds, which has diverged from Fed signaling and flattened unsustainability in recent weeks."
ING said the dollar's gains are likely to remain limited in the near term even if the Federal Reserve fuels expectations of tightening monetary policy at the Jackson Hole symposium Aug. 26-28.
The Fed will probably discuss tapering bond purchases at Jackson Hole, which should firm up expectations that the central bank will start tightening in early 2023 or even late 2022, said ING analysts. "Our preference is that the dollar enjoys a more powerful rally six months before the first tightening. That's the second quarter of 2022."
Before then, an orderly tapering cycle and a traditionally weak period for the dollar present a "more neutral environment" for the currency into year-end, the analysts said.
The pound is likely to weaken against the euro over the medium term as current interest rate rise expectations will prove too optimistic and Brexit risks are still lurking, said Commerzbank. The Bank of England will take its time before raising interest rates, said Commerzbank currency analysts You-Na Park-Heger and Esther Reichelt.
"After all, it remains uncertain for the time being how the economic recovery will continue and how long the pandemic will continue to have an impact." Brexit also remains a risk and will come to the fore again once the pandemic eases, the analysts said. Commerzbank expects EUR/GBP to rise to 0.88 by December 2022.
Bonds:
Treasury yields edged slightly lower in Asia after they climbed on Monday on data that showed record U.S. job openings for June, pointing to strength in the labor market, despite lingering concerns about the spread of the delta variant.
A "real and broadening" restart of the global economy is under way - with the U.S. "passing the baton" to Europe and other developed markets, even as Covid-19's delta variant presents a challenge for emerging countries, according to the research arm of BlackRock.
For now, the global-restart scenario "supports our pro-risk stance and our underweight in government bonds as we believe their low yields don't reflect the restart's momentum," Jean Bolvin, Elga Bartsch, Wei Li, and Nicholas Fawcett of the BlackRock Investment Institute said in a note.
The Bank of England's surprise announcement of a sequence plan on how start tightening monetary policy has left traders scrambling to price in the possibility of an earlier-than-anticipated interest rate rise, lifting short-dated yields.
"A rate-based reaction may soon be unavoidable," said Derrick Dunne, chief executive of YOU Asset Management. Inflation is now expected to peak at 4% towards the end of this year, double its target, and more than the 2.5% previously forecast, while the economy expected to reach its pre-pandemic level in the final three months of the year as the impact of the pandemic wanes, the BOE said.
Energy:
Oil prices steadied in Asia after they ended Monday's session more than 2% lower, as China took additional steps to limit the spread of the delta variant, underlining fears about global crude demand.
OANDA said that with inventories remaining tight, further downward pressure on oil could be limited. WTI crude has strong support at $65.00, but if this level breaks, it might get ugly very quickly as there's not much support until the $60.00 level.
Macquarie said BHP could look to sell or spin off its $15 billion petroleum business within 1-2 years given rising ESG pressures. While BHP "has previously indicated it had a positive outlook for oil prices for the rest of this decade...the increasing focus on ESG could see BHP accelerate a move to exit petroleum," Macquarie said.
It thinks a sale of the assets is most likely, although a demerger is also possible. Petroleum contributes only modestly to BHP's earnings and valuation, accounting for roughly 10% of Ebitda in recent years.
Metals:
Gold made modest gains in Asia after it skidded more than 2% on Monday to end at its lowest level since March.
IG said the precious metal is attempting to recoup some of its losses but a lower high formed on the hourly technical chart still indicates some weakness. If support at $1,730 fails to hold, the next support level could be at $1,680, where prices were supported on five occasions previously, said IG.
Copper prices were 0.4% higher, supported by a potential strike at some Chilean mines including Escondida, according to ANZ. Weakening Chinese copper imports could weigh on prices, however, with the country's July imports falling 44% on year to 424,000 tons. This bearishness should be short-lived, as ANZ expects imports to recover given China's widening import arbitrage--when domestic prices exceed international ones by a large enough margin to encourage inflows.
Elsewhere in base metals, iron-ore declined around 3% on weakening Chinese imports of the steelmaking material. They fell 21% for July on the year to 88.5 million tons, which ANZ attributed to the country's declining steel output. Iron-ore prices are at their lowest level since April, according to ICE data.
Fitch said global tin supply should rise strongly this year as mines likely experience less disruption from the Covid-19 pandemic and benefit from elevated prices, although sporadic lockdown restrictions could still restrain the recovery of output in Indonesia and Malaysia.
"As vaccination against Covid-19 will be gradual in all major tin-producing countries except China, the ramp-up of tin mine operations across the world will not be a smooth process," said Fitch. It has tipped global tin mine output to rise 9.4% in 2021 after a 1.3% fall in 2020.
Increased adoption of solar power should have a significant impact over time on demand for aluminum, copper and zinc which are integral to the construction of solar systems, said research company Wood Mackenzie. It has forecast the solar power industry's usage of the base metals to double by 2040.
Falling production costs and efficiency gains have driven down the cost of solar power globally, which should result in its share of the power supply increasing. For aluminum, demand from the solar industry could increase to 12.6% of total aluminum consumption by 2040 from about 3% in 2020.
TODAY'S TOP HEADLINES
Unfilled Job Openings Outnumber Unemployed Americans Seeking Work
Available jobs in the U.S. rose to another record high at the end of June, pushing openings above the number of unemployed Americans seeking work, a sign of an unusually tight labor market.
Unfilled job openings rose by 590,000 to a seasonally adjusted 10.1 million in June, the highest level since record-keeping began in 2000, the Labor Department said Monday. The increase was driven by industries such as professional and business services, retail and the accommodation and food services, as pandemic restrictions continued to ease that month and consumers were more willing to dine out and travel.
Senate Democrats Outline $3.5 Trillion Antipoverty, Climate Plan
WASHINGTON-Senate Democrats released an outline of the $3.5 trillion antipoverty and climate plan on Monday, further detailing their ambitions for a major overhaul of the nation's education and healthcare systems that they hope to advance alongside a bipartisan infrastructure bill.
The antipoverty plan is set to offer universal prekindergarten, two free years of community college, and expanded Medicare to cover hearing, dental and vision care, among other provisions.
Treasurys' Big Rally Gets Help From Skeptics of Low Rates
A little more than a month ago, Zhiwei Ren pared back his bet that strong growth and inflation would cause bond prices to fall and their yields to rise-even though he still believed in his economic forecast.
(MORE TO FOLLOW) Dow Jones Newswires
08-10-21 0021ET
