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EMEA Morning Briefing : Shares to Fall, Commodities Weaken as Focus Turns to Fed

08/26/2021 | 12:34am EDT


Watch For:

Eurozone M3; Germany GfK Survey; France Industrial Investment Survey, Business Sentiment Index; U.K. Capital Issuance, Card Spending; ECB accounts of its last monetary policy discussions; updates from Delivery Hero, Bouygues, Givaudan, Sodexo, Gazprom, TCS Group, CRH, Sibanye-Stillwater

Opening Call:

Caution over rising coronavirus cases globally will likely dent European shares on Thursday. In Asia, stocks suffered broad losses, the dollar held steady but Treasury yields and commodities weakened.


European shares face moderate opening losses on Thursday following a cautious Asian session, as investors worried about the regulatory outlook in China and persistently high Covid-19 cases worldwide.

This despite another robust performance on Wall Street on Wednesday, where stock indexes closed further in record territory. The Dow Jones Industrial Average extended its gains to a fourth straight day after strong second-quarter corporate earnings offset doubts about the pace of economic recovery, even with the coronavirus delta variant limiting consumer and business activity in some countries.

"The market is focused on this inflation question and whether it has an impact on Fed policy," said Tom Martin, senior portfolio manager at Globalt Investments. He added that with markets at all-time highs while also facing massive uncertainties stemming from Covid-19, fresh investment opportunities have largely dried up beyond simply backing large-cap U.S. stocks. "There's so much uncertainty and so many conflicting pieces of information," Mr. Martin added, referring to the spread of the Delta variant. "It's difficult to evaluate what happens with people and businesses."

Looking ahead, Jerome Powell may give some clues as the timing of any tapering of its bond purchases on Friday at the annual Jackson Hole central bankers symposium.

"All eyes are on the Fed," said Joe Quinlan, head of CIO market strategy for Merrill and Bank of America Private Bank, adding that while Powell might hint on Friday about talk of tapering, that's different than immediately tightening financial conditions. "There's still a lot of liquidity looking for a place to go. And the first stop is U.S. equities."


The dollar was steady in Asia, with a slightly firmer bias ahead of the Jackson Hole symposium. While expectations have been scaled back and few anticipate Powell will send a clear taper signal, key Fed officials will probably stress confidence that "substantial further progress" is on the horizon and that a slowing of asset purchases could start in coming months, said Westpac. This would likely leave the dollar's broad uptrend into the fourth quarter intact.

Rabobank said the dollar is likely the strengthen in coming months even if the Fed pushes back the timeline for tapering asset purchases. Dallas Fed President Robert Kaplan last Friday said he may rethink his view that tapering will need to start soon if the rise in Delta coronavirus variant cases slows economic growth materially.

"While this would be a USD negative factor on one hand, Delta worries may simultaneously increase its safe haven appeal," said Rabobank forex strategist Jane Foley. "On balance, while pullbacks are likely to be par for the course, we see scope for EUR/USD to head towards 1.16 on a six-month view."

MUFG Bank said the euro-dollar exchange rate is showing little reaction to European-specific factors, with global risk appetite its key driver. EUR/USD is currently lower on risk aversion due to Afghanistan's fall to the Taliban, the possibility of further Chinese regulatory clampdowns, a rise in coronavirus infections in the Australian state of New South Wales and an increase in U.K. deaths, said MUFG analyst Derek Halpenny.

Another factor curtailing risk is the prospect of the Fed signalling an early tapering of asset purchases at the Jackson Hole symposium, he said. "Fragile risk sentiment provides USD support and limits the impact of EUR-specific positive factors that do currently exist."

Morgan Stanley said emerging-market currencies are likely to extend losses against the dollar in the autumn on risk aversion and the prospect of the Fed starting to wind down stimulus.

"A hawkish Fed, slowing growth in EM and ongoing Delta concerns all pose headwinds for EM," said Morgan Stanley analysts. Worries about China's coronavirus containment measures and its tighter regulations will also support safe-haven flows into the dollar and put downward pressure on currencies exposed to China's growth outlook, they added.

Bitcoin's pullback after rising above $50,000 for the first time in three months on Monday is likely the result of profit taking, said cryptocurrency broker GlobalBlock. A report by blockchain analytics firm Glassnode shows the proportion of old Bitcoins being spent on the network has increased as long-term holders take advantage of high prices to realize profits, said GlobalBlock sales trader Alexandra Clark.

"Further to this, there has been a slight uptick in inflows to exchanges, which indicates that traders and investors are capitalising on market strength and taking profits." Bitcoin's short-term outlook is uncertain but it should benefit from a wider adoption of the cryptocurrency in the longer run, she said.


U.S. Treasury yields eased back slightly in Asia after they saw their biggest one-day gains in more than two weeks on Wednesday.

Economic data pointed to a continued recovery in the U.S. and Washington looked closer to an agreement on fiscal stimulus, helping spur the bond selloff.

With the annual Jackson Hole gathering in view, investors have been playing down expectations that Powell will provide any fresh insights on the Fed's tapering of asset purchases, until the rate-setting FOMC's Sept. 21-22 meeting.

"Jackson Hole is more about cerebral theorizing and less about tactical announcements," said Bruce Monrad, portfolio manager at Northeast Investors Trust. "It's not an FOMC meeting, so making a tactical announcement would open up the chairman to questions about what has changed since the July meeting that prompted the change in policy."

European real estate firms have ramped up issuance of new bonds so far this year, with Vonovia's five-part bond transaction becoming the latest deal in the sector, said Commerzbank. "The deal should...see issuance from the Real Estate sector reach record levels," said credit strategist Cem Keltek.

So far this year, European real estate companies raised a total of EUR27.6 billion in euro investment-grade corporate bonds, inching closer to the EUR29.8 billion raised in the whole of 2020.


Oil prices were lower in Asia, erasing most of Wednesday's gains, although they have risen about 10% so far this week.

TD Securities cautioned that the market could continue to face headwinds from the Covid-19 Delta variant and technical resistance levels.

News emerging in the Middle East may also influence oil prices.

Phil Flynn, senior market analyst at The Price Futures Group, said that according to reports, the U.S. is ready to make "tough concessions" in return for Iran's retreat from its nuclear program. Meanwhile, Israel's military is accelerating its operational plans against Iran due to the progress of the Islamic Republic's nuclear program, Israel Defense Forces Chief of Staff Lt.-Gen. Aviv Kohavi has warned, according to The Jerusalem Post.

That's just a rumor for now, but could "give a bid to crude [prices] if it plays out," said Tariq Zahir, managing member at Tyche Capital Advisors.

Voice of America reported Tuesday that Israeli Prime Minister Naftali Bennett will likely urge Joe Biden to take a hard-line stance on Iran when the leaders meet on Thursday.


Gold was a few cents lower, continuing to lose its grip on the $1,800 mark. Prices suffered their sharpest daily drop in more than two weeks on Wednesday, pulling back below the key level for the first time in three sessions.

Metals traders await the Jackson Hole symposium, with the focus squarely on whether Powell will give a timeline for asset tapering at his speech on Friday.

"Given how the precious metal remains highly sensitive to [Federal Reserve] taper talk, the next few days promise to be eventful," Lukman Otunuga, manager, market analysis at FXTM, told MarketWatch. A dovish Powell who "fails to provide the tapering roadmap could hit the dollar, ultimately injecting gold bugs with renewed confidence, while a formal announcement on tapering could "deal a heavy blow to gold as the dollar rallies," said Otunuga.

Copper also edged lower, as concerns over supply disruptions abated. Codelco has reached an agreement with supervisors at its Andina copper mine in Chile to freeze base pay in exchange for a one-time bonus and other incentives, said ANZ. Also, copper's limited price gains suggested the market is still wary that demand recovery may be vulnerable to further weakness as the Covid-19 pandemic isn't over, ANZ added.


Bank of Korea Raises Rate After 15 Months at Record Low

South Korea's central bank raised its base interest rate on Thursday after 15 months of keeping it at a record low, signaling it would further dial back its easy-money policy amid an economic recovery.

The rate increase makes the Bank of Korea the first major central bank in Asia to start withdrawing stimulus measures that were put in place because of the pandemic.

Derby's Take: Economists Don't Expect Powell Taper Announcement This Week

It's pretty unlikely Federal Reserve Chairman Jerome Powell will announce in his speech Friday that the central bank is officially ready to start pulling back on its asset-buying stimulus effort, economists reckon.

Mr. Powell is set to speak on Friday at 10 a.m. ET as part of the Federal Reserve Bank of Kansas City's annual Jackson Hole economic symposium. The event was moved last week to an all-online format because of the rising risks around the coronavirus pandemic.

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08-26-21 0033ET

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