Bundesbank monthly report; Christine Lagarde appears at Committee on Economic and Monetary Affairs; updates from Naspers, Prosus, Bunzl
Wall Street's slide on Friday will likely drag European shares lower this morning, as investors pivot with a more hawkish Fed. In Asia, major stock benchmarks tumbled, the dollar, yen and most commodities strengthened, while Treasury yields eased further lower.
European and U.S. stock-index futures fell steadily on Monday, following Wall Street's worst week since October.
The Dow retreated more than 500 points on Friday, as traders warily eyed the Federal Reserve for hints of where monetary policy is headed.
It isn't surprising that equities are falling, said ThinkMarkets analyst Fawad Razaqzada. U.S. stocks have hit a series of record highs and have been outpacing the economic recovery since last year. Now traders are repricing that "reflation trade" as they watch the Fed slowly start to alter its stance on monetary policy.
"It was coming," he said. "This kind of selloff was coming because the market got ahead of itself."
The Cboe Volatility Index, known as Wall Street's "fear gauge," climbed to its highest level in weeks.
"The markets will be more spooked by 2022 turning to a rate hike, because that will mean they have to taper as well," said Derek Halpenny, head of research for global markets in the European region at MUFG Bank.
Stocks to Watch: Vivendi on Sunday reached an agreement for a 10% investment in Universal Music Group by William Ackman's Pershing Square, valuing the world's largest music company at about $40 billion.
In an email to UMG employees, CEO Lucian Grainge called the investment a "strong validation." The deal-previously reported on by The Wall Street Journal-follows a 20% stake investment by Chinese internet giant Tencent and comes days before Vivendi shareholders will vote on the potential listing of 60% of UMG shares on Euronext.
"The fact that we now have, in addition to Vivendi, two committed investors-the consortium led by Tencent, as well as PSTH-is as powerful an endorsement as one could imagine from the investment and technology communities," said Mr. Grainge.
The dollar held firm against other major currencies in Asia, except the yen, as risk-off sentiment dominated regional markets.
St. Louis Fed leader James Bullard's acknowledgement that he thinks a late 2022 hike may be in the cards, helped the dollar push higher on Friday but it's more likely the real news was his comment about mortgage bond buying as part of the Fed's stimulus efforts.
"I'm leaning a little bit toward the idea that maybe we don't need to be in mortgage-backed securities with a booming housing market and even a threatening housing bubble here, according to some people," he said, adding "we don't want to get back in the housing bubble game that cost us a lot of distress in the 2000s."
Meanwhile, cryptocurrencies continued to fall over the weekend, following a recent crackdown by China against crypto miners. Bitcoin fell as low as $33,400 on Sunday, before recovering above the $35,000 level. Bitcoin is down about 9% over the past five days. Prices of ethereum and dogecoin also fell Sunday.
For global financial markets, it was all about the Fed's hawkish dot plots last week and little will change this week. New York Fed President John Williams speaks on Tuesday with Jerome Powell speaking on Wednesday.
Commonwealth Bank of Australia said market participants will be interested in whether Powell and Williams indicate concerns about an inflation overshoot. CBA said signs the FOMC is growing less certain about the inflation outlook is important for the policy view, and can support the dollar, with any upside surprise to Friday's U.S. PCE deflator also dollar supportive.
China's central bank on Monday held its benchmark lending rate--the loan prime rate--unchanged in June, as it moved to use administrative tools rather than price signals to rein in financial risk, said Capital Economics.
The PBOC has held its policy rates unchanged for over a year after it lowered the LPR twice last year to help the pandemic-shocked economy. Capital Economics said the central bank has succeeded in bringing credit growth back to the pre-virus pace by using other tightening tools, which are likely to "act as a headwind over the coming quarters even in the absence of any rate changes."
The Czech koruna's potential gains in reaction to an expected interest rate rise by the Czech National Bank on Wednesday will be limited, said UniCredit. The CNB is seen raising its key rate by 25 basis points to 0.50% and could deliver two more increases in 4Q, but that is largely priced in by the currency market, said UniCredit's Roberto Mialich.
"This means that a more pronounced CZK appreciation towards and beyond the 25.00 threshold would probably require more hawkish comments by the bank's board rather than the rate hike alone," he said. The CNB will likely refrain from providing such signals until the next macroeconomic forecasts are released in August, said Mialich.
Unicredit also said Hungary's central bank will likely raise its benchmark interest rate by 30 basis points at its June 22 policy meeting but that won't automatically boost the forint.
"The forint has already reversed recent gains against the euro after the National Bank of Hungary indicated that normalization will likely proceed on a quarterly basis, a pace that sounds too tepid," said Mialich. NBH member Gyula Pleschinger said in an interview last week that the bank could embark on quarterly interest-rate rises to rein in inflation.
Pleschinger's remarks came after NBH Deputy Governor Barnabas Virag last month indicated that the bank could raise rates in June.
Long-dated Treasury yields fell back further in Asia after they receded on Friday, although the short-term 2-year bond booked the sharpest weekly rise in nearly 2 years, compressing the yield curve.
Moves on Friday were sparked by comments by James Bullard but had been at least partly set in motion after the Fed's Wednesday meeting concluded with a hawkish tone for financial markets.
"We still expect nominal yields to reprice higher at some point this year, once technical factors dissipate and fundamentals reassert themselves," wrote Jefferies economists Aneta Markowska and Thomas Simons, in a Friday note.
"In the longer term, we do think the more hawkish sounding Fed does raise plenty of questions about how we are supposed to interpret the new average inflation targeting regime," the economists wrote.
Fitch on Friday revised its U.K. outlook to stable from negative, affirming its AA- rating, saying the economy and public finances have been "more resilient to the impact of the pandemic shock than Fitch had expected."
Fitch also raised its 2021 real GDP growth forecast to 6.6% from 5% and forecast the general government deficit to decline to 10.7% of GDP in 2021 from 12.2% in 2020.
Oil prices extended their gains in Asia on signs that a resumption of Iranian oil exports may take longer to happen.
Conservative cleric Ebrahim Raisi's win in the Iranian presidential election on June 18 may increase the risk of a delay to a U.S.-Iran nuclear deal, as he is under U.S. sanctions for alleged human rights abuses, said CBA. These sanctions will need to be lifted if any revival of the 2015 nuclear accord is to take place.
Baker Hughes data on Friday raised the possibility of higher U.S. oil production, as the number of active oil drilling rigs rose for a second-consecutive week. Still, officials from OPEC's Economic Commission Board were told last week by industry experts to brace for U.S. output to see a limited rise of 200,000 barrels per day this year, Reuters reported Friday, citing two sources.
Gold futures were higher in Asia trade, recovering Friday's modest losses, although the precious metal ended the week down 6%--its biggest weekly drop since March 2020.
UOB said a surge in the dollar has dented the metal's appeals, expecting any upside above $1,900 will likely be capped by the Fed's hawkish tilt last week.
Base metals edged lower, with the three-month LME copper contract down 0.2% at $9,131 a ton and aluminum 0.1% lower at $2,382 a ton.
Sentiment in metals has been weighed by the Fed's hawkish stance on interest rate rises, said ANZ, with headwinds from the stronger dollar and further measures by the Chinese government to quell speculation in the commodities market also likely to keep the downward pressure.
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