MARKET WRAPS

Watch For:

Eurozone Quarterly Sectoral Accounts, Balance of Payments; OPEC and non-OPEC Ministerial Meeting; Eurogroup meeting of eurozone finance ministers; updates from Getlink, Flughafen Wien

Opening Call:

Europe is poised for a steady opening session despite growing worries over inflation. In Asia, stocks were lower, reversing course as concerns over the Evergrande crisis drained the positive mood. Elsewhere, the dollar, Treasury yields and gold edged higher, while oil futures dipped with the OPEC+ meeting in focus.

Equities:

European shares could start the week with modest gains after Wall Street closed higher on Friday, as investors displayed a little risk appetite.

Equities started Friday's session lower, but turned midday. That move combined with other "risk-on" trades like a sharp rally in the cryptocurrency bitcoin gave some investors the gumption to wade back into the market, said Frank Cappelleri, the executive director of brokerage Instinet.

"All of that probably made some traders realize it wasn't a complete risk-off event," he said.

However, most Asian benchmarks turned negative on Monday, as traders continued to weigh growth prospects against worries over inflation.

Earlier gains evaporated after shares of China Evergrande and its property services unit halted trading in Hong Kong, as the debt-laden conglomerate struggles to resolve its financial troubles. Mainland Chinese markets remain closed through Thursday for the Golden Week holidays.

Forex:

The dollar was a touch firmer in Asia, with the yen weakening against most G-10 and Asian currencies, as news about Merck's anti-Covid-19 pill helped boost market sentiment.

To the extent that hospital and ICU capacity is a key constraint to countries removing or needing to keep in place Covid-related restrictions, prospects of a drug that could potentially halve the risk of hospitalization for those with mild or moderate symptoms would be a major positive, said NAB.

The dollar ended Friday's session slightly lower, but notched a weekly gain--its fourth straight weekly advance.

"The trade-weighted greenback is holding near its strongest levels this year as market participants firm bets on a more aggressive tightening trajectory from the Federal Reserve," said Karl Schamotta, chief market strategist at Cambridge Global Payments.

"This follows a pattern known to currency traders as the 'dollar smile, '" he added, which means the dollar does poorly when the U.S. economy is just muddling through--the middle of the smile--but tends to outperform when the economy is very weak and investors seek safety or when the economy is very strong and investors bet on higher interest rates.

Nordea said the long-term outlook for a stronger EUR/USD is driven by productivity, aging and climate change.

Productivity has been a strength of the U.S. "but there are signs that the EU is also making significant strides in that direction faced with lower potential growth in the long run," said senior macro strategist Sebastien Galy.

Aging is a bigger issue for Europe, "creating a greater demand for European fixed income and reducing potential growth to favor the dollar." But climate change strongly favors Europe even if we miss carbon neutrality by 2050, which we most likely will, Galy said.

"Climate is an inflationary cost and the odds are strong that many emerging markets will choose to offset this by weakening their currencies against the dollar."

However, Galy expects the euro to continue weakening against the dollar in the near and medium-term.

"The dollar should continue to be supported by expectations of an eventual series of Fed rate hikes and the value of the dollar as a safe haven against a potential equity correction...The downward trend in EUR/USD is likely to return in the coming weeks and months, suggesting EUR/USD around the 1.10 handle and potentially below that before moving higher."

Bonds:

U.S. Treasury yields edged higher early Monday after they posted their largest daily declines in months on Friday, as bond investors shrugged off data showing U.S. inflation at 30-year high.

"Markets appear increasingly jittery as the realization of a higher sustained level of inflation eventually resulting in a higher level of rates appears to be finally sinking in," said Lindsey Piegza, chief economist of Stifel Financial.

"While the Fed has assured market participants the taper process is only the first step towards a removal of accommodation and it will be slow and controlled, investors are increasingly focused on step two: the inevitable backup in rates."

Raiffeisen has raised German government bonds to "hold" from "sell" over the next three months, following recent stabilization of U.S. and German yields.

"Rising Bund yields were mainly located at the longer end of the yield curve and were driven in particular by rising inflation expectations," Raiffeisen said. In contrast, the Treasury curve has risen mainly in the intermediate maturity segment which is more strongly associated with increases in inflation-linked, or real, yields.

The recent increases in U.S. and German bond yields are of similar magnitude, but the drivers are different.

Commerzbank said riskier euro corporate bonds are likely to offer the highest returns in fixed income in the last quarter of the year.

High-yield euro corporate bonds should continue "to score better" than euro-denominated investment-grade paper as they offer higher carry, or investment return relative to the cost of funding, and lower sensibility to changes in interest rates, also known as duration, said head of corporate credit research, Marco Stoeckle.

Also, high-yield corporate debt has more scope to appreciate in value from improving credit ratings and low default rates, he said. Commerzbank also prefers exposure to euro-denominated corporate debt over dollar paper.

Energy:

Oil futures were lower in Asian trade ahead of the OPEC+ meeting later Monday on expectations the group could raise crude production beyond its planned 400,000-barrel-a-day increase.

Traders are "pricing in reports that OPEC+ may consider an option to hike output more than planned in its coming meeting," said Rystad Energy, although it doesn't think this outcome is likely.

Despite a tight energy market, "it would be uncharacteristic for OPEC+ to implement a knee-jerk policy in reaction to the energy crisis just yet."

Most energy market participants--from producers to commodity asset managers and equity investors--believe oil is beginning a multi-year bull cycle despite pandemic risks, said RBC Capital Markets after a week of client calls. It is exceptionally difficult to find bears among the energy specialist community or among the management teams of E&Ps, it said.

"Long only equity investors and producers focused on the cycle, some even mentioned the word super," said RBC. "Most were hesitant in calling $100/bbl oil, instead suggesting that every day above $70/bbl is a great day to be an equity investor." Near-term, many see the biggest uncertainties and downside risk coming from China.

Metals:

Gold prices were near flat early Monday, having struggled for momentum on Friday even after a reading on the cost of U.S. goods and services revealed a rise for August.

A rise in the U.S. personal consumption expenditures index is providing some support for gold, as the precious metal is seen as a hedge against inflation, said ANZ.

"I would certainly agree that the uncertainty sweeping the world has prompted risk-hedging buying and rightly so," says Jeffrey Halley, a senior market analyst at Oanda. He has put long-term support for gold at $1,680.00/oz and resistance at $1,780.00/oz.

Copper was slightly higher on expectations industrial activity could be boosted by China shoring up its energy resource inventories to resolve its power crunch.

"Authorities appear to be determined to support economic growth via ensuring power shortages are short lived," said ANZ. This could support Chinese industry and increase the demand for base metals, especially copper, the bank said.

TODAY'S TOP HEADLINES

China Evergrande, Property Services Unit Halt Trading in Hong Kong

Shares of China Evergrande Group and its property services unit halted trading in Hong Kong on Monday, as the debt-laden conglomerate struggles to resolve its financial troubles.

China Evergrande and Evergrande Property Services Group said in separate statements that trading of shares and structured products relating to the companies would be halted from 0100 GMT, and didn't specify reasons for the move.

Democrats Weigh Cutting Programs or Reducing Scope to Trim $3.5 Trillion Bill

WASHINGTON-Democrats, working to unite around a far-reaching social policy and climate bill, are weighing two different approaches to reduce its overall cost: eliminating proposed programs entirely or cutting their duration.

Democrats' debate over the two options took on fresh urgency this weekend after President Biden said Friday that they would have to shrink the size of the legislation, projected to spend $3.5 trillion over a decade to expand and create education, healthcare, climate and other programs.

Falling Unemployment Could Add to Worries About the U.S. Labor Market

Many economists would welcome a small rise in the unemployment rate.

They are troubled by the rate's swift decline from its pandemic peak because it partly reflects a lack of job seekers-effectively limiting the amount of fuel in the economy's engine.

Record Junk-Loan Sales Fuel Dividend Payouts

U.S. companies have sold a record amount of junk-rated loans to raise money for dividends this year, powered by a recovering economy and investors' demand for higher-yielding assets.

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10-04-21 0035ET