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EMEA Morning Briefing : Stocks Likely to Recoup Some Losses But Gains Look Fragile

09/29/2021 | 12:38am EST


Watch For:

Eurozone Business & Consumer Surveys; Germany Foreign trade price indices; France Housing starts; Italy PPI; U.K. Money and Credit, BOE effective interest rates, Monetary & Financial Statistics; ECB Forum on Central Banking concludes; updates from Vonovia, Sika, Next, SSE, ASML

Opening Call:

European shares should open on a steadier footing, despite Wall Street's tumble and as elevated bond yields continue to flag inflation fears. In Asia, stocks tracked the steep U.S. losses; the dollar held its solid gains; and commodities were mixed, with oil lower but gold edging up.


European equities should stem their recent losses on Wednesday, with stock index futures marginally higher.

Moves are likely to be muted however, following Wall Street's slide on Tuesday, as Treasury yields extended their climb, putting pressure on the technology sector and growth-oriented shares. Stocks sold off as investors anticipate the Federal Reserve moving away from the accommodative policy on concerns over elevated inflation.

Asian markets tracked the U.S. declines early Wednesday but U.S. stock futures rose modestly, suggesting that American markets could regain some lost ground.

"Investor anxiety is pretty elevated right now," said Seema Shah, chief strategist with Principal Global Investors, in a phone interview Tuesday. "There's a lot going on."


The dollar's gains leveled off in Asia, but the currency is likely to remain in demand after St Louis Fed chief James Bullard said he expects inflation to stay elevated while forecasting two FOMC rate hikes in 2022. He also said the FOMC should allow its balance sheet to shrink as soon as it finishes its tapering of asset purchases.

CBA said it expects the FOMC will start tapering its asset purchases by $15 billion per month from December and finish in July 2022, while it expects a 25-basis-point increase in the Fed funds rate in December 2022.

Re-pricing of FOMC rate hikes will continue to adjust in favor of the dollar in coming weeks, CBA added.

Minh Trang, senior FX trader at Silicon Valley Bank, said "from an FX perspective you're looking at a risk off-mood that's helping the dollar, and then higher anticipated interest rates, which are also going to be good for the dollar. It's a double win for the dollar."

As markets adjust to a new period of reduced liquidity in global markets, there is a window of opportunity in the Japanese yen, which is likely to weaken versus the dollar as the Bank of Japan "is nowhere near rising interest rates," said Giles Coghlan, chief analyst at HYCM.

"I expect a move maybe to 115, 120 [yen per dollar], can easily see this moving higher alongside U.S. 10-year yields," Coghlan said. "I think we have to price in [higher] interest rates from the U.S."


Bond yields continued to inch higher in Asian trade after the benchmark 10-year Treasury yield hit 1.534% on Tuesday, its highest since June.

Deutsche Bank pointed to inflation concerns and the U.S. debt ceiling drama as factors behind the climb in Treasury yields.

"[Tuesday's] moves were almost entirely driven by higher inflation breakevens, with 10-year breakevens up +3.7bps," Deutsche Bank said, noting that similar moves happened in Europe amid the fuel shortage and rallying natural gas futures.

On the debt ceiling, Deutsche Bank said: "Staying on the political scene, we are now less than 72 hours away from a potential U.S. government shutdown as it stands."


Oil futures extended their retreat on Wednesday, as losses in the stock market and a drop in U.S. consumer confidence raised concerns about near-term energy demand.

While the supply backdrop has not changed much, ANZ Research said crude prices hitting $80/bbl would put pressure on OPEC+ nations to increase their production quota at the upcoming meeting on Oct 4. Investors will be keenly watching U.S. inventories data later to gauge demand strength, ANZ said.

"There are clearly larger macroeconomic developments weighing on crude prices," said Troy Vincent, market analyst at DTN. Tuesday's Intraday price action showed the "ongoing tug-of-war between the bullish influence of OPEC's slow return of barrels...recent unexpected crude production outages...the bearish influence of a global economy...expecting weakening Chinese economic growth and the Fed to begin to taper its bond purchases."


Gold prices edged higher in Asian trade, after Wall Street's slide prompted some market participants to go on risk-off mode and move to the safe-haven asset, said a Kuala Lumpur-based research firm's chief strategist. However, he said the marginal gains indicated the majority of traders remained indecisive, and he expected the trend on bullion to be clearer over the next one or two days.

Gold futures on Tuesday posted their lowest settlement in seven weeks, weighed down by steadily rising Treasury yields and a strengthening dollar.

Nickel prices were lower, hit by China's stainless steel production curbs, ANZ said. It also expects rising concerns on China's slowing economic growth to weigh on prices of the industrial metal.

Iron-ore prices were higher though, showing signs of a recovery from their steep losses on Tuesday. But Huatai Futures warned the rebound momentum is unlikely to sustain, given China's continued tight steel production restrictions and rising inventory levels.

The brokerage reckons iron-ore demand may further weaken in the fourth quarter, as local governments are expected to more strictly implement steel output cuts toward the year-end.


Republicans Block Latest Effort by Democrats to Advance Debt-Ceiling Bill

WASHINGTON-Republicans blocked Democrats' latest effort to raise the debt limit, intensifying a high-stakes showdown in the Senate hours after Treasury Secretary Janet Yellen told lawmakers the government would be unable to pay all of its bills on time starting Oct. 18 unless Congress acts.

With Senate Republicans having lined up against the debt-limit increase, the developments raise pressure on Democratic leaders to find a backup plan to avoid a default on U.S. obligations. That could include adding a debt-ceiling measure to an already complicated package to bypass a GOP filibuster in the Senate, or exploring other, unprecedented approaches to keep the federal government liquid.

Janet Yellen Says Treasury Could Exhaust Cash Reserves by Oct. 18 if Debt Limit Isn't Raised

Treasury Secretary Janet Yellen told Congress that the Treasury would be unable to pay all of the government's bills if lawmakers don't raise or suspend the federal borrowing limit by Oct. 18.

"At that point, we expect Treasury would be left with very limited resources that would be depleted quickly. It is uncertain whether we could continue to meet all the nation's commitments after that date," she said in a letter to congressional leaders on Tuesday morning.

Progressives Split on Backing Thursday's House Infrastructure Vote

WASHINGTON-The House Democrats' powerful progressive bloc split Tuesday over whether lawmakers should vote for a roughly $1 trillion bipartisan infrastructure package this week even if a larger education, healthcare and climate package remains in flux.

In a sign of a growing conflict with House Democratic leaders, some liberals reiterated their determination not to vote for the infrastructure bill until the $3.5 trillion package has passed the Senate, while others signaled they could be reassured by firm signs of progress in reaching an agreement on the package.

Evergrande to Raise $1.5 Billion by Selling Bank Stake to State-Owned Firm

China Evergrande Group said it plans to raise about $1.5 billion by selling a minority stake in a Chinese bank to a state-owned enterprise, an indication that authorities in the country are moving to contain the fallout from the property giant's financial difficulties.

A unit of Evergrande reached a deal to sell nearly 20% of Shengjing Bank Co., which is based in Shenyang in Liaoning province, to a company whose owners include the local branch of China's State-owned Assets Supervision and Administration Commission as well as the local and provincial governments.

Evergrande Shareholder Chinese Estates Halts Trading After Shares Jump

A major shareholder in China Evergrande Group halted the trading of its shares, which had been rising sharply in Hong Kong.

Chinese Estates Holdings Ltd., which is controlled by Hong Kong billionaire Joseph Lau and his wife, Chan Hoi-wan, on Wednesday morning requested that its shares be suspended pending the release of an announcement related to takeovers and mergers.

Hidden Debt Plagues China's Belt and Road Infrastructure Plan, Studies Find

Hidden debt and problematic projects are emerging as features of China's Belt and Road Initiative, with several research reports pointing to headwinds facing President Xi Jinping's international infrastructure-development program.

Trillions of dollars in investment are needed around the world for infrastructure, which can mean anything from bridges to healthcare. China's program represents an enormous injection of funds for some of the most needy nations, but it has stirred global debate about the way China finances and manages its projects.

Elizabeth Warren Says She Will Vote Against Second Term for Fed's Jerome Powell

Sen. Elizabeth Warren (D., Mass.) said Tuesday she would oppose a second term for Federal Reserve Chairman Jerome Powell if President Biden nominates the central bank leader, highlighting the intraparty divide over his candidacy.

Ms. Warren told Mr. Powell during a congressional hearing that his effort to loosen financial regulations imposed after the 2008 financial crisis "makes you a dangerous man to head up the Fed."

Thoma Bravo Sells a Minority Stake in Command Alkon to HeidelbergCement

(MORE TO FOLLOW) Dow Jones Newswires

09-29-21 0037ET

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