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EMEA Morning Briefing : Stocks to Edge Higher; China Restricts Travel Again as Cases Spike

10/25/2021 | 12:47am EST


Watch For:

Germany Ifo Index; Bundesbank Monthly Report; updates from Galp Energia, Hermes, HSBC, SSAB

Opening Call:

Europe is set for a positive open despite a mixed Asian session so far, as China restricts some travel following a Covid spike. The dollar and Treasury yields were lower, while U.S. oil and gold made further gains.


European stocks are poised for modest gains early Monday, despite a constrained Asian session as China tightened travel controls in some areas in response to a spike in coronavirus infections.

Chinese stocks were mixed as investors focused on a resurgence of Covid-19 infections in China's 11 provinces. "One may expect aggressive measures to control virus spreads, which may put a cap on growth," said IG.

On Wall Street, the S&P 500 ended slightly lower on Friday after a day of choppy trading, although the Dow rose to a record and notched a third consecutive week of gains.


The dollar and the yen weakened against other G-10 currencies as gains across most Asian equity markets supported an appetite for risky assets.

However, investor sentiment could be on the defensive this week following news about the latest Covid-19 outbreak in China, said UOB. News reports have confirmed the spread of more than 100 locally transmitted cases across 11 provincial areas, UOB added.

Commonwealth Bank of Australia said dollar risks remain skewed to the upside for now: U.S. inflation is building and is now unlikely to return to the FOMC's target band; market-based and consumer inflation expectations are consistent with rising long-term U.S. inflation; importantly, FOMC members are slowly conceding that inflation risks are increasing.

CBA said the upshot is that interest rate markets can continue to price a more aggressive Fed Funds rate hike cycle which can support the dollar. High inflation is not contained to the U.S. and as a result, CBA still sees a risk that short term interest rates start to price in a global monetary tightening cycle that is so strong it causes equities to correct lower.

Christine Lagarde is likely to push back against market expectations for an interest-rate rise in late 2022 at Thursday's policy meeting, potentially weakening the euro, said TD Securities.

EUR/USD has "several negatives going for it" and could fall below 1.16 in the coming weeks if Lagarde can succeed in "converting a push into a shove" against the market's pricing for future rates, said TD.

Lagarde could emphasize that the pandemic bond-buying program and main asset-purchase program need to end before raising interest rates, meaning the ECB will be an appreciable laggard in tightening policy relative to the Federal Reserve, said TD.


Long-dated Treasury prices rose slightly in Asia, pushing down yields again and contributing to a further flattening of the yield curve, a pattern seen on Friday after Jerome Powell signaled the Fed is prepared to begin tapering its monthly asset purchases. He also warned that inflation is likely to remain elevated into 2022.

Powell's remarks were expected to be the final word from policy makers until the next Fed meeting in two weeks. Investors have seen yields on the 2-year rise to the highest level in over 18 months and the 10-year touching heights not seen since early May this year.

"Powell & Co. are in the unenviable position of executing a well-telegraphed tapering of QE at a moment when the market is far more focused on the potential for the Fed to bring forward rate hikes," said Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital Markets.

"It goes without saying that the higher-than-expected realized inflation profile has added a meaningful degree of urgency to the liftoff process and, as a result, the Fed needs to navigate the policy error risk of overcorrecting toward high yields only to prematurely counteract positive economic momentum."


Oil futures were mixed in Asia, with U.S. prices extending a record streak, boosted by easing travel restrictions, a slow recovery in U.S. crude production and expectations for higher energy demand for the holidays.

UOB said that crude stockpiles at Cushing Oklahoma are quickly approaching critically low levels and expects the decline to accelerate. "The last time that happened, crude cost more than $100/bbl," it said.

Data from Baker Hughes on Friday also suggested a potential decline in oil production, with the number of active U.S. rigs drilling for oil posting their first weekly decline in seven weeks, down two at 443 this week.

Brent was a few cents lower, however, having settled more than 1% on Friday.


Gold edged higher, with the weaker dollar offering some support. Oanda said the precious metal is likely to be supported by some safe-haven demand, noting ongoing Covid-19-related concerns in Europe and Asia. It has put support at $1769.50 and resistance at $1800.00.

Gold futures climbed Friday, but bullion ended below the day's best levels after Powell's 'time to taper' remarks.

Copper prices were more than 1% higher as energy shortages in China have led to lower output, said ANZ.

Power rationing in China's Jiangxi province should affect the production of several metals, including copper, ANZ said. It added that the amount of copper held on the London Metal Exchange has fallen 36% since the beginning of September.


Energy-Stock Surge Leaves Climate-Focused Investors Behind

A surge in energy stocks is challenging climate-conscious money managers who beat the market for years when the sector struggled but are now missing out on Wall Street's hottest trade.

The S&P 500 energy sector has rebounded 54% this year, outpacing the broad index's 21% climb and leading the second-best performing group by about 16 percentage points. That would mark the third-largest such gap between the top two sectors since 2000, according to Dow Jones Market Data.

Powell Says Supply-Side Constraints Have Worsened, Creating More Inflation Risk

Federal Reserve Chairman Jerome Powell indicated he is now somewhat more concerned about higher inflation and said that the central bank would watch carefully for signs that households and businesses were expecting sustained price pressures to continue.

"Supply-side constraints have gotten worse," Mr. Powell said Friday at a virtual conference. "The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation."

Xi's 'Common Prosperity' in Theory and Practice

Investors had, over the past 30 years, grown so accustomed to ignoring rhetoric about communism from nominally-communist China that a leader firmly putting equality at the heart of his economic agenda has caused more than a little heartburn. The Oct. 15 release of a fuller transcript of President Xi Jinping's mid-August remarks on "common prosperity" therefore piqued considerable interest.

The publication in the party's theoretical journal, "Seeking Truth," appears partly aimed at reassuring investors and entrepreneurs spooked by novel language about "rationally adjusting" excessive incomes in the original mid-August readout of Mr. Xi's speech, which came at the height of Beijing's campaign to rein in its internet giants.

Bitcoin ETF's Success Could Come at Fundholders' Expense

There are signs that the bitcoin futures market isn't big enough for a planned wave of crypto exchange-traded funds.

Since launching Tuesday, the ProShares Bitcoin Strategy ETF has amassed $1.2 billion in investor assets, the quickest billion-dollar fundraising on record.

Shippers Find New Supply-Chain Hurdles at Alternate Ports

When Flexport Inc. learned in the past month that an ocean carrier planned to shift cargo from the congested operations at the Port of Los Angeles to little Port Hueneme some 80 miles up the California coast, the freight forwarder found that trucking companies weren't ready to go along with the changing direction of the imports.

China Plans Property-Tax Trials as It Targets Speculation

China said it would conduct five-year property-tax trials in some regions of the country as Beijing looks for ways to rein in real-estate speculation and distribute wealth more evenly.

The National People's Congress Standing Committee, the country's top legislative body, passed the tax-pilot program on Saturday, the official Xinhua News Agency reported. The State Council, China's cabinet, is expected to disclose details in the next few months, including which regions this initiative will cover and how the tax rate will be set, people familiar with government deliberations said.

Talks Collapse Over Sale of Troubled Italian Bank Monte dei Paschi

Monthslong talks between the Italian government and bank UniCredit SpA over the sale of nationalized lender Banca Monte dei Paschi di Siena SpA have ended, UniCredit and the government said Sunday.

The collapse of the negotiations is a blow to the government headed by former European Central Bank President Mario Draghi, which needs to reprivatize the bank by April under an agreement struck with European authorities when Rome rescued the Tuscan bank in 2017.

The U.K. Ditched Coal and Left Itself With a New Set of Challenges

BLYTH, England-Coal from mines around this northeastern English port town made the U.K. an industrial and imperial superpower in the 19th century. In the 21st, the country has all but ditched the fuel.

By kicking its coal habit, the U.K. has charted a route for the U.S. and other nations seeking to reduce carbon emissions. British governments made it prohibitively expensive to burn coal while prodding investors to plow tens of billions of dollars into renewables, energy executives and financiers say.

Endemic Covid-19 Has Arrived in Portugal. This Is What It Looks Like.

(MORE TO FOLLOW) Dow Jones Newswires

10-25-21 0046ET

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