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EMEA Morning Briefing : Stocks to Fall as Covid-19 Surges Across Europe

11/09/2021 | 12:43am EST


Watch For:

Germany ZEW Indicator; Germany, France Foreign Trade; OECD Harmonised Unemployment Rates; NIESR's quarterly UK and global forecasts; ECOFIN meeting of EU finance ministers; updates from Swiss Life, Bayer, Munich Re, Schaeffler, Porsche, Salvatore Ferragamo, Mediaset, Rubis, Fraport, Associated British Foods, DCC, Sberbank, Persimmon, Direct Line, Meggitt, SEB, Ericsson

Opening Call:

The rising Covid-19 tally in Europe will likely knock investor sentiment early Tuesday. In Asia, stocks were mostly lower, along the dollar, Treasury yields and oil. Gold was steady after hitting a more-than-2-month high on Monday.


Worries over rising Covid-19 cases in Europe will likely drag on the region's stock markets Tuesday, while some lingering concerns about inflation and the Federal Reserve's policy shifts could add to the cautious outlook.

"Germany's ZEW Index will be of marginal interest, with more concern in Europe likely focused on surging virus cases and possible restrictions returning, thanks to stalled vaccination programmes across the continent, " Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA.

Major U.S. stock benchmarks all book record closes on Monday, as investors bought materials, energy, and technology shares on apparent optimism for the outlook for the economy.

Meanwhile, Fed officials indicated that the central bank could raise U.S. interest rates by the end of 2022 based on the rapid recovery of the economy and an extended bout of high inflation.

Fed Vice Chairman Richard Clarida repeated his view that the criteria for a rate hike could be met before the end of 2022. St. Louis Fed President James Bullard told Fox Business that he foresees the central bank raising interest rates twice next year, and that a more rapid pace of interest-rate increases could be adopted if inflation runs hotter than expected.


The dollar continued to fall in Asia, on optimism the infrastructure bill will drive new spending into the U.S. economy, boosting economically sensitive sectors, said IG.

IG added that while markets are leaning toward taking on more risks, there appears to be a lingering sense of caution ahead of U.S. CPI data due Wednesday.

JPMorgan said central-bank policy divergence remains a tradable theme for FX markets, adding it maintained its "high-conviction short in EUR/USD, reflecting the different cyclical states for these two central banks."

The bank said: "Last week revealed (1) a Fed that is more open minded, data dependent, and accepting of market pricing, (2) an ECB that aggressively pushed back, (3) a BOE that is facing unusually trying macro circumstances, and (4) an RBA that has split the difference, retaining some degree of forward guidance but jettisoning its best tool to enforce it."

Rabobank said U.K. government threats to suspend a pact governing trade in Northern Ireland following the U.K.'s EU exit could hit sterling.

London reportedly may trigger Article 16 of the Northern Ireland protocol over dissatisfaction with the pact, which U.K. ministers approved as part of the Brexit trade deal between the U.K. and EU. Still, Brussels may abandon the entire deal if London suspends the protocol, according to reports.

"Headlines that the U.K. government may be close to triggering Article 16 of the protocol have the potential to open a fresh set of worms for GBP. The worsening in [U.K.-EU relations] and the continued difficulties in finding workable solutions for Northern Ireland are clearly not bullish factors for the pound."

Rabobank also said the outlook for sterling will be guided by expectations on the pace of monetary policy tightening by the Bank of England vis-a-vis other major central banks, including the Fed and European Central Bank.

While the BOE could raise interest rates soon, a "fair degree of caution could color the policy decisions by the Monetary Policy Committee in December and beyond," said Rabobank forex strategist Jane Foley.

How much support the pound would receive from a potential rate rise will also depend, to some extent, on whether such action is seen as warranted. The currency initially failed to benefit from rate rise bets last month due to concerns about a policy mistake amid headwinds to economic growth, Foley said.


Treasury yields eased back in Asia after they rose across the board on Monday, with the benchmark 10-year and 2-year rates climbing by the most in a day since late October, as investors began positioning for global reopening trades and digested approval of the infrastructure package.

Investors are looking for indications of where monetary policy is heading as the Fed tries to balance inflation and employment. Cornerstone looks at employment diffusion and labor force participation, and sees signs of more labor supply coming online soon.

"More labor supply means less wage pressure. That, along with rising productivity, will dampen unit labor costs, keeping core inflation down, adding runway to this expansion."

In other news, the biggest selloff that China's international junk-bond market has ever seen has wiped out around a third of bondholders' wealth in just six months.

The steep and rapid decline shows how regulatory curbs on borrowing, extremely dislocated credit markets, and slowing home sales have combined to pressure more Chinese property developers, which account for most of China's high-yield issuance.

Read the full article here.


Oil prices dipped in Asia, although losses were contained on expectations of supply tightness.

Goldman Sachs said the market is cyclically tight "with risks to our year-end Brent target of $90/bbl skewed to the upside. The bank added that the U.S. crude oil market looks more balanced than Brent due to rising U.S. production and seasonally weak demand and expects the WTI-Brent spread to widen as a result.

Louise Dickson, senior oil markets analyst at Rystad said oil demand is likely to grow in the wake of the $1 trillion infrastructure bill passed by Congress late Friday. "This U.S. infrastructure bill screams bullish for oil," Dickson wrote.


Gold futures eased back from a more-than-2-month high after a third straight gain on Monday.

However, Goldman Sachs said bullion will likely find support from physical demand in emerging-market economies such as India and China, which remain strong due to rising inflation and a rebound in consumer purchasing power.

Central banks could also add to demand, with the Russian central bank beginning gold purchases again, said Goldman Sachs.

Aluminum was around 0.7% lower but could rebound, supported by signs of low inventories.

In China, both primary aluminium and billet inventories have declined, which could be signs of producers of semi-finished aluminum products returning to the market for purchases after power reductions moderate, said ING.

Elsewhere, Goldman Sachs said the recent declines in crude oil and base metal prices may not last, as it reiterates its bullish commodity call.

"We do not believe the underlying supply constraints have eased for spot prices, and view the recent bout of weakness in oil, aluminum and other base metals as a great entry point for strategic long positions, although we expect further volatility."


Fed Officials Flag High Inflation and Some Warn of Rate Rises if Pressure Persists

Several regional Federal Reserve Bank presidents said Monday they expect today's high levels of inflation to cool, but some added that if they don't, the central bank might need to raise rates to help bring price pressures back in line.

"I expect that the currently elevated inflation readings from supply-side pressures will eventually fade," Federal Reserve Bank of Chicago President Charles Evans said in a virtual appearance. "That said, I had expected to see more progress by now, and there are some indications that inflationary pressures may be building more broadly."

Fed Says U.S. Public Health Among Biggest Near-Term Risks to Financial System

WASHINGTON-The potential for U.S. public health to worsen as the Covid-19 pandemic continues is one of the greatest near-term risks to the financial system, the Federal Reserve said, while noting that asset prices are susceptible to large declines should investor sentiment shift.

Any deterioration in the public-health situation could slow the recent economic recovery, particularly if widespread business closures returned and supply chains were further disrupted, the Fed said. The number of new Covid-19 cases has fallen in recent months, but a resurgence this summer, tied to the Delta variant, coincided with a slowdown in hiring and economic growth.

Fed's Randal Quarles to Resign at End of Year

Federal Reserve governor Randal Quarles said Monday he would resign his position around the end of this year, giving President Biden as many as four seats to fill on the central bank's seven-member board in the coming months as he weighs how to fill the top job of Fed chairman.

Mr. Quarles was appointed to a four-year term in October 2017 by then-President Trump as the Fed's vice chairman for bank supervision, a position created by the 2010 Dodd-Frank financial-regulatory overhaul. The resignation this year was largely expected because Mr. Quarles's term as vice chairman had lapsed last month and because his term leading a separate international regulatory body, the Financial Stability Board, expires next month.

Germany Hits Record Covid-19 Tally as Pandemic Rebounds Across Europe

BERLIN-Germany kept Covid-19 infection rates relatively low this past summer-a feat experts say might be driving a record surge in infections in the country that has prompted fears that hospitalizations and deaths could spiral in the colder months ahead.

Infections are rising again in Europe, as colder temperatures and the fading of vaccine-induced immunity drive renewed case loads.

Chinese Junk Bond Yields Top 25% as Property-Market Strains Intensify

(MORE TO FOLLOW) Dow Jones Newswires

11-09-21 0042ET

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