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EMEA Morning Briefing: Stocks to Gain Despite Cautious Powell

08/18/2021 | 12:28am EDT

MARKET WRAPS

Watch For:

Eurozone Harmonised CPI, Construction Output; U.K. Producer Prices, Monthly Inflation, House Price Index; FOMC Meeting Minutes; updates from Gazprom, Persimmon, Sberbank, Balfour Beatty

Opening Call:

Jerome Powell's cautious assessment of the Delta's impact on the U.S. economy, will likely cap opening gains for European shares. In Asia, stocks were steady, the dollar dipped but Treasury yields and commodities were slightly firmer.

Equities:

European equities are poised for modest opening gains on Wednesday despite warnings from the Federal Reserve that the Covid-19 pandemic remained a threat to the economic outlook.

Jerome Powell on Tuesday said it remains to be seen how the U.S. economy will weather the recent virus surge, in comments that offered no views on the outlook for monetary policy.

Mr. Powell's comments on the health situation followed those he made on the topic after the Fed's policy meeting in late July. He said then that "with successive waves of Covid over the past year and some months now, there has tended to be less economic-less in the way of economic implications from each wave, and we will see whether that is the case with the Delta variety." He added, "We don't have a strong sense of how that might work out. So we'll just be monitoring it."

Mr. Powell also said the recovery isn't complete. "The Covid pandemic is still casting a shadow on economic activity. It is still very much with us. We can't, you know, we can't declare victory yet on that," he said.

Speaking at a separate event, Federal Reserve Bank of Minneapolis leader Neel Kashkari expressed concern about what the more virulent Delta Covid-19 variant could mean for the nation.

"I was feeling really optimistic in June and July. It seemed like the light was on at the end of the tunnel, and this is soon to be over, and then the Delta variant emerged and it's simply much more contagious," he said. "It could lead to a more sluggish recovery if people are nervous," Mr. Kashkari said.

The Fed releases minutes from its July 27-28 policy meeting after the European close on Wednesday. Officials last month inched toward scaling back the easy-money policies adopted at the start of the pandemic and the latest minutes could offer more insight on those plans.

Forex:

The dollar's advance stalled in Asia and the yen also weakened as strength in several regional equity markets spurred mild appetite for riskier assets.

However, market sentiment may largely stay on hold with the Fed minutes to monitor, said IG, which will likely be scrutinized for any clues on the tapering timeline ahead of the Jackson Hole symposium next week.

Ebury said the euro is likely to rise against the dollar in the near-term but only modestly as the eurozone's economic recovery catches up with the U.S.

"We think that the recent move lower in EUR/USD has perhaps been excessive, and think that the likely convergence in economic performance between the U.S. and Euro Area in the third quarter should support the euro in the near-term," said Ebury analyst Matthew Ryan.

However, inflationary pressures in the euro-area are lagging and the European Central Bank appears in no rush to scale back stimulus, he said. Ebury expects EUR/USD to rise to 1.19 by year-end.

Rabobank said sterling is likely being weighed down by risk aversion due to concerns about the potential global economic impact of the fast-spreading Delta coronavirus variant.

The U.K.'s economic fundamentals, such as its large current account deficit, make the pound more sensitive to swings in market sentiment, said Rabobank forex strategist Jane Foley. Sterling may also be dragged lower by market expectations that global growth worries could prompt central banks to "roll back their degree of hawkishness" and that could include the U.K, Foley added.

The Fed's Kashkari poured acid on the cryptocurrency market Tuesday as part of a long running series of comments in which the central banker dumps on things like Bitcoin and other private digital assets that purport to be money.

Cryptocurrencies so far are "95% fraud, hype, noise and confusion," Kashkari said, adding "I've not seen any use case outside of funding illicit activities like drugs and prostitution." He said those who argue these digital assets are needed as the U.S. slides down some path towards communism and a Venezuelean-style collapse are ridiculous and at odds with the facts about the value of the dollar on the world stage.

Bonds:

Treasury yields were a touch firmer in Asia after they ended mixed on Tuesday following the weak U.S. retail sales data and rise in industrial production for July.

"The market seems to be sitting at the threshold of a major bifurcation of scenarios with material implications for likely rates ranges both near-term and over the current cycle" strategist Bruno Braizinha said in a BofA Global Research note.

Pessimistic scenarios may imply a "sub-1% 10-year Treasury by year-end, while optimistic scenarios may see convergence to the 1.75-2% range."

In the process of building consensus around a central scenario over the next few months, "market participants will likely be focused on the potential inflation path, the impact of Covid variants and reopening models, the Fed response function and the contingency between hikes and taper, the evolution of labor markets and the rotation between manufacturing and services gauges."

Federated Hermes said investors could reduce interest rate exposure and capture further upside in corporate bonds via credit default swaps.

"In current market circumstances of broadly tight spreads investors have to be very conscious of the best way to access a company's capital structure," said Vincent Benguigui, senior credit portfolio manager, at the international business of Federated Hermes, adding that corporate bonds have outperformed credit default swaps, particularly in the U.S.

With "the cash price of global high yield near record highs we think CDS is the more optimal place to be positioned to capture further material upside, especially in the U.S." Also, those worried about rising inflation would lower their interest-rate exposure by switching corporate bonds for credit default swaps, Benguigui said.

Energy:

Oil futures inched a few cents higher in Asia after they settled lower on Tuesday for a fourth session in a row on persistent demand worries. Commonwealth Bank of Australia noted that "oil prices are now in danger of developing negative momentum that can spillover into other commodity markets."

Late Tuesday, the American Petroleum Institute reported inventories of crude oil in the U.S. fell by 1.2 million barrels in the latest week, according to a source, while gasoline supplies declined by 2 million barrels.

The results landed close to forecasts and were released ahead of official inventories data from the Department of Energy due Wednesday. Average forecasts in a WSJ survey indicate the DOE report will show crude supplies fell by 1.3 million barrels and that gasoline supplies declined by 2.1 million barrels.

Metals:

Gold managed to recover Tuesday's losses in early Asian trade, and Commerzbank said the precious metal is likely to be supported in the near term by concerns over the rising number of Covid-19 Delta variant cases worldwide. Meantime, OANDA said that any move in bullion prices this week will depend on the strength of the dollar.

Lukman Otunuga, senior research analyst at FXTM, said a strong daily close for gold above $1,792 could "open the doors towards $1,800 and $1,830." However, should the $1,792 mark prove to be "reliable resistance," a decline back towards $1,760 could be in the cards.

Copper was around 0.6% higher after a sharp decline on Tuesday due to concerns over weaker demand caused by Covid-19 Delta-variant outbreaks in several markets, said ANZ.

However, these demand concerns aren't enough to offset support from a fundamentally tight copper market due to the metal's use in green energy projects and electric cars, said Goldman Sachs. It continues to expect a global shortage of 276,000 tons of the red metal this year. Goldman said the copper deficit is only likely to clear in 2023, and remains bullish on the base metal in the short term.

TODAY'S TOP HEADLINES

Jerome Powell Says It's Unclear What Covid-19 Surge Means for Economy

Federal Reserve Chairman Jerome Powell said it remains to be seen how the U.S. economy will weather the recent Covid-19 surge, in comments that offered no views on the outlook for monetary policy.

"It's not yet clear whether the Delta [coronavirus] strain will have important effects on the economy; we'll have to see about that," Mr. Powell told students and teachers Tuesday during a virtual event held by the central bank.

Cargo Ships Are Again Idling Off Jammed Southern California Ports

Container ships are stacking up again off Southern California's jammed ports, as a flood of imports and logjams in domestic logistics networks hit operations at the biggest U.S. gateway for seaborne trade.

Thirty-seven container ships were anchored off the adjacent ports of Los Angeles and Long Beach in recent days, according to the Marine Exchange of Southern California, the highest number since February, when 40 ships waited there.

Nancy Pelosi Braces for Showdown With Moderates Next Week Over Infrastructure Vote

WASHINGTON-Top House Democrats said the chamber would move forward with voting on the budget blueprint for a $3.5 trillion healthcare, education and climate package next week, rebuffing demands from a group of centrist Democrats to first vote on a $1 trillion infrastructure bill and urging their caucus to stay unified around President Biden's agenda.

(MORE TO FOLLOW) Dow Jones Newswires

08-18-21 0027ET

Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / EURO (AUD/EUR) 0.02% 0.6396 Delayed Quote.1.53%
AUSTRALIAN DOLLAR / JAPANESE YEN (AUD/JPY) 0.45% 84.765 Delayed Quote.6.26%
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) 0.10% 0.7421 Delayed Quote.-3.64%
BALFOUR BEATTY PLC 0.23% 267 Delayed Quote.-1.18%
BITCOIN (BTC/EUR) -1.01% 51350 Real-time Quote.124.03%
BITCOIN (BTC/USD) -0.99% 59560.666723 Real-time Quote.113.30%
BRITISH POUND / EURO (GBP/EUR) 0.47% 1.1848 Delayed Quote.5.39%
BRITISH POUND / JAPANESE YEN (GBP/JPY) 0.95% 157.058 Delayed Quote.10.26%
BRITISH POUND / US DOLLAR (GBP/USD) 0.59% 1.3749 Delayed Quote.-0.06%
CANADIAN DOLLAR / EURO (CAD/EUR) 0.00% 0.697136 Delayed Quote.8.32%
CANADIAN DOLLAR / JAPANESE YEN (CAD/JPY) 0.38% 92.322 Delayed Quote.13.40%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.02% 0.8081 Delayed Quote.2.90%
COMMERZBANK AG 0.99% 6.101 Delayed Quote.15.86%
COMMONWEALTH BANK OF AUSTRALIA 0.36% 102.28 End-of-day quote.24.56%
DJ INDUSTRIAL 1.09% 35294.76 Delayed Quote.14.07%
EURO / JAPANESE YEN (EUR/JPY) -0.07% 132.42 Delayed Quote.4.73%
EURO / US DOLLAR (EUR/USD) -0.08% 1.1591 Delayed Quote.-5.12%
FEDERATED HERMES, INC. 0.46% 33.02 Delayed Quote.14.30%
INDIAN RUPEE / EURO (INR/EUR) -0.11% 0.011484 Delayed Quote.2.62%
INDIAN RUPEE / JAPANESE YEN (INR/JPY) 0.37% 1.522371 Delayed Quote.7.34%
INDIAN RUPEE / US DOLLAR (INR/USD) -0.06% 0.013331 Delayed Quote.-2.58%
JAPANESE YEN / SWISS FRANC (JPY/CHF) -0.46% 0.8074 Delayed Quote.-5.39%
LONDON BRENT OIL 0.72% 84.89 Delayed Quote.62.65%
NEW ZEALAND DOLLAR / JAPANESE YEN (NZD/JPY) 0.90% 80.799 Delayed Quote.8.04%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.53% 0.70722 Delayed Quote.-2.01%
PERSIMMON PLC 0.45% 2692 Delayed Quote.-2.71%
PJSC SBERBANK -1.23% 371.4 End-of-day quote.37.00%
PUBLIC JOINT STOCK COMPANY GAZPROM 0.53% 367.62 End-of-day quote.72.84%
PUBLIC JOINT STOCK COMPANY GAZPROM NEFT 2.58% 519 End-of-day quote.63.75%
S&P GSCI CRUDE OIL INDEX 0.25% 447.9336 Delayed Quote.68.03%
US DOLLAR / EURO (USD/EUR) 0.08% 0.862738 Delayed Quote.5.39%
US DOLLAR / JAPANESE YEN (USD/JPY) 0.32% 114.2 Delayed Quote.10.31%
WTI 1.09% 82.468 Delayed Quote.69.35%
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