MARKET WRAPS
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Eurozone, Germany, France, U.K., Italy Services PMI; Eurozone PPI; France Industrial Production; Italy General Govt Quarterly Accounts, Revised GDP; U.K. Car Registrations, Official Reserves; OECD CPI; ECOFIN meeting; updates from Air France-KLM, Petrofac, Ryanair
Opening Call:
Shares in Europe should rebound on Tuesday despite the U.S. selloff and persistent fears over inflation. In Asia, stocks mostly tracked lower; the dollar, Treasury yields and oil gained, while gold prices fell.
Equities:
European stocks are primed for solid opening gains on Tuesday, with major benchmarks likely to recover the previous session's losses. U.S. futures also inched higher, suggesting Wall Street could recoup some of Monday's heavy losses.
This despite Asian markets suffering a broad retreat on Tuesday, tracking the technology-driven selloff in U.S. shares, and as investors confronted fresh concerns about the health of China's property sector and the impact of multi-year high crude oil prices will have on inflation.
Big tech fell the most in Monday's U.S. retreat, with many in the group in correction territory.
"There has been a considerable build-up of market angst-a pullback is not unreasonable," wrote Seema Shah, chief strategist at Principal Global Investors.
Supply chain constraints are disabling some companies from meetings sales goals, while higher costs associated with this are eating into profit margins. Higher corporate taxes could be on the way. Plus, bond yields are expected to keep rising, which makes future profits less valuable.
Analysts also noted that the U.S. debt ceiling deadline in December and continuing political conflict over the $1 trillion infrastructure bill and $3.5 trillion reconciliation package muddied the waters.
Forex:
The dollar strengthened in Asia on safe-haven demand and the currency still looks bullish in the short term, owing to China-U.S. tensions and risks related to China Evergrande, Oanda said.
Morgan Stanley said the dollar's recent rally isn't over with the DXY Dollar Index likely to rise to 96.000 and EUR/USD to fall to 1.14 before year-end.
Strong U.S. data for the rest of 2021 will keep expectations for the Federal Reserve's policy tilted to the "less dovish side" said Morgan Stanley analyst James Lord.
Surging European gas prices should also boost the dollar through safe-haven flows and as the adverse affect of the price shock on economic activity reduces the likelihood of the European Central Bank tightening its monetary policy stance, Lord said. Meanwhile, the U.S. economy is among the least exposed to the growth headwinds facing China, he added.
Cambridge Global Payments said the dollar stands to benefit from risk-on and risk-off factors.
U.S. growth opportunities look remarkably attractive: "The household sector is still sitting on enormous amounts of dry powder in the form of savings and relatively low leverage levels," said chief market strategist, Karl Schamotta.
"Corporate profit margins remain incredibly healthy. And a shale gas investment boom could be in the offing. This 'barbell' dynamic--in which the greenback gains during both risk-on and risk-off conditions--is likely to keep the trade-weighted dollar aloft for now: long dollar positioning is beginning to look overcrowded, but the warning lights aren't yet flashing red."
Bonds:
U.S. government bond yields added to gains in Asia but the yield on the benchmark 10-year Treasury note remained below 1.5%. Yields edged up Monday but selling in Treasurys moderated as stocks fell sharply and government debt drew some modest bids.
"We see bond yields gravitating higher over time as the Covid-inspired inflation lift helps inflation settle at higher levels than we have seen in the recent past," wrote Steve Barrow, head of G-10 strategy at Standard Bank.
Morgan Stanley Wealth Management said the Delta variant growth scare explains much of the yield decline in the 10-year Treasury since the March 2021 high, while another important factor was the plummeting term premium.
"Watch for a rise in the 10-year real rate and term premium, which would signal that equity risk is rising, too," said Lisa Shalett, chief investment officer.
For much of 2021, fiscal stimulus and steadfast communication from Jerome Powell kept term premiums not only low, but actually negative. However, the recent signal by the Fed that a tapering announcement is near and turmoil in Congress around the debt ceiling will have the bond market's attention, said Morgan Stanley.
Euro corporate hybrid bonds, which blend debt- and equity-like characteristics, are set to bounce back after recent stock market volatility drove their credit spreads wider, said ING.
"Corporate hybrids have substantially underperformed with 10 basis-point widening last week, coinciding with the fall in equities," said ING credit strategists, adding that hybrid paper is now sitting eight basis points wider on the month. They see value in hybrids, particularly in the more defensive sectors such as utilities and telecoms, and see tightening potential in BB- and B-rated hybrid bond spreads relative to stock prices.
Energy:
Oil futures extended gains in Asia after OPEC+ maintained its current agreement to gradually raise crude production each month. Oil rallied Monday, with U.S. prices settling at a nearly 7-year high.
"Markets were expecting a larger increase, with some estimates around 800,000 b/d, given forecasts of a deepening deficit in oil markets," said Commonwealth Bank of Australia. "OPEC's outlook suggests further reductions in global oil stockpiles. That's a problem given that oil inventories are already low."
Mizuho's Bob Yawger said: "Recent chatter in the oil space had raised the possibility that OPEC+ would increase by more than 400,000 in order to cool runaway energy prices. That did not happen. The market also caught a bid just as the OPEC announcement was hitting the tape, when the Saudi Aramco CEO, Amin Nasser, said the natural gas crisis had already boosted oil demand 500,000 bpd."
Metals:
Gold weakened slightly in Asia after it tallied a gain for a third session in a row, with prices finding some support from weakness in the dollar as tensions between China and Taiwan boosted safe-haven demand for the precious metal.
Prospects that the Fed may still wind down economic support this year could pressure gold in the near term, said ICICI Securities. "Reduced stimulus and higher interest rates tend to push government bond yields up, raising gold's opportunity cost."
Copper production growth from next year should benefit from the delayed ramp up of some projects as well as improved output from Escondida, the world's No. 1 copper mine, said Fitch.
It revised its 2022 copper mine output growth forecast to 4.7% from 4% previously, and its 2023 projection to 4% from 3.2%. "We were already expecting 2022 and 2023 to be relatively strong growth years for Chilean copper production given the slate of projects coming online," Fitch said.
TODAY'S TOP HEADLINES
Empty Buildings in China's Provincial Cities Testify to Evergrande Debacle
LU'AN, China-Rows of residential towers, some 26 stories high, stand unfinished in this provincial city about 350 miles west of Shanghai, their plastic tarps flapping in the wind.
Elsewhere in Lu'an, golden Pegasus statues guard an uncompleted $9 billion theme park that was supposed to be bigger than Disneyland. A planned $4 billion electric-vehicle plant, central to local leaders' economic dreams, remains a steel frame with overgrown vegetation spilling into the road.
Schumer Sets Up Vote on Debt Ceiling After Saying It Must Be Raised by End of Week
WASHINGTON-Senate Majority Leader Chuck Schumer set up a vote by Wednesday on increasing the federal government's borrowing ceiling, but didn't lay out how Democrats planned to pass a bill without Republican votes.
Mr. Schumer warned earlier Monday that lawmakers must act by the end of the week to avoid any repercussions. "Let me be clear about the task ahead of us: we must get a bill to the president's desk dealing with the debt limit by the end of the week. Period," Mr. Schumer (D., N.Y.) wrote in a letter to his Democratic colleagues.
U.S. Wants New Trade Talks With China, but Will Keep Tariffs
WASHINGTON-The Biden administration began defining its China trade policy Monday, saying it aims to launch new talks with Beijing but will keep existing tariffs in place, while also restoring the ability of U.S. importers to seek exemptions from those levies.
The new policy, outlined by U.S. Trade Representative Katherine Tai on Monday, largely builds on the China trade policy initiated by former President Donald Trump, who launched the biggest trade war since the 1930s in an attempt to get China to buy more U.S. goods and to stop it from pressuring American companies to hand over their trade secrets.
Covid-19 Booster Shots Win Broad Backing From European Regulator
Europe's top health regulator issued a broad endorsement of Covid-19 vaccine booster shots, diverging from U.S. officials' more limited recommendation, and paving the way for more countries across the continent to offer additional doses to the already vaccinated.
An expert committee for the European Medicines Agency said Monday that the vaccine developed by Pfizer Inc. with BioNTech SE could be given as a booster to those aged 18 and over, at least six months after their second dose. It is still evaluating data for booster shots of Moderna Inc.'s vaccine, but said that it or Pfizer's shot could be administered to people with weakened immune systems at least 28 days after their second dose.
Petrofac Puts Bribery Case to Rest With $104 Million Fine
A U.K. court on Monday fined Petrofac Ltd. GBP77 million (equivalent to $104.3 million) for failing to prevent senior executives from using agents to bribe public officials for oil contracts in the Middle East.
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10-05-21 0024ET
