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Renewed doubts about China Evergrande will likely cast a shadow over European shares on Thursday. In Asia, stocks struggled for meaningful gains; the dollar weakened further; while Treasury yields, oil and gold all pushed higher.
Caution will dominate European stocks early Thursday, as fresh worries about China Evergrande will likely outweigh the positive impetus from a near-record finish on Wall Street.
Evergrande on Wednesday called off plans to sell a majority stake in its property-management unit for the equivalent of $2.6 billion, a major setback in the real-estate giant's attempts to ease its liquidity crunch.
The developer said it had planned to sell 50.1% of the profitable subsidiary, Evergrande Property Services, to a unit of rival developer Hopson Development.
The agreement was struck on Oct. 1 and was to be completed by Oct. 12. It was terminated by Evergrande, which said in a regulatory filing that it "had reason to believe...that the purchaser had not met the prerequisite to make a general offer for shares in Evergrande Property Services."
Hopson, in a separate filing, rebutted Evergrande's version of events. It said it had been ready to buy the stake but the other parties to the deal had made unacceptable requests to change the terms. It said that included a demand that Hopson send all the funds directly to Evergrande, rather than first depositing the payment with the property management unit, as the agreement had stated.
The news capped gains for stocks in Asia, although property developers in China found some support from verbal assurances by government officials and the loosening of rules around home loans at some banks, said IG.
Sectors to watch:
The semiconductor shortages currently affecting the global automotive industry should stabilize in the second half of next year, with a full recovery to come by 2023, said RBC Capital Markets analyst Tom Narayan. He expects global light vehicle production to reach the level of 2019, when around 89 million vehicles were made, by 2023.
While the first half of 2023 should show improvement, companies should be able to start making up missed backlog in the second half of the same year, Narayan said. For 2021, the bank has forecast global auto production to be around 75 million vehicles, and around 83 million units could be produced in 2022.
The dollar was broadly softer in Asia, extending Wednesday's losses as risk appetite improves.
However, weakness in havens such as the yen and the dollar may be limited by renewed concerns about China Evergrande Group after the cash-strapped developer called off plans to sell a majority stake in its property-management unit. This has increased pressure on Evergrande to raise cash elsewhere, as the 30-day grace period on some of its interest payments comes to an end this week, said IG.
Bank of America said ahead of the next FOMC meeting in November, at which the start of bond tapering is expected to be announced, "we expect the USD to be supported and the U.S. to continue to act as the main driver of global FX market." BofA said previous sharp rises in global yields during the June 2013 taper tantrum, September 2019's money-market squeeze and June's hawkish FOMC meeting were bullish for the dollar.
Ebury said the dollar should weaken over the next year even though the Federal Reserve could start tapering asset purchases as soon as November and raise interest rates in the second half of 2022.
Analysts at the financial services firm said the dollar has continued to benefit from concerns about coronavirus and rising inflation pressures slowing the global recovery but these worries are perhaps "slightly overblown." Market sentiment will "take a turn for the better," especially once developing nations have rolled out vaccines to a larger share of their populations, they said.
Ebury expects EUR/USD to rise to 1.22 and GBP/USD to rise to 1.45 by the end of 2022.
Ebury also expects the Swiss franc to weaken on reduced safe-haven flows once the global economic outlook improves. "We think that an improvement in market sentiment is on the cards as the pandemic situation continues to normalize." It has forecast EUR/CHF to rise to 1.12 by the third quarter of 2022 from 1.0705 currently.
Treasury yields remained elevated in Asia, with the 10-year note yield holding at a five-month high following Wednesday's 20-year auction and the Beige Book report, which indicated the U.S. economy was growing at a "modest to moderate rate" amid a low supply of workers and elevated prices.
Bond investors are particularly attuned to the prospects of a potentially faster pace of Fed tapering, which would suggest that the central bank may be inclined to raise interest rates faster than expected to quell intensifying pricing pressures.
Fed Governor Randal Quarles warned that extended high inflation through next spring could force the central bank to consider raising interest rates sooner than anticipated. He also said he will support the decision at the Fed's next meeting in November to start tapering asset purchases.
AXA Investment Manager said credit valuations remain expensive but some pockets of U.S. high-yield corporate debt and European credit look attractive.
Nick Hayes, manager of the firm's Global Strategic Bond strategy sees short-dated, high-carry opportunities "further down the rating spectrum" in the U.S. high-yield corporate bond market, though the asset manager is underweight energy due to its ESG-integrated strategy.
Rather, it individually assesses single B- and CCC-rated debt where average yields are 4-6%, Hayes said. More generally, AXA prefers lower-quality investment-grade credit over higher quality and sees value in select subordinated financials with more attractive spreads and strong fundamentals.
Oil futures added to gains in Asia, buoyed by a surprise weekly decline in U.S. crude inventories and a drop in gasoline stocks to their lowest in almost two years, even as China's move to bolster coal supplies looked to dull the outlook for oil demand.
The EIA numbers were "undoubtedly on the bullish side," Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch. The data helped alleviate an "overbought situation" in crude oil, he said.
The fall in crude supplies has prompted U.S. benchmark oil prices to move up more sharply than Brent, which has seen limited gains following news on China. Beijing's top economic planner this week vowed to use "all necessary means" to roll back record coal prices, The Wall Street Journal reported, including domestic laws that let the government limit profit and prices for essential goods.
"This should pressure the high coal prices to ease lower and, in turn, bring oil prices lower too," said Brian Swan, senior commodity analyst at Schneider Electric, in a note.
Gold edged higher but gains may be capped by higher Treasury yields.
Gold's latest rise has come as Fed rate-increase expectations may have gotten a bit too aggressive, said Oanda, noting Fed Gov. Waller's comments on Tuesday. However, gold currently has two headwinds: rising Treasury yields and Bitcoin, which is being used as an inflation hedge instead of the precious metal, Oanda added.
Gold futures settled higher for a second day in a row on Wednesday, as support from concerns over a rise in inflation outweighed pressure from strength in Treasury yields.
In other metals news, nickel extended its recent gains, with the three-month LME contract on its sixth consecutive winning session following concerns that Indonesia could slow its nickel-ore exports support, said ING.
Indonesia said the government plans to hit the brakes on exporting raw materials. Additionally, Russian nickel smelter Nornickel, reporting weak production volumes, may also result in increased market tightness. Nickel prices are 10% higher from a week earlier.
TODAY'S TOP HEADLINES
China Evergrande Calls Off Plans to Sell Key Unit for $2.6 Billion
SINGAPORE-China Evergrande Group called off plans to sell a majority stake in its property-management unit for the equivalent of $2.6 billion, a major setback in the real-estate giant's attempts to ease its liquidity crunch.
The cash-strapped developer said Wednesday that it had planned to sell 50.1% of the profitable subsidiary, Evergrande Property Services Group Ltd., to a unit of rival developer Hopson Development Holdings Ltd.
Fed Official Says Lingering Inflation Could Change Interest-Rate Outlook
A top Federal Reserve official warned that extended high inflation through next spring could force the central bank to consider raising interest rates sooner than anticipated.
Fed governor Randal Quarles said Wednesday he still expects higher prices to ease next year as bottlenecks and supply-chain disruptions fade. If the Fed raised rates in response to recent price surges driven by the economic reopening, the central bank could constrict demand at the same moment that supply bottlenecks abate, Mr. Quarles said during a moderated discussion at a conference in Los Angeles. That could lead to undesirably low levels of inflation and employment.
U.S. Growth Slowed in Recent Months Amid Elevated Prices, Fed's Beige Book Says
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